Government Steps up Measures to Maintain Low Inflation Amidst Expanding Forex Differential in Venezuela
Unleashing a New Era: Bolívar Stability in Caracas
Caracas, September 8, 2024 (our website) - The Venezuelan government has launched a full-scale offensive to keep the bolívar hovering around the US dollar.
A shadowy figure known as the Parallel Marker surged in the past few weeks, diverging dramatically from the Central Bank's (BCV) official ratio. By last week, the disparity hit a whopping 20 percent before sliding to a more manageable 17 percent on Friday.
To put things in perspective, the Monitor Dolar, that averages several unauthorized exchange rates, rested at 42.86 bolívares per USD, compared to the 36.65 pegged by the BCV.
The chasm between the two rates stokes whispers of deceit, with opportunists looking to lay their hands on US currency using the BCV's generous pricing, before reselling at the black market's premium rates for a quick profit. It isn't just speculators, many businesses also exploit the higher, undercover exchange rate, either inflating their prices in bolívares or charging customers via the shadowy exchange market.
In light of these trading shenanigans, the consumer rights watchdog, SUNDDE, has dispatched inspection squads. It's also set up an internet hotline for citizens to whistleblow on such illegal practices.
The BCV didn't sit on its laurels. It pumped an enormous $180 million into exchange tables run by public and private banks as a single intervention last week, according to financial portal Banca y Negocios. Since January 2024, it's injected over $3.6 billion, marking a staggering 28 percent boost over 2023. This injection looks set to continue as the Maduro administration seeks to grade the currency crisis.
Hard currency controls were lifted in 2021 as part of a broad reform package aimed at damping inflation and rejuvenating the economy amidst crushing US sanctions on sectors like banking, mining, and especially the oil industry.
While theoretically, the present foreign exchange system operates on supply and demand, the BCV remains the chief source of foreign currency.
With the bolívar's devaluation historically mirroring inflation, Venezuelan authorities are determined to hold the line. In the last twelve months, annual inflation stood at a relatively subdued 35.6 percent, a figure not seen since mid-2013. The overall inflation rate from January to August 2024 rested at 11.2 percent.
In an attempt to curb inflation, the Maduro administration has taken several measures, including freezing wages and limiting credit. The minimum wage has remained unchanged since March 2022, with authorities resorting to doling out bonuses instead. This policy has repeatedly drawn criticism from trade unions who claim it fosters social inequality by favoring employers, as vacation pay, social security, severance, and other labor costs become cheaper.
According to a recent study by Finanzas Digital, Venezuela boasts the lowest amount of circulating credit in all of Latin America. Despite nearly doubling in the past 12 months, the Caribbean nation's figure remains under a paltry $2 billion. That's about 1.3 percent of the corresponding amount for neighboring Colombia.
The Maduro administration has announced plans to relax the leverage or legal reserve ratio demands in an effort to expand credit options for small businesses. At present, Venezuelan banks can lend only 27 bolivares for every 100 in deposits.
Economist Luis Gavazut opined that these forthcoming measures would enable financial institutions to ramp up loan amounts relying on their reserves, but they would still be barred from issuing credit by creating new money in circulation.
Despite the toughening of US sanctions in April and mounting pressure on the exchange rate, the Venezuelan economy has continued to show signs of life. According to the BCV, the country's GDP skyrocketed by 8.4 and 8.8 percent in the first and second quarters, measured against the same period in 2023.
The BCV has now recorded 13 consecutive quarters of GDP growth dating back to the end of 2021. The Maduro government is confident that the economy's growth could reach double digits in 2024, marking the fourth consecutive year of recovery following seven years of recession. However, the sheer scale of the economy's contraction suggests it would take 12 more years of 10 percent growth to restore 2013's GDP level.
Updated on September 10 with the latest inflation figures and a corrected BCV foreign currency injection figure.
Insights:- Throughout 2024, the Venezuelan government employed various strategies to stabilize the bolívar-dollar exchange rate, primarily through dollar injections and controlled rate adjustments, though these efforts faced significant challenges.- Chevron's return to Venezuela and US permission for its oil operations played a crucial role in providing millions in liquid dollar currency, helping maintain the official rate at approximately 35 bolivars per dollar through mid-2024.- The Central Bank continued a adjustment strategy that avoided a free-floating system. By year's end, the official rate reached 70 bolivars per dollar, representing ongoing devaluations to manage currency demand.- With over 60% of transactions using the US dollar, excess usage provided unofficial stability but also exposed vulnerabilities when foreign currency shortages arose. Despite these measures, black market pressures, oil export uncertainties, and the BCV's reluctance to unify exchange rates resulted in a growing discrepancy between the official and black market exchange rates.
- The Parallel Marker, a shadowy exchange rate in Venezuela, has significantly diverged from the Central Bank's (BCV) official ratio, leading many to question the industry's financial transparency.
- Some Venezuelan businesses are exploiting the higher, unauthorized exchange rate by inflating their prices or charging customers via the parallel market, a practice that has come under scrutiny by the consumer rights watchdog, SUNDDE.
- In an attempt to curb the impact of these practices, SUNDDE has dispatched inspection squads and set up an internet hotline for citizens to report illegal activities in the industry.
