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2017, March 3 - A barter system by SMEs and Venezuela good opportunity for local businesses

The economic turmoil faced by Venezuela presents a unique opportunity for small- and medium-sized businesses in Jamaica to collaborate for mutual benefit through a barter system that will stimulate the Jamaican economy as well as provide necessities to struggling Venezuelans in one of the worst crises to face the country.

Venezuela, which is one of the most urbanised countries in South America, is in economic turmoil.

In the last year, the country experienced an inflation rate increase of 50 per cent, recording at 500 per cent up from 275 per cent in 2015, according to a note published by the IMF’s Western Hemisphere Director Alejandro Werner.

The forecast for 2017 is even ‘’gloomier’’ — the inflation rate is predicted to be around 1,600 per cent. The situation is so bad that the highest currency denomination, the 100-bolivar note is worth around US 15 cents. This has led to a black market scenario in which there is a shortage of US dollars and Venezuelans are crossing the border to Colombia to change the bolivar into US dollars, which they use to purchase food that is not available in Venezuela.

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The money has been become so worthless that instead of counting it, it is weighed to be used for the purchasing of goods and services.

Venezuela is one of the world’s leading exporters of oil having the world’s largest oil reserves. Oil was first discovered in the early 20th century.

Before having oil as its main resource, Venezuela was an underdeveloped exporter of agricultural commodities such as cocoa and coffee. Oil came along and brought some prosperity but soon the glut of the 1980s enveloped the country and this led to a long-running economic crisis. Inflation peaked at 100 per cent and poverty rates increased by 66 per cent by the mid-nineties. A major banking crisis saw the country’s per capita GDP plummeting.

At the beginning of the 2000s, oil prices picked up and this saw the economy slowly recovering with more capital and social spending to improve infrastructure and the lives of Venezuelans. However, a currency control system implemented by former President Hugo Chavez in 2003 led to the devaluation of the Bolivar, and in 2008, Venezuela was one of those countries hit hardest by the global financial crisis.

Venezuela’s economy is dominated by the petroleum sector which accounts for a third of its GDP, around 80 per cent of exports and more than half of government reserves. The country which is located in South America has strong links to the Caribbean and evidence of this can be found in the PetroCaribe agreement.

PetroCaribe is an agreement that began in 2005. Under this regime, 18 Caribbean countries (of which two are South American), purchase oil from Venezuela on preferential terms. The countries, which include Jamaica, are able to buy oil at market value but only pay between five and 50 per cent of the cost up front. The balance can be paid in 25 years at one per cent interest. The deal also accommodates an agreement for nations to settle their debts by providing goods and services to Venezuela.

Jamaica and Venezuela have had an excellent relationship which has transcended the PetroCaribe agreement. In August 2016, the two countries embarked on a deal that sees Venezuela selling oil in exchange for food, medicine and building supplies — good old-fashioned barter system in the 21st century. This deal has proven beneficial to Jamaica where the demand for oil has put the country in a precarious position in past years when oil prices slid past US$100 dollars per barrel.

Fast-forward to 2017, Venezuela is desperately in need of basic supplies for its people and this presents a unique opportunity for a barter system for SMEs in Jamaica.

A barter system in this context is one in which goods and services are directly exchanged without using the medium of money, oil or gold. Needs have to be identified and matched in order to strike appropriate deals. Participating entities would obviously have to satisfy themselves with the quality of the goods and services being exchanged and the relevant values have to be objectively agreed.

Venezuela is in critical need of food, medicine, rice, flour, beans, milk, eggs, vegetables, toilet paper, fish and chicken, among other goods.

Apart from oil, Venezuela’s main exports are gems and precious metals, organic chemicals, iron and steel, ores, aluminium, inorganic chemicals, fertilisers, vehicles and electronic equipment.

On the other hand, Jamaica’s main exports are coffee, banana, fruits, sugar, rice, yam, fish and chicken, and the country’s main imports are oil, ethanol, wheat, lye, electronic appliances, vehicles, metals and rice.

From this list, we can see an opportunity for a barter arrangement between local SMEs and the Venezuelan government and/or Venezuelan businesses. There could be a trade of food and building materials by local businesses in exchange for items such as electronic equipment, which includes engines and pumps, and machinery to automate the production of other goods as well as vehicles. Jamaica is not a producer of electronic equipment or vehicles and these are two of the main necessities small businesses need in order to expand.

Barter is not a new idea for Venezuela. In 2009, under the presidency of Hugo Chavez, the country signed a US$120-million rice agreement with Guyana where the latter would provide approximately 220,000 tonnes of rice annually to Venezuela. This deal was done under the PetroCaribe agreement. A similar deal costing US$50 million was also struck with Trinidad late last year for the supply of food which included beans and ketchup to Venezuela.

So how can SMEs use this situation to their advantage?

Small businesses can group themselves under one body such as the Medium and Small Business Alliance and lobby the Jamaican government through the Ministry of Trade to chart discussions for small businesses to exchange goods with Venezuela in return for goods that are needed either locally, for the expansion of their businesses or for them to repackage and export to other countries with which Jamaica has strong trading relationships. An example of this once again is how the Guyana government brought small farmers together to build the large quota of rice Venezuela needed.

In this way, Venezuelans could ride out their economic depression with some dignity being able to not only use barter to provide basic needs but also to strengthen their own economy.

Paramount Trading Jamaica, for example, is currently examining opportunities for exchange with Venezuela. The company manufactures food and household chemicals such as baking powder and fruit drink stabilisers as well as cleaning and water purification products, which may be exported to Venezuela, and in exchange the company could accept chemicals that it can distribute through its established channels to monetise the food supplied in the first place.

On the other hand, one company could also collaborate with another that could supply dairy products, eggs, chicken, toiletries, or medicines in exchange for machinery that may be used to automate the manufacturing process. This could be particularly useful where SMEs struggle with lack of funding that limits expansion.

Venezuela’s economic crisis sees many Venezuelans either suffering from starvation or illnesses for which simple medications can be exchanged through a barter system. A barter system is a fair medium of exchange and is also a vehicle that could help a country that has propped up many in the Caribbean in their times of need, particularly during structural adjustments, as has been done for countries like Guyana and Jamaica.

A collaboration of this kind would assist SMEs to earn income as well as expand for the future, thereby stimulating growth in our economy and providing jobs.

Hugh Graham is managing director for Paramount Trading Jamaica.

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