Venezuela: Central Bank confirms that money supply soared in weeks prior to elections
December 6, 2015
Venezuela headed to the polls on December 6 amid one of the biggest economic crises the country has faced in its recent history. Although no official GDP data has been released for 2014 or 2015 and there is no official inflation data for this year, the available evidence continues to point to a deepening economic crisis. A sharp drop in oil prices, which accounts for about 95% of Venezuela’s exports and half of public revenues, has significantly limited access to foreign currency and is aggravating inflation and creating huge goods shortages. Meanwhile, President Nicolas Maduro has downplayed the crisis, arguing that the economy has been sabotaged by the opposition. He also stated recently in the presentation of the 2016 budget that his government expects inflation to stand at around 60% in 2016. However, neither the Central Bank of Venezuela (BCV) nor the National Statistics Institute (INE) has produced an official press release.
Despite Maduro’s statement, the FocusEconomics panel of analysts has a more pessimistic view of price developments in the country. Our panel estimates that inflation has worsened drastically since December 2014’s 68.5% and that it soared from October’s 183.4% to 192.9% in November, which will mark a multi-year high if confirmed. Inflation has continually spiraled upward in Venezuela as the drop in oil prices is hindering the ability of the government to supply dollars to its complex exchange rate system. Public finances are unlikely to improve as the Venezuelan government has forecast the price per barrel of oil to average USD 40 in 2016.
The Central Bank confirmed just weeks ahead of the elections that money supply had been increasing by more than 100% in annual terms. The pace of monetary expansion, particularly that of narrow money, soared to almost 102% in mid-November after climbing from 80% in mid-year to 100% in September. Broad money, defined as money in any form such as notes and coins, has registered a similar growth trend because time deposits have dropped notably as confidence in the banking system is extremely low. The revelations made by the Central Bank offer important insight into the current monetary situation in Venezuela. Money-printing by the BCV reflects, on the one hand, the aggressive fiscal policy carried out by the government ahead of the legislative elections. The deficit has soared as spending on social projects, campaigning and public sector-wages all went up ahead of the decisive 6 December elections. On the other hand, as panelists participating in the LatinFocus Consensus Forecasts have suggested in previous reports, this clearly indicates that inflation has been rising sharply in the past few months the increase in money supply has exceeded the supply of consumer goods.
Economic analysts who participated in this month’s LatinFocus Consensus Forecast see inflation to end the year at 179.6%, which is down 0.3 percentage points from last month’s forecast. For 2016, the panel foresees inflation to remain elevated at 164.8%, which is up 15.7 percentage points from last month’s forecast.