Venezuela boasts of the largest oil reserves of any country in the world (a whopping 25.0% of total OPEC oil reserves). Yet today it is facing the worst economic crisis in its history amid an inflation rate of over 2,000,000%. The current crisis facing country is predicated on a cocktail of negatives – chief of which is the “oil curse”.
Its authority’s statist economic leaning, a currency peg at a fixed rate despite an obvious overvaluation, as well as external sanctions by the US, are all factors that have contributed to the country’s economic demise.
While Nigeria’s economic situation is nothing near Venezuela’s, the traits of pre-crisis Venezuela are discernible. Continued reliance on oil exports, the dominance of recurrent expenditure, grand social/subsidy schemes, the CBN’s hold on rates above its fair value till unbearable pressure builds up, and the government’s interference in the oil sector which has deterred investments are the most apparent. As it is said, “never let a crisis go to waste.”
We believe Nigeria can learn from Venezuela’s. This would involve taking the bold (but difficult) steps of letting the market forces allocate economic resources- at least to a decent extent. In addition, addressing infrastructural deficits and other policy reforms that would incentivize foreign investments into the economy will help.
UNITED CAPITAL RESEARCH
