Even with the dollar and high inflation, Venezuela must have

Even with the dollar and high inflation, Venezuela must have
Even with the dollar and high inflation, Venezuela must have

In the process of recovery, Venezuela should have the highest growth rate in South America in 2022, according to the latest data released by the Economic Commission for Latin America and the Caribbean (ECLAC). The entity’s new projections, published on August 23, are twice as high as the indices forecast in April.

According to ECLAC, Venezuela should register growth of 10% in 2022, double the 5% forecast by the agency five months ago. This would make the country, in addition to the highest growth in South America, the third highest in Latin America.

The projections, however, come at a bad time for economic indicators. Since April, inflation has risen again after months of decline and, in recent days, the dollar has skyrocketed, approaching 8 bolivars in recent weeks. The negative trends in the economy have raised skepticism on the part of some economists who fear that the return of a wave of inflation and exchange rate instability will once again attack Venezuelans’ purchasing power and put a damper on projected growth.

To Brazil de factoVenezuelan economist Luis Guanipa said that the projections are plausible when put into perspective in relation to the drop in GDP that the country has suffered in recent years of economic crisis, but may not represent a sustainable positive cycle if the country again suffers from recurring increases in prices.

“We have reached a delicate point in the Venezuelan economy in which the financial blockade prevents the country from doing commerce, carrying out international transactions, in addition to having its foreign debt frozen and suffering the consequences of the covid-19 pandemic, that is, multiple factors that made that the Venezuelan economy entered a very difficult stage. In 2022, the blockade persists, but the country managed to dribble some sanctions, it has some new international allies, so logically the growth can be 10% and it can even reach 20%, which in another country would be exaggerated, but in Venezuela it is a bit normal because we came from a very severe crisis”, he says.

Dependent on oil income, Venezuela went into crisis when the price of a barrel began to fall and the US began to impose sanctions against its economy. The scenario caused the production of the product to plummet, going from about 3 million barrels of oil per day in 2010 to 500 thousand in 2020, which led the country’s GDP to contract by more than 86% in the last decade, according to IMF data.

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The oil crisis directly affected inflows and led to a significant reduction in Venezuelan international reserves. The country then entered a hyperinflationary cycle that drastically reduced the purchasing power of workers and devalued the national currency. After showing a slight recovery in recent months, with small easing of economic sanctions imposed by Washington, oil production has generated a certain increase in Venezuelan reserves, although it is still far from pre-crisis levels.

Economics professor at the Universidad Central de Venezuela (UCV), Carlos Peña, remains skeptical about growth projections. To Brazil de factohe states that a certain recovery is possible in the short term, although insecurity on the part of the private sector and consumers continues to negatively influence the economy.

“We came with a more or less acceptable oil production, it wasn’t massive as in the past, but in fact a little money came in. But recently production has decreased again and this has many consequences, because no matter how much the government say that the real GDP, non-oil, is growing, we continue to be an oil country and in the end the Venezuelan economy continues to live under a very strong process of uncertainty”, he says.

This does not, however, prevent the Venezuelan government from getting excited about the recovery figures. Caracas is now seeking to attract more and more investment from allied countries such as Turkey and Iran to circumvent trade limitations imposed by the US blockade. At the regional level, the country is already talking about creating a binational economic zone on the border with Colombia, a plan that is supported by the new neighboring government, now under the command of Gustavo Petro, after the resumption of relations.

On August 22, the president of the Central Bank of Venezuela (BCV), Calixto Ortega, presented the most recent quarterly growth data collected by the institution on a national network. According to the BCV, Venezuelan non-oil GDP grew 19% in the last quarter of 2021 and 117% in the first three months of this year. In addition, Ortega stated that growth in the second quarter of 2022 should be around 18%.

To Brazil de facto, Guanipa argues that, regardless of the projections on Venezuelan GDP, the central issue of Venezuela’s economy is “to increase national income affected by the blockade”. For the economist, it is impossible to think of sustainable growth in the medium and long term if the country does not increase its reserves, either through the reactivation of the oil sector or through the export impulse of other sectors of the economy, something that the government already seems to be trying to achieve with projects such as the Special Economic Zones.

“The fall until 2019 was dramatic, so it is difficult for a country to be able to command an efficient economic policy when it has practically no income, so it had to resort to issuing currency, but this was also not efficient because it created an inflationary spiral. Now that the economy is stabilizing a bit, that incomes are increasing with negotiations that circumvented the blockade, the state is trying to balance itself, not applying an orthodox monetarist plan, but also not putting money into the economy that will later melt.” says.

Crisis and inflation: what is the way out?

The balance to which the economist refers concerns the strategy adopted by the Central Bank to keep the exchange rate stable since the end of last year. After the last currency conversion that took place in October 2021 and cut six zeros from the currency, the BCV has been injecting dollars into the economy in exchange for bolivars at stable prices. The idea is to reduce liquidity by containing the issuance of currency and using part of the new resources acquired with the slight oil reactivation to hold the exchange rate.

In August, the increase in monetary liquidity in the country reached about 170%, that is, there is more than twice as much money circulating in the economy as there was in January. The variation, however, is far from what it was in 2018, for example, when in the same period, between January and August, the indicator increased by more than 3,200%.

“It is a plan that many criticize, but it is working”, argues Guanipa. “In October 2021, during the conversion period, the parallel dollar was at 5.25 bolivars and on August 1 of this year it was at 6 bolivars, that is, the parallel exchange, which is known to destabilize the economy, increased less. of 1 bolivar in 10 months”, he says.

In recent weeks, however, currency stability has been shaken as the dollar’s price soared for the first time in several months. The US currency started the month of August at 5.77 bolivars and arrived on the last day of the month at 7.89 bolivars, an increase of more than 36%. The rise in August was even greater than the total variation recorded between January and July, since the dollar started the year at 4.62 bolivars.

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The exchange rate disturbances are likely to mess with inflation for the month of August, which has yet to be published. The increase in prices was already a trend observed in previous months, especially between April and July, when the index rose again. In June, the country registered an inflation of 11.4%, the highest of the year so far.

The numbers call the attention of economists because after ending a cycle of hyperinflation that lasted 4 years, the country had been registering a sequence of declines in the Consumer Price Index since November last year. In March of this year, Venezuela even registered the lowest monthly variation in the last decade.

Professor Carlos Peña explains that the rise in prices and the exchange rate in recent months is due to the fact that the stability of the indicators is being maintained mostly by the intervention of the Central Bank and that, therefore, it does not generate the economic confidence it should.

“The government wants to try to keep the exchange rate stable at any cost because it already knows that there is a perverse relationship between inflation and the exchange rate. So the government continues to finance its deficit with monetary expansion and begins to spend foreign exchange to try to keep the exchange rate more or less stable, but the question is: how far is it feasible to maintain a valued exchange rate with international reserves? All this leads to a process of increasing uncertainty and makes the expectations of economic agents continue to be of high inflation and exchange rate depreciation”, he says.

Editing: Arturo Hartmann

The article is in Portuguese

Tags: dollar high inflation Venezuela

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