Government Prioritizes Maintaining Low Inflation amid Expanding Foreign Exchange Gap in Venezuela
Huddled Updates from Caracas - Sept 8, 2024 (our badass platform)
The Venezuelan authorities have cranked up the heat to set the bolívar's dance with the almighty buck on a steady beat.
A rogue currency whisperer, known as the "Parallel Marker," has reared its ugly head recently. The gap between this shadowy character and the official exchange rate set by the Venezuelan Central Bank (BCV) has widened to an intimidating 17% just last Friday. But after causing a stir, it retreated to a still-hairy 15%.
At the moment, the "Monitor Dolar" is standing tall at 42.86 bolívares for each buck, contrasting with the BCV's demure 36.65.
This schism between the two rates fuels rumors, with folks eager to snap up greenbacks at the official rate, only to resell them on the black market for quick profits. Most businesses don't miss this opportunity, factoring the fickle parallel rate into their cost structures. Many either jack up prices in bolívares or slap the black market rate on customers.
In response to complaints about retailers charging higher-than-legal rates, the consumer rights watchdog, SUNDDE, has swooped in with a posse of inspection teams. They're keeping a watchful eye, and citizens can even report suspect cases via an online portal.
Meanwhile, BCV ain't just standing idly by. They've been splashing dollar bills at "exchange tables" run by banks - public and private. Last week alone, they invested a whopping $180 million in a single move, pocketing a total of over $3.6 billion this year. That's a bullish 28% jump from 2023.
Back in 2021, President Maduro's administration tossed a lifeline to currency exchange controls as part of a grander plan to rein in inflation and boost the economy under the crushing weight of waves of US sanctions targeting industries such as banking, mining, and oh-so-precious oil.
Though the theory suggests a free-roaming currency market based on supply and demand, the BCV remains behind the scenes, pulling all the strings as the greatest provider of foreign currency.
With the bolívar's value historically tied to the spike in inflation, Venezuelan authorities are clinging dearly to recent progress that's finally brought 12-month inflation down to a relatively sane 35.6%, the lowest since mid-2013. So far this year, the cumulative inflation rate is sitting at a more manageable 11.2%.
To further rein in inflation, the Maduro government has taken action by freezing salaries and regulating credit. However, the minimum wage hasn't budged since March 2022, with authorities banking on bonuses instead. But trade unions argue that employers are benefiting from this policy, as labor costs like vacation pay, social security, and severance packages become cheaper.
A study by Finanzas Digital discovered that Venezuela contains the smallest amount of circulating credit in all of Latin America. Despite a spectacular 100% boost over the past year, it remains slightly below $2 billion, a puny 1.3% of its neighboring nation Colombia's figure.
The Maduro administration has made it known they're planning to loosen the reins on bank leverage, aiming to improve credit options for small businesses. Presently, banks can only extend loans for 27 bolivares for every 100 in their deposits.
Economist Luis Gavazut claims that the upcoming changes will enable banks to dish out more cash based on their reserves but bar them from creating new money in circulation.
Despite Washington's unrelenting hardening of sanctions in April and the recent exchange rate battles, the Venezuelan economy continues to grow. The BCV records an impressive 8.4% and 8.8% increase in the first and second quarters of this year, compared to the same period in 2023.
The BCV has now logged 13 consecutive quarters of economic growth dating back to the end of 2021. The Maduro government is optimistic that the economy's growth could hit double digits in 2024, indicating the fourth consecutive year of recovery following a seven-year recession. However, given the colossal contraction the economy has faced, it would take a mind-boggling 12 more years of 10% growth to get back to 2013's GDP level.
Updated on Sept 10 with updated inflation numbers and corrected foreign currency injection figures.
- The finance industry in Venezuela has been impacted by the widened gap between the official exchange rate set by the BCV and the parallel market rate, often referred to as the "Parallel Marker," with the latter influencing the prices businesses charge.
- Despite the BCV's efforts to control prices by investing large amounts of foreign currency and freezing salaries, the average inflation rate remains higher than that of many neighboring countries, such as Colombia.
- In an attempt to improve credit options for small businesses, the Maduro administration plans to loosen restrictions on bank leverage, allowing banks to lend more based on their reserves while preventing the creation of new money in circulation.
