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PetroCaribe: Are Caribbean countries prepared for the worst?

Sunday, February 23, 2014    

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CARIBBEAN governments that are members of the PetroCaribe Agreement with Venezuela would be prudent by beginning to adjust their budgets to take account of the loss of benefits now derived from the oil arrangement.

This is especially important for the countries of the Eastern Caribbean which appear to have made little provision for the possibility that the arrangements with Venezuela could end abruptly.

Two events are playing out in Venezuela to which vigilant officials in ministries of finance in Caribbean countries should be alert. The first is the problematic state of the Venezuelan Government's finances, and the other is the increasing confrontation between dissenting groups and the Government that has spurred violence in the streets.

Venezuela's economic conditions make it tough for President Nicolás Maduro to continue the largesse of PetroCaribe started by his predecessor Hugo Chávez. Inflation is now at 56 per cent; the Government's budget deficit is almost 50 per cent; the rating agencies, Moody's and Standard & Poor's, have downgraded Venezuelan bonds to junk status; and the bolivar fuerte (the "strong bolivar", so renamed by Chávez) has weakened steeply against the US dollar — on the black market its value dropped from roughly 8 to 1 a year ago to 87 to 1 now.

Additionally, while in the Chávez years poverty declined and access to health care increased, today there are real food shortages across the country. The food shortages have a worse effect on the poor who, unlike the better-off, cannot afford to pay to circumvent normal food distribution chains.

The declining value of the Venezuelan bolivar and the foreign currency restrictions that the Government has imposed have also angered the Venezuelan diaspora who find it difficult to get US dollars out of the country.

This led to a demonstration by disgruntled Venezuelans outside the embassy in Barbados on February 17 when charges of human rights violations by the Maduro Government were also made.

Venezuela also has debt obligations it must service. For example, reports indicate that the Government and the State-owned oil company, Petroleos de Venezuela, SA (PDVSA), signed loan agreements with China amounting to US$49.5 billion for the period 2007-2013. Of that sum, only US$20 billion — or less than half — has been repaid in oil supplies.

These economic conditions make it difficult for Maduro, with the best will in the world, to continue the PetroCaribe arrangements as they are. His Government needs to address its crucial fiscal problems as well as the performance issues that confront PDVSA, which has been the source of financing not only for the social transformation measures under Chávez, but also for the PetroCaribe arrangements.

There are 17 beneficiary members of PetroCaribe of which 12 are Caribbean Community (Caricom) countries, including The Bahamas, Guyana, Haiti, Jamaica, and Suriname. But the most vulnerable are the smaller territories Antigua and Barbuda, Belize, Dominica, Grenada, St Lucia, St Kitts-Nevis, and St Vincent and the Grenadines.

It should be noted that two other Caricom countries — Barbados and Trinidad and Tobago — are not exposed to change in the PetroCaribe Agreement, since neither country joined the arrangement. Under PetroCaribe, there is no reduction in the price of oil; instead, Venezuela converts a portion of the cost into a low-cost loan.

The amount of the debt owed to Venezuela by many Caribbean countries is shrouded in secrecy because the process of dealing with PetroCaribe has not been transparent. A notable exception is Jamaica where, in January, the Government publicly put its PetroCaribe debt at US$2.5 billion.

For each of the other Caribbean countries, the debt would amount to hundreds of millions of dollars which, in their current situation of very high debt and large fiscal deficits, they would find almost impossible to repay.

Sources within the Venezuelan Government have lamented that in many Caribbean countries, not only has provision not been made to repay the debt, but the loan component of the oil price has not been used for the social programmes for which Chávez intended it. In one case it has been used to pay the Government's public sector wage bill and in another to meet commercial obligations.

What would be worse for all of the beneficiary governments is either a sudden change in the PetroCaribe arrangements, forced by increasingly difficult economic circumstances in Venezuela, or a collapse of the arrangements altogether triggered by the intensifying confrontation between dissenting groups and the Maduro Government in the streets of Caracas.

There is no doubt that Maduro is politically committed to continuing Chávez's policies of helping Caribbean countries through the low-cost loan component of oil supplied by Venezuela. But as conflict and confrontation increase and intensify within Venezuela, and economic conditions worsen for his own supporters, he may be forced to choose between them and his own political fortunes and a political commitment to Chávez's ideas.

The present turmoil in Venezuela and the clashes in the streets between groups protesting against the Government and security forces have resulted in four deaths so far and increased alarm about the stability of the country and its prospects for economic growth.

Caricom as a whole was right to call on all parties in the Venezuelan confrontation "to take the necessary steps to refrain from any further action that would hinder a peaceful resolution of the differences and a return to peace and calm in the country".

The beneficiary Caribbean governments have much for which to thank Hugo Chávez and Nicolás Maduro, but they would be imprudent if they did not now begin to make adjustments to their budgets for a transition from dependence on PetroCaribe to buying oil on the international market.

They would be sensible to approach the Caribbean Development Bank for technical advice on how to alter their financial circumstances to make the transition and to propose ways in which such a transition could be accomplished with the least amount of inevitable pain — pain which would be more desirable than calamity.

— Sir Ronald Sanders is a consultant, senior research fellow at London University and a former Caribbean diplomat

Responses and previous commentaries: www.sirronaldsanders.com

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