CARACAS, Friday February 01, 2013 | Update

Pdvsa's higher funding to central bank spurs inflation

Professor Pedro Palma of the Higher Business Studies Institute (IESA) warned that money in circulation has skyrocketed

Professor Pedro Palma said the fiscal deficit is alarming (Photo: Oswer Díaz)
Friday February 01, 2013  11:59 AM
In a forum organized by the Venezuelan-American Chamber of Commerce (VenAmCham), Pedro Palma, an economist and a professor at the Higher Business Studies Institute (IESA), remarked that since Venezuela's state-owned oil company Pdvsa receives more funds from the Central Bank of Venezuela (BCV), there are more bolivars in circulation, thus boosting inflation.

Palma explained that Pdvsa issues bonds that are bought by the central bank by printing new bolivars. Once Pdvsa spends all this money, the funds go to the banking system, which relies on it to grant loans. This way, the amount of money in circulation skyrockets and spurs prices.

If this situation continues, "we will experience an increasingly remarkable expansion of the monetary base, which in turn the financial system will double or triple. This may lead to an explosive expansion of money supply that will result in significant inflation."

The IESA professor also indicated that ahead of the elections held in 2012, Hugo Chávez's Government boosted public expenditure to the extent that today it faces a fiscal gap that represents eight percent of the gross domestic product (GDP). Including the whole public sector, the gap stands at 14% percent of the GDP. 

Translated by Jhean Cabrera
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