Venezuela is at risk of accelerating inflation by stopping depreciating the currency

Years of slowdown inflation in Venezuelaare about to be reversed due to the depreciation of the currency, said sources from the private and public sector, at a time when the flow of foreign currency is insufficient to meet the demand of companies and the government has kept its strategy reserved.

After four years of hyperinflation, the government of President Nicolás Maduro applied an orthodox policy in 2022 to lower prices by restricting public spending and credit, along with anchoring the exchange rate, which has led the Central Bank to sell through of banking billions of dollars.

Maduro has highlighted that his government defeated inflation of more than 100,000%, and the consumer price index in 2024 will be similar to that of a decade ago.

But the policy now changes.

For more than nine months the exchange rate was at an average of 36.5 bolivars per dollar, until in mid-October the local currency began to depreciate and reach 45.7 units per dollar, according to figures from the Venezuelan issuer.

According to analysts, the overvaluation of the currency made imports cheaper compared to national products, which affected the Venezuelan private sector, which has faced inflation of 12% in nine months.

With the slide in the exchange rate, prices in this last quarter of the year will accelerate, added the consulted sources and analysts. A LatinFocus report estimates that the exchange rate will end the year at 50 bolivars.

Until September, year-on-year inflation was 25%, according to official data. The official figure for October has not been released.

“For nine months the depreciation of the currency was zero, while inflation advanced, which showed problems in the exchange rate scheme,” said Daniel Cadenas, economist and professor.

“For the (exchange) system to work, a growing source of foreign currency is needed and that is not possible,” he added, referring to the fact that the market depends on oil revenues.

Within the government it was analyzed that the price index in 2024 would end at 30%, said two financial sources with knowledge of the goals. With currency depreciation, the figure may change.

Inflation this year could close between 35 and 40%, according to estimates by local economic firms.

“There has been a necessary exchange rate adjustment that will have an impact on inflation,” said Asdrúbal Oliveros, economist and director of the local consulting firm Ecoanalítico. “The government has understood that it has to devalue.”

Uses of currencies

Vice President Delcy Rodríguez said in October in an activity with businessmen that it was necessary to “reflect on the use of currencies.”

“We should all be concerned about how these currencies are used in imports (…) We have to take care of the currencies because this is a blocked country and there cannot be cheap currencies for shampoo, so that gray hair does not look golden, but rather pink,” he added, without giving more details and referring to imported products for cosmetic use.

Rodríguez’s comments are the only ones the Government has made on the exchange issue. The Central Bank and the Communications and Finance ministries did not respond to requests for comment.

With an exchange rate the same for nine months, demand for cheap foreign currency by the private sector increased, while the flow of dollars to inject into the market began to reduce, said the sources consulted.

In July, the placement of dollars by the Venezuelan issuer in banks averaged about 800 million dollars, while in October it was at 400 million dollars, according to calculations by the local consulting firm Síntesis Financiera.

The Central Bank did not immediately respond to the reasons for the decrease in the injection of dollars.

“The exchange rate policy strategy is not moving forward,” added a source from the ruling party when asked about the changes in the policy.

Food and medicine companies have acquired a percentage of their foreign exchange requirements, sources said. While companies that cannot buy dollars receive titles in bolivars indexed to the exchange rate from the issuing entity, which are kept in their accounts until the banks have the currencies and can sell them.

While waiting for a greater flow of foreign currency to import, many companies are consuming their inventories, added two sources from the private sector, who pointed out that inventories have yielded, because consumption has been lower.

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