Monetary aggregates grow while the exchange rate surprisingly stabilizes

In the last 4 weeks and up to April 8, the weekly growth of the monetary base in Venezuela has doubled its average size in the year. In fact, the monetary base grew in the past four weeks to an average weekly rate of 12,4% from an average rate of 6.27% throughout the year.  The money supply (M2) rate, which has been recording a weekly growth of 3.4% throughout the year, has increased by 8.26% in the last 4 weeks, up to April 8. 

This significant increase in the monetary aggregates, though it might be accounted for by the important adjustment in the minimum wage and pensions, and in salary payments to teachers and workers of the middle and higher education system, surprisingly has not resulted in greater pressures in the official and parallel market exchange rates. 

The dollar’s rate fluctuation in the parallel market has remained in a range between 4.6 bolivars/US$ and 4.3 bolivars/US$ since the third week of February of this year.  It is worth recalling that after almost a year without adjusting the minimum wage, Nicolás Maduro’s administration has decided to raise the minimum wage from 7 bolivars per month (US$ 1.62) to 126 bolivars (roughly US$ 29) on the second half of March. This 1,705% increase has also been applied to pensions, whose monthly transfer is pegged to the minimum wage.

In addition, in the third week of March, the Ministry of Education updated the salary tables for teachers in the different modalities of elementary and high school in the 40-hour and 53.33-hour categories. Likewise, the Ministry of Higher Education approved a salary increase for workers and teachers of public universities of near 1,800%. 

The corresponding amounts in elementary and high school vary depending on the modality and working hours. They range from 264.69 bolivars (non-teaching high school 40 hours) to 600.39 bolivars (VI tuition 53.33 hours), in the field of primary, elementary and higher education. Meanwhile, university professors will earn between 27.14 bolivars (teaching assistant III TCV 2 hours) and up to 522.16 bolivars (full-time employees). 

Recent data published by the Central Bank of Venezuela suggest that the March inflation rate measured by the consumer price index does not seem to have been impacted by these increase in household income (in bolivars) and monetary aggregates. 

Just a few days ago the Central Bank of Venezuela (BCV) reported that the country recorded a monthly (month-on-month) inflation rate of 1.4% in March, the lowest figure since August 2012, when the average price increase amounted to 1.1%, Thus the monthly inflation rate has remained in the single digits for the seventh consecutive month. 

In our previous report, we noted that amid a disinflation process currently experienced in Venezuela, the government of Nicolás Maduro seems to be confident about moving towards a significant increase in the bolivars issued for circulation through significant wage and pension increases. 

In perspective, the government’s economic policy advisors now seem to be convinced of the consolidation of the exchange rate stability, of anchored inflationary expectations, as well as of the fact that the increase of the mass of bolivars coming from fiscal management would not lead to a renewed search for dollars amid low inflation. To face the possibility of excess monetary balances, the Central Bank has been preparing open market operations with instruments of its own issuance for the first time in several years. 

Although these increases in household income have already impacted the money supply (in bolivars), the impact has been relatively soft since the Central Bank of Venezuela has summed the so-called “Hedging Securities”, denominated in bolivars to the current policy of high reserve requirements (73% of deposits). So far, the Central Bank has been urged 14 times to place these liquidity absorption securities.

Moreover the recurrent interventions of the Central Bank in the foreign exchange market cannot be ignored, as well as the impact of the new tax on financial transactions in dollars (IGTF) on the demand for dollars and bolivars. 

Although this whole policy scheme has compressed bank loans, has had a significant regressive impact on people’s income, and has prevented the creation of a sizable cushion of international reserves, it seems that in the short term these actions have ended up anchoring the exchange rate and sustaining the disinflation process in bolivars. However, it is difficult to estimate whether these benefits could be permanent. 

Although it is too early to declare victory on inflation, the major economic challenges faced by the Maduro government in the medium term are gradually changing. The Venezuelan economy needs to grow, restore the purchasing power of wages and salaries, boost the credit market and reverse the very adverse international context to encourage foreign trade and the income sources coming from the exploitation of hydrocarbons.