Inflation & Exchange Rate: Report on Venezuela’s Economy in 1st Quarter of 2024
Franco Vielma, Orinoco Tribune, May 13, 2024 ─
The performance of the Venezuelan economy so far this year suggests the mitigation of the most adverse indicators that have been recorded in the country in recent years.
A coercive economic framework of foreign origin continues to influence Venezuela’s economy. The coercive economic measures—euphemistically referred to as “sanctions”—continue to restrict important activities internally and will continue to be influential for the remainder of the year. However, the Venezuelan government has applied strategies that have provided it new control over sensitive sectors that have a direct impact on the population.
The year 2024 is shaping up, so far, to be the most successful in the fight against inflation in more than a decade, and President Nicolás Maduro has mentioned that he estimates economic growth of about eight percentage points. For other institutions, such as the International Monetary Fund (IMF), a growth of 4% is forecast, which would be the highest in South America.
Clearly, the illegal sanctions against the Venezuelan economy will have an impact on economic indicators, but so far this year, the outlook remains favorable.
The “monster” of inflation
This indicator has been the most difficult to manage for Venezuela’s economy in recent years. Its escalation began with the internal economic and commercial war and the fall in international oil prices beginning in 2014.
Subsequently, the sanctions imposed on Venezuelan oil activity in 2017 by Donald Trump’s government amplified annualized inflation, which increased in 2018 to the astonishing figure of 130,060%, the highest ever recorded by any country. That year, like never before, inflation reached truly monstrous levels, regardless of the fact that this phenomenon of price hikes has occurred very frequently in Venezuela since the “Black Friday” in the early 1980s.
However, the economic policy implemented by the Venezuelan government managed to progressively degrade this influential indicator, and, for the month of December 2023, it was reduced by 33 percentage points compared to the same month of the previous year—annualized inflation for December—thus registering the lowest figure since 2013, 2.4%.
The forecasts of some economic analysis firms had estimated inflation by the end of 2024 beyond 100%. The Venezuelan Finance Observatory (OVF) had estimated inflation of 176% for this year. However, such calculations could be changing in light of the new data, and inflation could, unexpectedly, only reach into double digits by the end of this year.
The least inflationary December in the last 13 years announced the possibility that 2024 would have more stable and downward inflation, according to figures from the Central Bank of Venezuela (BCV). Indeed, this has been the case, and, from January 1 until the end of April, 2024 is the year with the least inflation in more than a decade.
On May 3, the BCV released its calculations on the National Consumer Price Index (INPC) for the month of April. “Inter-monthly variation of the INPC [meaning inflation] in April 2024 was 2%. This result represents the lowest inflation for 12 years, within the framework of a new economy and with the efforts of all Venezuelans,” said the BCV official account on the X social media platform, which they supported with two graphics.
According to the data, it can be seen that in April 2018 alone, inflation was 55.8%, while in 2022, 2023 and 2024, years of deployment of the new national exchange system and significant monetary measures to restrict liquidity, the indicators dropped notably.
So far in 2024, accumulated inflation is 6.3%, which, in effect, means the lowest record in the January-April period in the last 12 years, as can be seen in the following graphic.
In light of these numbers, it is worth mentioning that one of the most relevant elements that could help explain these results is that of the new monetary governance enforced in the country following the deployment of the new national exchange system.
An exchange rate system that works
This system has three denominations. One of them is the “exchange intervention” mechanisms, which consist of the placement of currencies in the system by the BCV.
Secondly, the placements in the exchange boards of contributions from large companies in the country in order to exchange foreign currency for bolívars [Bs, Venezuela’s national currency] to fulfill their various commitments to national currency.
Thirdly, in retail operations, exchanges between bolívars and dollars in small amounts, carried out by ordinary individuals and small legal entities through simple and routine operations in the national banking system.
As of May 5, the BCV’s reference exchange rate remained at 36.5 Bs/USD, a level that has remained practically static since October of last year. Meanwhile, the so-called “parallel dollar,” or unofficial exchange rate, kept a level of 39.2 Bs/USD, a gap that, although it widened slightly in the month of April, is still narrow when compared to the records from previous years.
Obviously, the system has managed to contain the exchange rate, and this is a key factor to understand the metabolism of inflation in Venezuela. If the exchange rate increases [meaning the price of the US dollar rises], this will be immediately reflected in the prices, which are referenced in the foreign currency. By stabilizing the exchange rate, the Venezuelan government is achieving indirect containment of prices.
Regarding the containment of the exchange rate, it can be stated that this is not solely and exclusively due to the injections of foreign currency that the Venezuelan government is making into the system. Recently, Vice President Delcy Rodríguez pointed out that in 2019, the average amount traded in the exchange system was US $277 million; in 2023, it was US $14.6 billion and, so far in 2024, that is, the first quarter, it has already exceeded last year’s figures for the same period by 34%.
This suggests that the total estimated amount of foreign currency that could be traded in the foreign exchange system at the end of this year could exceed US $18 billion.
On Monday, May 6, the BCV made a new foreign exchange placement in the order of US $68 million, which includes some US $1.3 billion sold through the BCV so far this year.
This is an element that deserves attention given that, if the Venezuelan government maintains placement levels, it could close the year with some US $3.99 billion sold in the exchange system, which would be equivalent to only 22% of the contributions to the system. The remaining 78% would be contributed by the private sector if current conditions continue.
Clearly, economic policy has managed to overcome the rentier relations that had predominated in the national exchange system [where most of the placements originated from the Venezuelan state].
Another important element is the name “exchange intervention” to refer to the BCV placements, according to the economic and journalistic jargon in Venezuela. The pattern used by the BCV for placements is weekly, which does not qualify [for some economists] as an intervention pattern, but, rather, a routine pattern.
It is evident, then, that the Venezuelan state is proceeding to sell foreign currency in the system because it also fulfills its commitments and various forms of payment in bolívars, including its payroll payments for workers, retirees, and pensioners of the public administration. Technically, what the BCV does is buy bolivars at the market rate, which contributes to raise the value of the national currency.
Compared to the private sector as a whole, the Venezuelan state is now a minority supplier within the exchange system; hence, it is not accurate to classify the mechanisms of injection or sale of foreign currency as “intervention” practices.
The components of the price of the bolívar against the US dollar are also associated with the purchases of bolívars made by private legal and natural persons, both at Exchange Boards and in retail operations.
Next, it is important to remember that the Venezuelan government has implemented significant actions to contain liquidity during these years, just as it did until recently, which has led it to maintain the banking legal reserve at levels greater than 70%. But this picture is also changing.
Vice President Delcy Rodríguez said recently that between March 2023 and March 2024, credit grew by 82%. The Maduro administration is now more lax with its monetary policy so that credit increases, and, consequently, this can encourage economic growth.
So far this year, specifically, until Friday, May 10, accumulated monetary liquidity rose to 36.4%. But the exchange rate has remained the same. This means that it is the supply of foreign currency that is managing to maintain the value of the bolívar against the dollar.
The development and concrete execution of coercive measures against Venezuela will be important for the future of the national economy for the remainder of the year, especially in terms of the flow of foreign currency to the economy, which could have repercussions on the exchange system.
But, so far, the monster of inflation has been contained. This is the most important achievement of the Venezuelan government’s economic policy so far this year, due to the great significance of price indices for the daily life of the population.
It is evident that the exchange system is meeting its objectives. It is managing to contain the devaluation and, therefore, the price systems, which offers necessary stability for the development of economic activities and the daily life of the population. In this way, growth is facilitated.