Rising dollar may stymie Venezuela’s efforts to combat inflation

9:18 pm Thursday, August 25th, 2022

CARACAS (Reuters) – Efforts by the administration of Venezuelan President Nicolas Maduro to tamp down inflation by increasing supplies of foreign currency may be at risk amid economic growth after years of stagnation, analysts said.

Maduro’s government has succeeded in lowering consumer price growth, which was 137% year-on-year through July, by increasing the supply of foreign cash in local banks, limiting the expansion of credit, reducing public spending and increasing taxes.

But in recent weeks the central bank has sold fewer dollars and the government has increased spending, raising demand and sending the official dollar exchange rate soaring by 21.7% in six days.

“It’s impossible to think of exchange stability with the level of prices in Venezuela,” said economist Luis Arturo Barcenas. “The balance between the official rate and the non-official one was very fragile because it was based on the injection of foreign currency.”

The central bank on Wednesday proposed a new strategy to deal with demand for dollars, asking banks to share the foreign currency figure needed by businesses and propose an exchange rate that will then be evaluated by the government, two sources said.

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

“The changes this week (in the dollar) have been very strong and those who are disadvantaged are those of us who earn bolivares,” said 62-year-old snack seller Alicia Rodriguez, who feared the cost of her merchandise may increase by up to 30%.

The minimum wage in local currency is equivalent to some $19 per month.

Venezuela’s economy grew 17.04% year-on-year in the first quarter of 2022, the central bank said on Tuesday.

“All the indicators show progress in the first half of the year,” said economist Leonardo Vera, referring to food production, tax collection and other indicators.

But oil production may stagnate in the coming months, he added, which would diminish growth.

Faced with lower oil production and U.S. sanctions, Maduro in 2019 relaxed currency controls, breathing new life into certain sectors.

(Reporting by Mircely Guanipa, Vivian Sequera and Mayela Armas; Writing by Julia Symmes Cobb; Editing by Matthew Lewis)