Currency Exchange Stability and Falling Prices: What is Happening? (Interbanex III)
by Luis Salas
In the last weeks, very important things have been happening in the economic field. And when I say important, I mean determinants. The problem is that, having our eyes set on the political arena, we may not have been fully aware of it.
Leaving aside for the moment the most evident and mediatized issues-the aggravation of economic aggression, expressed in the confiscation of CITGO and the reserves in gold of the Republic by hostile governments, but at the request of the oppositionist coup, the most relevant things that happened these days are undoubtedly the following things:
1.- The relative stability achieved after the exchange shock of January 28, with respect to the official currency market but also to the black market dolar.
2.- The decline – in some cases quite remarkable – of the prices of several consumer goods, particularly food, occurred especially in the last two weeks, something confirmed by our own observations and ratified by dozens of followers of the networks of 15 and Ultimo.
In this regard, in the two previous parts of this series we gave our hypothesis about what is happening, an approach that we can outline in the following way:
- On August 20, 2018, on the occasion of the monetary reconversion, two types of economic measures were launched, framed in the so-called Recovery, Growth and Prosperity Plan . On the one hand, some heterodox type, which were based on the anchor of the Sovereign Bolivar to Petro, ditto wages and agreed prices. These were undoubtedly the most publicized. But in parallel – although with much less publicity – another set of rather orthodox measures was launched, which have been accentuated with the passage of time. The core of the latter involves the application of a strong monetary lobotomy, understood as a reduction in real terms of the money supply and which has as its pivot the application of legal reserves to banks, but also and above all, the reduction of public expenditure and the wage lag with respect to prices. It is needless to say that both sets of measures were aimed at the same thing: to stabilize the foreign exchange market, stop hyperinflation, stop the free fall of the economy, creating the conditions for recovery, etc .
- From the outset, we pointed out that the impossible coexistence of both groups made the Recovery Plan a contradictory amalgam , so that sooner or later their managers had to decide on one or the other. In my view, the decision made was evident on November 29, when the account of the first 100 days of the Recovery Plan was abandoned, the anchor of the Sovereign Bolivar was abandoned to El Petro and from there to the barrel of oil , being that both were anchored to the DICOM dollar, which started a vertiginous escalation that took it to its current values dragging El Petro (in its facet of active crypto of “saving”) and devaluing the novel Sovereign Bolivar .
- The only doubt that remains about this is whether this was always planned like that or whether it was a forced rectification halfway through. Depending on the answer to this question, it will be known then if what seemed contradictory in August was actually two moments of the same plan. Or rather it was always two plans, within which the orthodox package worked as a kind of emergency insurance if the heterodox did not work. Seen in retrospect, there are elements that allow us to think one or the other thing. For example: legal reserve measures began to be implemented since September, less than a month after the Recovery Plan began and more than two months after its “correction”. On the other hand, the government, predictably – and the exchange rate did not stabilize either – began to discursively handle the idea of a Plan B , (in fact, before Plan A was announced, the president himself said he was preparing a B “just in case”) . Media and spokesmen both side as another speculated that it was a “radical” plan, involving expropriation of companies, banks, more price controls, etc . Everything indicates that they were right in the radical. But what was clearly unclear was the type of measures that the government would radicalize.
- In summary: what we are witnessing these days is for the purposes of the exchange and price field of orthodox monetarist measures taken by the government since September last year, but clearly since the end of November and markedly since January this year, which have involved the application of a currency shock in the midst of extreme monetary lobotomy, consisting of interrupting and as much as possible cutting the cash flows that go from the real to the speculative economy, in order to discourage the dollar black market and impose the exchange stability, and with it, the price stability.
This is at least my hypothesis, which I will explain better as well as to account for its “collateral” effects and the enormous dangers associated with what at first sight could be considered an achievement.
Monetary Shock + Monetary Lobotomy.
Indeed, as we have been reviewing, on January 28, in the context of the exchange rate generated by the “surprise” appearance of Interbanex , the BCV applied a currency shock that in nominal terms implied a devaluation in the exchange rate of 58% in a single day, but in broader terms meant that it would quintuple its price with respect to the previous month. With this hard bet, the BCV placed the official exchange rate above the black market marker , a relationship that has been maintained in the three weeks since then, as can be seen in the following graph:
In the previous installment to this series , we affirmed that the exchange anchor imposed that same day by the BCV, could be sustained for two basic reasons: the first and most notorious because the level of the 3,300 sovereign bolivars per dollar is high enough to guarantee it for a while. But in second place and above all because of the monetary policy practiced.
A third reason that should also be considered is the seasonal behavior of the parallel exchange rate. Several of us have already referred to them extensively at other times, so we will not stop to explain it again. Just remember that although the long-term parallel exchange rate has an upward trend it is not linear but oscillating, with the first quarters of each year usually stagnating or going down.
On the other hand, whenever the official exchange rate shoots up, the black market slows down, because the devaluationist expectations of the second go to the first. And no less important: whenever the black market exchange rate is triggered, then it tends to fall and / or stabilize until it goes back up again.
In any case, however it may be, the truth is that at this moment the most important reason for the temporary stabilization of the exchange rate is the monetary lobotomy, a set of orthodox monetarist measures expressed in the following actions:
Decrease in real wage income : One of the most celebrated aspects of the monetary conversion (erasing 5 zeros to Bolivars) was the relative recovery of purchasing power, achieved through an increase in the legal minimum income (minimum wage + basket tickets) of about 38 times more than the one in force before the reconversion, as well as the launch of the agreed prices. The issue is that over time the agreed prices were abandoned resulting in a liberalization of the same, being that, on the other hand, wage increases decreased their frequency, being visibly lagging behind prices, which caused the contraction of the salary income that we currently attend.
To the extent that official figures on the increase of the National Consumer Price Index (NCPI) are not known, the task of measuring this contraction is complicated. At other times we have speculated with some of the many unofficial figures that are handled publicly and with our own estimates, but for practical purposes consider the following table from which we can grasp the magnitude of what we have been talking about:
As a basis we take the prices of the selected products considered in the first list of agreed prices published in August , although we know that for that date the prices on the street were slightly higher than agreed. However, the truth is that at the end of January of this 2019, the variation in these basic necessities is astronomical, exceeding an average of 15,000%. In contrast, in the same period of time, the legal minimum income only increased 994%.
This contraction in purchasing power caused by this wage lag has been accentuated by the reduction in the granting of compensatory bonds via Carnet de la Patria, which, although they are far from being a structural solution, allow many to solve day to day ( following the same CLAP logic).
Devaluation of the Sovereign Bolivar: From August to date, the devaluation of the bolivar goes on the order of 98%, that is, it has lost 98% of its value in just over five months of its entry into circulation. To all these, due to the combination of devaluation policy with wage lag, to date the minimum legal monthly income (minimum wage + food bonus) is equivalent to $ 6 per month, that is, 55 times less than the regional average minimum wage. Last, but not least, we must bear in mind that the liberation of prices and the exchange strategy has caused, in the context of political confrontation and uncertainty that we are going through, that they seek to be equal to their regional and world averages, that is to say , “Internationalization of prices”. To the extent that this process of indexation of internal prices to external prices has occurred in a disorderly and conflictive manner, it happens that many inmates already outnumber their external peers, which, among other things, although the sending of remittances increased in nominal terms (in quantity), in real terms the purchasing power of the same has also fallen. In this regard, it is estimated that today you need about US$ 700 to buy the same as a year ago were bought with US$ 100.
From an “excess” of liquidity to the minimum liquidity: to the extent that the exchange and economic authorities bought the monetarist thesis of the “excess” of liquidity as a cause of inflation and of the exchange rate hikes, they have opted to reduce it to its minimum expression, thereby seeking to slow down the price and stabilize the exchange rate. And this is where we enter the heart of the monetary lobotomy, because although the monetarist thesis is not true ( in real terms, at least since 2014, liquidity has always lagged behind in both real and nominal terms with respect to prices), what is certain is that if you reduce the amount of money in circulation (more if it is a money with much less purchasing power in a hyperinflationary context), the circulating mass reaches less and less to pay for things, be it food, medicine, shoes or currency. In this sense, taking into account the available figures of the BCV on liquidity and the most conservative estimates on inflation, the actual fall of the latter from August to date -that is, within the framework of the Recovery Plan-, is almost equivalent to the devaluation of the sovereign bolivar (around 90%).
Added all the factors mentioned, the effects on purchasing power and economic activity have not been expected. In my view, these effects were already felt strongly between November and December, but the extraordinary payments associated with the Christmas date (bonuses, profits, etc.) plus remittances served as buffers.
However, once arriving in January and February and the cushioning effect disappearing, the panorama of contracted consumption showed itself in all its harshness, also considering the violent exchange run that began on January 7 and did not stop until the 28th of the same month, with the shock of the exchange anchor that pushed prices up even more but with the same salaries of two months ago.
In addition, we must consider a factor that we have not mentioned but that can be understood from all that has been said and that the majority will immediately grasp: between the end of last year and the beginning of this the resignations have become massive in public administration given the salary disincentive (which includes figures such as benefits, savings accounts, etc.), since many workers went to the informal economy, which works for some but in the aggregate it places a population that previously received fixed income and insurance in the uncertainty of informalized income.
(Another factor that must also be taken into account is that the official exchange manipulation had the virtue of discouraging the smuggling of extraction into Colombia, so this has increased the supply of goods such as meat and milk).
Consequently, as I said, the effects on purchasing power changed the price panorama in the first two weeks of February compared to January, as we can see in the following table, the fruit of our first-hand surveys in downtown Caracas. and validated by the users of our social networks with their own testimonies at the national level . It is worth clarifying, before moving on to the table, that this fall corresponds almost exclusively to food and especially to those whose supply is less concentrated in a few industries. In other areas such as hygiene products, medicines and foods linked to oligopolies such as Polar, the picture is very different:
Extraordinary measures for extraordinary times?
We are fully aware of the extremely delicate context in which these measures are taken, which can not be called in any other way than in a war context, even though in conventional terms this has not materialized. In addition to the international siege that oscillates between the plundering of our riches and the intensification of a prolonged policy of impoverishment and economic collapse of the country, we must add the irresponsibility and criminal attitude of an oppositionist leadership that also strongly supports the war in the sense war materialize both in the form of a civil war and an international invasion or a mixture of both.
But precisely we consider it more urgent to make the relevant alerts. And it is that this orthodox-conventional policy that under normal conditions is already problematic (see but the current Argentine case, where the BCRA applies a similar one), in our current condition it is not only useless to meet the financial blockade scenario- commercial and impoverishment measures of the neighbor but dangerously tends to amplify its effects.
On the other hand, and from a broader point of view, they have a dangerous contractionary effect, which instead of stopping the fall of economic activity and boosting growth can make us go back even more, if we can even think about it, with all that implies from the social and political point of view.
For the rest, and despite the associated high costs, the monetary and exchange measures aimed at stabilizing the exchange rate and stopping hyperinflation, sooner rather than later will prove ineffective, unless the decision is to keep the Venezuelan economy in a sort of state of paralysis where prices do not rise and the exchange rate does not either, but because the majority of the population is definitely below the subsistence level. Although this Monday 18 the opening trend of the parallel has been slightly upward, we estimate that the coming week the trend will remain the same as it is so far, although we must wait and see what effects the calls to the new oppositional apocalypse of this coming 23 of February will be. Last but not least, the shortage of bolivars in circulation is accelerating two distortions: on the one hand there are new spreads between the prices in cash and by electronic payment, which will give rise at any time to the resale of cash. And the other that is accelerated “desbolivarización” of the economy (using fewer Bolivars) , which creates the conditions or for a greater monetary anarchy or a final dollarization.
Of course, it is also true that, given the external constraint, the possibility of expansionary policies is complex. But in my view, no matter how hard the oil scenario and the blockade are, the activation of PDVSA and state companies are still the only real possibility of reversing the complex panorama we have and the one that is looming to follow the coas as they go. It would be the subject of another delivery as extensive as this, but it seems clear that all the incentives that this government has directed to private investment both nationally and internationally between little and nothing have paid off. The so-called “national bourgeoisie” of our minister of agriculture does not have anything to give and when it does they do not want to. Moreover, given the hostile attitude not only of the United States and its regional satellites but of the European Union especially countries like France and even Portugal (both with important and strategic investments in the country) it does not look very advisable to continue with the signing of trade agreements with companies from these countries.
Oil is the only economic and geopolitical weapon that we have, and although it sounds paradoxical, it is the only one that guarantees us in a less traumatic way the transition to a diversified economy that is less dependent on the external. That is the main lesson that the criminal blockade and sabotage of 2002-2003 left us, which allowed us in less than a decade to reach the highest standards of living known in the country and which currently the majority of the population – even the opposing party- misses and protests.
About Luis Salas
Sociologist (Central University of Venezuela). Master in Sociology of Development UARCIS-Chile. Professor and researcher at the Bolivarian University of Venezuela (UBV). Researcher CLACSO. Political Economy and Human Rights Prize University of the Mothers of the Plaza de Mayo 2011 (Argentina). Gustavo Machado 2015 Socio-Political Essay Award (Venezuela). He was Minister of Productive Economy and Economic Vice President of Venezuela.
Source URL: 15 y Ultimo
Translated by JRE/EF
