Venezuela’s currency falls by more than 30%, threatening timid recovery

A sharp drop in the value of the bolivar against the U.S. dollar in the past month threatens to disrupt Venezuela’s economic recovery and the timid honeymoon between the Caracas Socialist regime and the private sector, analysts said.

In just 30 days, Venezuela’s national currency has lost 31.2% of its value, falling Monday to a rate of 8.59 bolivars per dollar, from its July 29 level of 5.91 bolivars, due to a sharp decline of U.S. currency available at local exchanges and a recent increase of bolivars in circulation.

The bolivar’s decline has had an immediate impact on the economy, increasing acquisition prices for merchants, who have automatically passed on the rise in costs to consumers.

Concerned about the risk of social unrest caused by the sudden rise in prices, Venezuelan leader Nicolás Maduro ordered government inspectors to check on local shops to ensure that the merchandise is sold at “fair” prices. The action marks a reversal of the official rhetoric employed during most of this year to promote a timid economic opening to convince businessmen that “Venezuela has been fixed” and that it is now safe to invest in the country within a framework of less government regulation.

“This reaction shows that the government handles the process of economic freedom as far as it can, and when it can’t then it turns around and returns to the rhetoric of cracking down on speculation and sanctioning businessmen,” commented Venezuelan economist Orlando Ochoa. “They clearly show the limitations of opening an economy under an authoritarian environment.”

The fear of being punished with new sanctions is rapidly eroding business confidence, Ochoa warned.

“What is being heard is the possible closure of many businesses, small, medium and others, because by having to adjust prices based on the free exchange rate, and not the official one, these businesses fear being punished,” Ochoa warned.

The official exchange rate, which in recent months fluctuated not far from the free-floating rate, was at 7.85 bolívars per dollar on Monday. Even though that rate is currently available to all Venezuelans with access to the banking system, many merchants acquire dollars on the free market, since they are easier to obtain.

The economists said that the situation, if it continues, could apply the brakes on the recovery of the Venezuelan economy, which is just now emerging from a catastrophic decline that has shrunk the country’s GDP by more than 80% since Maduro took power in 2013. In contrast, during the Great Depression the U.S. economy shrank by only 30%.

The bolivar’s drop also threatens to hike the inflation rate in Venezuela, which had been moving away from the hyperinflationary process that began in 2018 and which reached a maximum rate of 2,690,000% in January 2019.

By the end of July, Venezuela had managed to lower its year-on-year inflation rate to 139% and the regime hopes to bring it below triple digits by the end of 2022. That goal, however, seems difficult to achieve given the current economic situation.

That the Venezuela economic recovery is faltering does not surprise Francisco Ibarra, director of the Venezuelan firm Econometrica.

The underlying problems of the Venezuelan economy have not really been resolved, namely a huge government deficit and overspending, he said.

It has been the country’s gradual and informal dollarization that has been helping the economy to move away from inflation, but the bolivar’s sharp decline is now exerting pressure over local prices.

Economist and opposition government deputy José Guerra said in an interview with the news website La Patilla that the efforts that the regime had been making to contain the exchange rate have failed because the Central Bank does not have enough dollars to keep the value of the U.S. currency from rising.

And the demand for dollars has no end in sight given the overall weakness of the bolivar.

“The hyperinflation is no longer there but the high inflation rate of one hundred and fifty percent a year continues. That clearly impacts and disadvantages the positions in bolivars because we have bolivars that evaporate with inflation,” he said in the interview.

And the Venezuelan Central Bank has no power to stop this, he said. “It doesn’t have lungs” to be able to stop the currency’s depreciation, he said. “If it is reversed, it will be very short-term, immediate thing.”