Mié. 04 Diciembre 2024 Actualizado ayer a las 5:13 pm

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US Dollar bills (Foto: Archive)

How Exchange Rate Stability Affects Venezuela’s Inflationary Dynamics

So far this year, the Central Bank of Venezuela (BCV) has gone for maintaining stability in the exchange rate of the bolívar against foreign currencies.

On Monday, May 8, the BCV made its eighteenth exchange intervention selling $63 million to banks, $1 million more than last week in anticipation of greater pressures on the market.

The exchange rate mechanism, which keeps the Venezuelan State as the main supplier of foreign currency, is facilitating the purchase of bolívars from the BCV to support the payment commitments of the State entities. This formula of financing in bolívars appears to be containing the issuance of currency and liquidity, the factors which, when not under control, act as the main catalysts that drive the devaluation of the bolívar.

According to the private firm Venezuelan Financial Observatory (OVF), the stability operation is functioning as a determining factor in controlling inflation.

The accumulated inflation between January and April was 22%, a significant decrease from the same period last year when it stood at 660%, according to OVF’s calculations. It may be added here that OVF’s analyses of the Venezuelan economy are usually negative compared to Venezuelan government publications.

Although the BCV has not published the economic indicators for April, according to OVF, inflation in April was only 2.5%.

Foreign exchange market

According to analitica.com, the BCV raised the value of foreign currency it has placed in the financial system by 54.88% so far this year, while the official exchange rate has climbed 43.28%, with constant variations since mid-February.

In addition, in the first two weeks of May, the BCV intervened in the market with $125 million, $18 million less than what it had placed in the market during the same period of April.

The accumulated amount placed in the market so far this year was $1.47 billion, which represents a decrease of $12 million or 0.84% compared to the same period of 2022.

In 2023, the average amount per intervention has been $59 million, which is 25.6% lower than the average of $74 million in the same period of 2022.

However, although the Venezuelan State has been decreasing its placement quota in the foreign exchange market, the exchange rate has not shot up, and this seems to be related to the injection of foreign currency by the joint ventures of Petróleos de Venezuela (PDVSA) with the US oil multinational Chevron. Chevron is making a series of investments in Venezuela and acquiring bolívars to settle part of its financial commitments.

According to the consulting firm Síntesis Financiera, the foreign currency sales of Chevron in March were around $100 million.

“Chevron will remain a stabilizing factor if it continues to cover 20% of the foreign currency demand of the banks, and will surely alleviate BCV’s intervention burden,” stated the consulting firm.

In an adverse context marked by the monumental drop in the Venezuelan State’s availability of foreign currency due to the blockade against Venezuela’s oil operations, the government resorted to monetary issuance mechanisms to finance the deficit. However, in the last two years, the Venezuelan government’s monetary policy has been characterized by sobriety, the renunciation of massive issuance, and the containment of liquidity.

Currently, the main instrument implemented by the government is the purchase of bolívars in the market through the exchange bureaus.

Thus, the exchange rate stability tends to have an impact on the behavior of consumer price indices (inflation).

Indexation of minimum living income

Recently, President Nicolás Maduro announced an increase of the minimum living income in bonuses for the public sector payroll that includes workers, retirees, and pensioners. The bonuses are equivalent to $70 per month.

The president added that the payments will be indexed to the official exchange rate.

This announcement is relevant in the exchange rate issue since, in accordance with the government’s monetary policy, the government would have to finance its commitments through the purchase of bolívars.

If the indexation is applied on a monthly basis, the incorporations in the exchange system could be much more fluid, and the payment of payroll may be estimated at about $ 500 million per month.

This formula would allow the government to guarantee stability of the exchange rate and contain devaluation and inflation, the two factors which—together with commercial speculation—are the main causes behind the loss of the real income of the Venezuelan working class.


Translated by Orinoco Tribune.

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