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Venezuela’s anti-inflation efforts dealt blow as currency tumbles

Venezuela's anti-inflation efforts dealt blow as currency tumbles
© Reuters. FILE PHOTO: A street vendor holds a one dollar banknote beside an old Bolivar banknote in Caracas, Venezuela, October 1, 2021. REUTERS/Manaure Quintero/File Photo

CARACAS (Reuters) – Venezuela’s effort to curb high inflation by stabilizing exchange rates is becoming less effective as the local bolivar currency slips in value against the dollar, analysts said on Wednesday.

For months, President Nicolas Maduro’s administration has sought to fight inflation by anchoring the bolivar’s exchange rate. It has increased the supply of foreign currency cash in local banks and limited the expansion of credit and public spending.

But that strategy is no longer working, analysts said.

In recent weeks, the Venezuelan Central Bank has sold fewer dollars and the government has increased spending, allowing the exchange rate to slide to 10.23 bolivars per dollar by Wednesday, according to the central bank’s figures.

The local currency has depreciated 17% since October, and 55% so far this year. Last month, the country’s monthly inflation was seen at 6.2%.

“The strategy of lowering prices with the exchange rate frozen is not working,” said economist Jose Guerra, who predicted that inflation in November could possibly return to double digits.

At the end of 2021, inflation began to slow down but year-on-year inflation in Venezuela still stands at 155%, among the highest in the Latin American region, official data shows.

“The exchange environment lives with a fragile balance. Its stability depends on the amount of dollars that the Central Bank injects in an environment in which the government spends more in bolivars,” said Luis Arturo Barcenas, economist at consultancy Ecoanalitica.

“The fragile model is imploding,” he added.

The issuer’s weekly placement of foreign currency in banks has been around $50 million, while a month ago it was $80 million to $100 million, according to estimates by local consultancy Sintesis Financiera.

Both economists said the government may be fine with letting the exchange rate slide a little more, if it allows them to spend again.

The central bank did not immediately respond to a request for comment.

Source: Investing.com

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