The Venezuelan economic debate has been dominated by headlines over hydrocarbon deals and speculation around the future of the mining sector. The focus is understandable. It’s a petrostate with an abundance of natural resources, capable of propelling us out of the prolonged economic and humanitarian crisis that chavismo inflicted upon us. But as we must continue to discuss the future of the oil, gas and mining sectors, we must not forget the reforms required to allow the non-oil economy to flourish.

Although a large share of the state’s revenues and the country’s GDP is ultimately tied to hydrocarbons, the overwhelming majority of Venezuelans are not oil engineers, geologists or miners. Nor are most Venezuelan companies directly involved in extracting natural resources. The non-oil economy is there, operating under a highly restricted business environment of price controls, extortion, a minefield of a tax system and labour laws hostile to companies. All while facing a contraction in its market due to the migration crisis and severely restricted access to credit.

Venezuela is still among the hardest places to do business in the world. It is time to discuss how to give the sector, which includes formal and informal businesses of all sizes, the breathing space it needs to grow.

Let’s first put the power grid and infrastructure issues aside. The reforms required span virtually every aspect of the business environment, from the institutions that oversee the economy at the macro level, to the banking system and the nitty-gritty of tax and labour law. At the most basic level, the private sector needs confidence that contracts will be respected, property will be protected, and disputes can be resolved through institutions that are predictable and independent. Without these basic reassurances, investing in Venezuela remains a gamble that many businesses and outside investors will simply not be willing to take.

Dollarization without the institutional and financial framework to back it will fail in its mission to stabilize the economy.

As previously explained regarding the macro level, the Venezuelan Central Bank (BCV) needs to regain its independence and establish a credible monetary policy based on transparency and clear rules, supported by a board and president who are not subordinate to Miraflores. Burning through the petro-dollar cash pile to curb the Bolivar devaluation won’t cut it. The central bank is estimated to have used 65% of the oil sale proceeds to shore up the Bolivar. This has proven to be futile without a proper macro framework to support such interventions. It is the BCV’s credibility that is fundamental to correcting the distortions in the FX market and preserving confidence in the Bolivar, in order to lower the still extraordinary inflation rate hovering around 500%.

A credible BCV will also be fundamental to back whichever currency policy the State decides to embrace. Debates over dollarization have spread. However, the measure is not a magic wand, and going for it without the institutional and financial framework to back it will fail in its mission to stabilize the economy. Monetary stability with a functioning BCV will not suffice, but it’s a necessary foundation to correct the distortions that pervade the Venezuelan economy.

Surviving without credit

Reforms aimed at stimulating the non-oil private sector must not stop there. 

Venezuela needs its banks to be banks again. The country has by far the region’s lowest credit portfolio relative to GDP thanks to draconian restrictions from regulators, which limit the capacity of banks to function as credit facilitators, and reduce them to mere transactional businesses. A functioning banking system is fundamental for the private sector’s recovery. Venezuelan businesses need the capital, as much as consumers need the credit to finance purchases of the goods and services those businesses produce.

Without a functioning banking sector, the private sector costs of capital increase as businesses either accept higher rates from non-bank lenders or are forced to rely disproportionately on their own cash flow to fuel operations. Ultimately, this leads to firms forgoing investments and lower productivity. The survival-mode resource allocation and corporate planning allowed some firms to surf through the crisis, but still makes it considerably harder for a successful company to scale operations and increase productivity.

Under the right conditions, Venezuela could become fertile ground for a dynamic M&A market.

On the consumer side, there is an important advantage from which to build on. Venezuela has a relatively high degree of financial inclusion and has rapidly adopted digital technologies for payments and money transfers. This provides an infrastructure through which a consumer credit market can develop.

Time for real business-friendly laws

Labour laws and informality must also be addressed. The private sector needs to be able to absorb more workers, particularly those who will eventually transition out of an oversized public sector, without facing excessive legal and financial restrictions associated with hiring. The current system makes formal employment particularly costly for smaller businesses, contributing to informality and limiting the capacity of companies to expand their payrolls and operations.

Venezuelan businesses have performed something close to a miracle by continuing to operate under such dire conditions. But many of the businesses that remain have low productivity and have become costly to scale. The end goal of this debate should be to reduce the cost of capital and frictions that limit businesses from increasing their size and productivity, aiming to allow companies to compete at scale internationally.

We need to keep pushing for reforms across the non-oil economy so that businesses can access credit, hire more workers, invest, consolidate and attract capital.

Under the right conditions, Venezuela could become fertile ground for a dynamic M&A market. Consolidation can allow fragmented industries to achieve economies of scale, invest in technology, professionalize management, employ more people, and eventually compete internationally. Stronger and better equipped companies would become more attractive to foreign investors and better positioned to access global markets.

This is what economic reform should seek to achieve: a private sector made up of larger, more productive, inclusive, and competitive businesses.

The private sector has already demonstrated that it can survive under almost any conditions. The task now is to create the conditions for the windfall from those petro-dollars to run through a private sector that is more efficient, inclusive, and scalable. We need to continue pushing for reforms across the non-oil economy so that Venezuelan businesses can access credit, hire more workers, invest, consolidate, and attract capital. That will allow it to become one of the engines of our economic transformation.