(Bloomberg) -- Venezuela is letting the bolivar depreciate as the government tries to quell demand for US dollars that’s been rising since July’s election, risking sparking a new bout of inflation.
Officials have let the tightly managed currency slide by the most in nearly two years. It now trades for nearly 43 bolivars per dollar from about 37 at the start of October. The move is a response to the growing gap between the official and black market exchange rates.
The currency has come under intense pressure in the aftermath of the disputed presidential vote as Venezuelans have sought to sell bolivars for the safety of the US dollar. The bolivar trades for about 51 per dollar on the black market from 44 in early October.
Letting the official rate slide is a high-stakes gamble in a country that has repeatedly been pummeled by bouts of runaway inflation that have rendered the currency worthless. President Nicolas Maduro finally wrestled inflation back to double digits this year by cutting spending and flooding the exchange market with dollars. Price swings in the de-facto dollarized economy are closely correlated to variations in the exchange rate.
“The government has had a currency peg strategy that had been successful,” but requires the government to keep supporting it with increasing dollar injections, said Luis Vicente Leon, an economist and president of Caracas-based pollster Datanalisis. “You need more and more money to maintain the same level of balance.”
The central bank has poured more than $2 billion into the official exchange market over the past few months to keep the currency steady, according to Jesus Palacios, an economist in Caracas-based financial analysis firm Ecoanalitica, eating away at oil revenue.
But with Maduro declaring victory despite evidence from the opposition showing he lost the presidential election in July, there’s increasing uncertainty around his government’s ability to keep up the money supply. That’s unlocked fresh demand for greenbacks.
In October, the central bank sold around $500 million through the banking system, compared to $367 million in September, according to estimates by consultant Sintesis Financiera.
That’s done little to contain the black market rate, however, leaving the government few options but to let the official rate depreciate.
The impact of that decision is likely to show up in October’s consumer price index, according to the Sintesis Financiera report. So far, Maduro has managed to keep monthly inflation below 2% but that might change with higher spending ahead of Christmas.
“The government hasn’t had the capacity to keep up with the pace of the demand, which has sharpened due to the elections,” Palacios said.
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