Venezuela oil boom raises inflation spectre

It is boom time in Venezuela. Many of the hillside slums encircling Caracas now have satellite dishes on their corrugated iron roofs. Wealth is reaching all levels of society and it is being spent with gusto.

But this effervescent economy – averaging about 12 per cent growth in the past three years – has unleashed one of the highest inflation rates in the world. And as growth slows, which some fear it is doing, inflation could continue to rise.
Armando Leon, a director of the central bank, admits that he is more optimistic than most economists. He argues that Venezuela is only at the beginning of a growth cycle he expects to last another five to six years.

“Inflation continues to be a problem,” he says, particularly because it is much higher than Venezuela’s trade partners. At almost 20 per cent, it is close to double the next highest rate in Latin America. Although the central bank forecasts inflation will fall to 12 per cent by Christmas, Mr Leon warns that if government spending spirals, this goal could be derailed. “It’s a very delicate game,” he says.

Efrain Velazquez, the president of the National Economic Council which advises the government, says current fiscal policy is unsustainable. The problem, he says, is the government’s reliance on oil income to finance an array of subsidies, grants, generous social programmes, ambitious infrastructure projects and rising public-sector wages.

As oil revenues are received in dollars abroad, they have to be converted into local currency to be spent in Venezuela. This has resulted in a huge injection of new bolivars: the amount of money in circulation has multiplied by six times since 2003, escalating inflation.

This has also caused a steady depreciation of the parallel “black market” rate of the bolivar. The parallel rate is now about twice the bolivar’s official value of 2,150 to the dollar.

Financial Times