President Nicholas Maduro’s attempts to control inflation have had some effect, but without more severe measures we think that price pressures will probably remain extremely high over the coming months.
- President Nicolas Maduro’s attempts to control inflation have had some effect, but without more severe measures we think that price pressures will probably remain extremely high over the coming months.
- After peaking at 350,000% y/y in January, Venezuelan inflation began to ease over the first half of this year. (See Chart 1.) But conditions have worsened again more recently, in month-on-month terms inflation doubled from 33% in July to 65% m/m in August.
- Inflation was brought down via two methods which cut the pace of growth in the monetary base in half. The first was a curtailing of public spending, which eased public borrowing from the central bank, financed by the printing of bolivars. This process nearly ceased between January and March. (See Chart 1 again.)
- Secondly, the central bank sharply tightened reserve requirements from 31% in January to 57% in February. This reduced credit expansion, which caused the average commercial bank lending rate to rise from 22.4% in January to around 32% between February and August. And given that many Venezuelans were using credit to buy dollars, the reduction in lending eased pressure on the Bolivar.
- We think that the August pickup in m/m inflation has occurred because deficit monetisation only ceased temporarily. Since March, the central bank has extended around 90 trillion bolivars of credit to the public sector. This has doubled the government’s debt pile extended by the central bank. (See Chart 1 again.)
- Furthermore, we don’t think that the reserve requirement policy has been enough. Indeed, it could even prove to be detrimental. Though the policy initially stemmed the depreciation of the bolivar, the currency has weakened by around 70% against the dollar since May. And commercial lending rates are still too low. By comparison, in Argentina, where inflation is much lower, lending rates are 50%-pts higher.
- A policy similar to Venezuela’s reserve requirements was tried by Argentina to tackle inflation in 1989, which backfired. Lending rates spiked, but credit extension growth stayed rapid, and inflation high. What’s more, higher interest rates increased the debt burden of the government, driving further deficit monetisation.
- We looked at five historical instances where Latin American countries experienced hyperinflationary episodes like Venezuela’s. In all the cases, (except for Chile in 1975), initial attempts to bring down inflation brought temporary relief, before inflation rebounded. Prior to regime change, the unsuccessful preceding governments tended to implement unorthodox monetary and currency targeting policies while continuing to run an unbalanced budget. Table 1 shows five key criteria (fiscal, monetary, and currency policy, regime change, and IMF bailouts). Green indicates that a criterion was met, and red the opposite. The final column shows whether the country successfully exited hyperinflation. What stands out is that no country in the sample successfully tamed hyperinflation without all five criteria being satisfied. As of now, Venezuela’s regime has satisfied just one. Achieving a lasting end to hyperinflation will most likely require significantly more action, including a change of regime. (For more, see our Focus.)
Chart 1: Venezuela – Credit to Public Sector & Inflation
Table 1: Responses to Hyperinflation
Sources: Refinitiv, BCV
Sources: Refinitiv, World Bank, IMF
Quinn Markwith, Latin American Economist, +44 20 7808 4072, firstname.lastname@example.org