Excess of liquidity threatens to speed up inflation in Venezuela

The supply of foreign currency by alternative means dropped 78%

Monetary liquidity stands at VEB 96.8 billion (USD 11.4 billion) (File photo)
Saturday November 23, 2013  12:00 AM
In an attempt at arresting the rising amount of local currency in the Venezuelan economy, triggering demand and pushing prices up, the Central Bank of Venezuela (BCV) enlarged from 17% to 19% the portion of deposits that financial entities may not lend. Nevertheless, the government injection of banknotes is so huge that the move has rendered ineffective.

Financial institutions are evidence of mushrooming bolivars. Last October, banks recorded VEB 74.5 billion (USD 8.7 billion) in the aggregate, on the amount that must be deposited as legal reserve in the BCV. At November 20, the idle cash that has not been lent or placed in bonds jumped by 30% to USD 96.8 billion (USD 11.4 billion).

Excess of bolivars in banks shows the increasing liquidity shooting prices due to a larger amount of cash for the same amount of products, thus resulting in higher inflation rates.

It is worth noting that the government ordered to cut prices in several sectors of the economy, including household appliances, electronics, apparel and footwear. Therefore, demand will be higher than expected with looming shortage in some areas that had not suffered from scarcity to date.

The private sector experiences a significant cut in the supply of foreign currency. This will make an effect on replacement of commodities. This is the case after the government declared a war against importers who buy US dollars in the black market so as to procure their merchandise.

Data supplied by think tank Síntesis Financiera show that last year, Sitme, a mechanism which used to supplement the Foreign Exchange Administration Board (Cadivi), tendered USD 7.9 billion to the private sector. Considering the amount disbursed by Sicad (a total of USD 1.3 billion), the replacing mechanism, at November 18, the supply of foreign currency has plummeted 78%.

Translated by Conchita Delgado