A senior economist at Bank of America Corp. told Bloomberg in an interview on Sunday, December 28th that he anticipates inflation in Venezuela to start to move up rapidly unless the government undertakes a major devaluation of the currency. Estimates of the rate of inflation in Venezuela range from 60 to 180% for the month of August.

Venezuela’s self-made economic predicament

Venezuela currently has a complex the three-tier foreign exchange system. Under the current system, Venezuela’s officially overvalued bolivar results in the government in effect selling the dollars it gets from oil exports at a discount. This forces the government to print more and more currency just to cover domestic spending needs.

The system also includes currency controls limiting Venezuelans’ access to dollars, which has spawned a black market where dollars are worth 170 bolivars each, compared with official exchange rates ranging from 6.3 to around 50 bolivars per dollar.

The recent dramatic drop in crude oil prices has further exacerbated Venezuela’s economic problems.

Statement from BoA’s Francisco Rodriguez

“If we don’t see a large adjustment of the exchange rate, we’re almost certain to have triple-digit inflation and I wouldn’t be surprised to see the economy veering into four-digit annual inflation,” Francisco Rodriguez, the chief Andean economist at Bank of America, commented in a phone interview with Bloomberg on Sunday. He noted the government “needs to print money to finance the deficit and it is running a deficit because its revenues in bolivars are too low.”

Venezuela
Chart via x-rates.com

 

Venezuela President Maduro announces currency reforms in early 2015

In a speech in Caracas on Tuesday afternoon, President Maduro announced a six-month plan to turn around the Venezuelan economy in 2015 by reducing liquidity, boosting international reserves, cutting costs and instituting a major reform of the three-tier foreign exchange system.

“We are going to perfect the currency system,” Maduro said at a news conference, without providing further details on that or the other measures. “2015 will be a year of economic recovery … great economic transformation.”

Critics immediately responded to the president’s announcement, saying the lack of specifics means Maduro is not serious about real currency reform.