Surprise! The Bolívar, Venezuela’s long-running hyperinflationary currency, has remained relatively stable since October after several years of continuous depreciation. Reason: The government injected more than $2 billion into the foreign exchange market to curb inflation and support trade.
According to the consulting firm Aristimuño Herrera & Asociados, the Central Bank of Venezuela (BCV) has pumped about $2.2 billion into the market over the past five months, boosting the supply of the dollar, which has been criticized for years by authorities that regularly criticize US imperialism. .
In 2019, facing widespread deficits, devastating hyperinflation and a sluggish economy, Caracas crossed the Rubicon after 15 years of prohibition, allowing the dollar to circulate, which took precedence over the bolivar.
Liquidity in bolivars is increasing, but according to private estimates, liquidity in dollars, which circulate widely outside the banking system, is now more than four times higher.
Annual inflation remains the highest in the world with 686% in 2021 according to BCV, but very far from 130,000% in 2018, 9,585% in 2019 and 3,000% in 2020.
“By putting more dollars into circulation than there is demand, you keep the exchange rate stable,” Cesar Aristimunho told AFP.
Without disclosing amounts, BCV recognizes 29 “interventions” since October 2021, the date of the new cash conversion. The authorities then removed six zeros from the bolivar (1 million became 1 bolivar) for accounting reasons, promising to restore confidence in the local currency.
At the same time, Caracas introduced a 3% tax on foreign exchange and cryptocurrency transactions.
“Legal tender has been and will remain the bolivar,” Venezuelan Vice President Delcy Rodriguez, who is also the economy minister, said on Tuesday.
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Since October, the official dollar exchange rate has fallen from 4.18 to 4.34 bolivars, a near-slight depreciation of 3.69% after hitting 76% in 2021 before conversion and over 95% in 2018, 2019 and 2020.
But, as Henkel Garcia, director of the firm Econometrica, points out, this policy of injecting dollars is only possible because of the “small” size of the economy, with a gross domestic product (GDP) that has fallen by more than 80%. in the period from 2013 to 2020. According to the government, in 2021 it rose to 4%.
“The question is how long can you sustain” this policy of injecting dollars, he stresses.
Some accuse the government of “burning” foreign reserves, but two experts believe that the dollars released to the market come from increased oil revenues.
After falling from 3 million barrels per day (2014) to an all-time low of 400,000 barrels in 2020, Venezuela is starting to rise again (680,000 in 2021, according to OPEC), also benefiting from a sharp increase in the price of a barrel .
BCV reports reserves of $10.8 billion, less than half of 2014 reserves. This includes the 5 billion allocated but still unpaid to Venezuela due to the political crisis by the International Monetary Fund (IMF) to boost liquidity around the world during the Covid-19 pandemic.
If the infusion of dollars has a positive effect, there is “collateral damage,” Mr. Arstimugno emphasizes. On the one hand, as inflation remains very high and the exchange rate changes little, the purchasing power of the dollar tends to decline…
On the other hand, and this is the main thing, “exports are losing interest” in favor of imports.
Carlos Fernández Gallardo, President of Fedecamaras (Employers), is concerned “the increase in dollar value for manufacturers is detrimental to the consumer”, he is alarmed, stressing that the industrial park is operating at 27% of its capacity. “What happens if these dollars disappear?”
In 2018, in an effort to fight inflation, the authorities raised the reserve requirement for banks to 85% to limit money creation. This contributed to a further fall in credit, which was already in free fall with the collapse of the bolivar.
Venezuela is currently a credit dwarf with $140 million in 2021 compared to neighboring Colombia’s $14 billion.
Realizing that credit, investment, and economic growth are closely linked, the government stepped back somewhat in February, authorizing dollar-indexed loans under certain conditions and changing the reserve requirement, which now stands at 73%. Goal: Support growth but avoid an inflationary spiral.