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Venezuela: Excess liquidity brings instability to the market

By Victor Salmeron, El Universal

The Central Bank of Venezuela has recently widened its absorption capacity, trying to reduce the pressure on the parallel dollar market. The foreign exchange control keeps the public from buying any currency and accumulates big amounts of local money that the Central Bank tries to absorb as a means to curb pressure on the parallel market or inflation. To that end, the Central Bank offers the financial system interests between 12 and 13 percent.

At the end of last year, the Central Bank had absorbed 7.8 trillion bolivars (which, at the newly increased foreign exchange rate, is equivalent to $4.06 billion), obtaining VEB 908 billion ($472.91 million) in tax-free interests. This would have caused losses to the institution, except for the funds coming from exchange profits.

Despite this cost, pressure does not fade. Too busy in its turbulent electoral agenda, the government just "opened the tap" of public spending and excess liquidity in the banking industry, which usually surrounds VEB 500 billion ($260.41 million). On February 4, it was at VEB 1.3 trillion ($677.08 million).

Experts of the Central Bank say that the excess liquidity problem is so serious that the banks have continued to show these peaks even after the Central Bank's VEB-1.1-trillion ($572.91 million) absorption wave between January 26 and 30.

However, the Central Bank's board of directors made the problem even deeper when it recorded exchange gains of VEB 928 billion ($483.33 million). Many specialists have said that these are mere accounting-book gains, but they will be in fact handed over to the government to cover public spending. This also means that money will return to the economy quite soon.

The excessive amount of bolivars in the market is the reason behind the curbing interest rates. While savings receive interest rates of 4.6 percent and term deposits get a maximum of 12.6 percent, the inflation rate - which in the last 12 months jumped 27 percent - devours the population's purchasing power.

Apart from the overabundance of money, the rumors that the government would (as it in fact did last February 6) implement a devaluation (that was implicit in this year's national budget) continue to feed the parallel market, making the price of the U.S. currency to fluctuates between VEB 3,050 and 3,090.

Financial sources say the crucial impact of the unofficial price of the U.S. dollar on a vast part of the economy is troubling the government so much, that it is considering to freeze the sale of telephone firm Cantv's benchmark shares in the Caracas Stock Exchange.

As a consequence, masses of investors have jumped on these stocks because they can be converted into ADRs. The obvious result is that the Cantv dollar now serves as a reference for the parallel market.

Translated by Edgardo Malaver.

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