CARACAS (Reuters) – Venezuela’s government is intensifying its efforts to lower inflation ahead of a presidential election this year, keeping the bolivar-dollar exchange rate steady and weighing how to manage spending without stoking consumer prices, public-sector sources and analysts said.
The oil-rich South American country, whose government is under U.S. sanctions for repressing political opposition and alleged criminal activity, has faced a long-running economic crisis marked by chronic shortages, a plunging currency and hyperinflation.
Consumer prices rose by nearly 190% in 2023, one of the highest readings in the world, as the costs of basic goods continued to increase and the local currency fell sharply against the dollar.
Price increases were down to 107% on a year-on-year basis through January.
Monthly price rises have been in the single digits for the last 10 months as President Nicolas Maduro’s socialist government has held to an orthodox anti-inflation approach that began in 2021, injecting dollars and heavily restricting credit and spending.
“Venezuela will consolidate its definitive victory this year against inflation, returning, with the help of God, to annual inflation of two digits,” Maduro told lawmakers in January.
Annual inflation has not been under 100% since 2014.
“The objective is low inflation and holding the exchange rate. That is the policy,” one source close to the government said on condition of anonymity.
So far this year the exchange rate has been held at 36 bolivars to the dollar, after depreciating by 38% in 2023.
Delcy Rodriguez, the country’s vice president and finance minister, asks the central bank for weekly price reports, a source with knowledge of the matter said.
“What has been done so far should be maintained so as not to return to complicated scenarios,” said Francisco Torrealba, a government-allied lawmaker, alluding to efforts to avoid sharp fluctuations in the exchange rate.
The central bank and U.S. oil giant Chevron Corp (NYSE:CVX) sold some $4.2 billion in dollars via local banks last year, according to analyst firm Sintesis Financiera, a figure that is 17% higher compared to 2022.
Chevron operates in Venezuela with special authorization from Washington, bringing back some of its export earnings to exchange for bolivars so it can pay local expenses.
Analysts predict dollar sales will grow this year.
Neither the central bank nor the communications ministry responded to requests for comment.
SPENDING DILEMMA
After the U.S. relaxed oil sanctions late last year on the back of an election deal with the opposition, Maduro’s government predicted a 27% increase in income from state oil company PDVSA and analysts said the government would probably use the earnings to boost social spending with an eye to attracting voters.
Maduro’s administration has done an abrupt about-face on rapprochement with Washington and his domestic opponents in recent weeks and the U.S. has said oil sanctions roll-backs will expire in April unless the opposition’s candidate is allowed to compete in this year’s presidential election.
The reversal will hit the government’s spending ability, presenting the dilemma of how to attract voters without stoking inflation.
“Within the government the main thing is inflation, but it needs to create a feeling of well-being for the elections,” requiring spending, a source close to the administration said when asked about possible public-sector pay increases.
Public employees earn an average of $40 a month and have not gotten raises since 2022, after receiving them sometimes as often as three times per year.
Maduro’s government has instead given out bonuses.
“The government will maintain the bonus strategy and may give a raise in May, though it won’t be very large,” predicted Asdrubal Oliveros, an economist and director of consulting firm Ecoanalitica. “The elections will determine spending.”
Apart from bonuses, the government may distribute more food baskets because they are less costly than raises and do not impact prices as much, said Tamara Herrera, the head of Sintesis Financiera.
“If the election is competitive there will be more spending, but if it is not competitive, spending will be restricted and the money will be used for (regional and legislative) elections in 2025,” said Luis Vicente Leon of analyst firm Datanalisis.
Source: Economy - investing.com
