Central Banck reserves are only 22% higher than in 2001

The Central Bank doubles 2001’s reserves in nominal terms, but once adjusted for price inflation in imports, they barely surpass the level they had when convertibility fell. The aggravating factor is that the import ratio (percentage of imports relative to the GDP) doubles the one that prevailed in 2001. This demonstrates that the currency crisis that Argentina is suffering now is severe, and demonstrates the need for a change in policy strategy.

An acceleration in the decline of international reserves happened during the first month of 2014, despite the official exchange rate’s sharp devaluation. During January, 23% devaluation was applied, when last year’s whole devaluation was of 33%. Reserves, meanwhile, fell by approximately US$2 million in one month. Compared to 2013, a US$ 12 billion decline, the first month of 2014 shows that the rate at which Central Banks reserves decline has doubled.

In a country with a single free exchange market, the level of Central Bank reserves has little importance because imports are paid with currency earned by exporters who trade freely in the foreign exchange market. But when the foreign exchange market is heavily intervened, as in Argentina, the Central Bank reserves become a highly relevant variable, since they depend on the possibilities to sustain imports, which at the same time are essential to maintain the level of production.

To assess the adequacy of the level of existing reserves it is relevant to analyze official information. According to the Central Bank and Ministry of Economy, between 2001 and 2014:

· Reserves increased from U$S 15.232 million to U$S 28,250 million

· The prices of Argentine imports increased by 52%.

· This means that reserves, adjusted by import inflation, are equivalent in real terms to U$S 18,600 million at 2001 prices

This data shows that the purchasing power of the of the US$ 28 billion reserves today is only 22% higher than the US$ 15 billion of 2001. An aggravation is that currently the imports coefficient is much higher. In 2001, imports accounted for only 8% of the Gross Domestic Product (GDP), while they currently represent about 15% of GDP. In other words, the economy is much more dependent on imports than in 2001, with a level of actual reserves (i.e. inflation adjusted imports) that is quite similar. The evidence that once again, as it often happens in the Argentinean history, the country is suffering from a “bottle-neck” that manifests itself in foreign reserves shortages is overwhelming. Although the external context is unprecedentedly favorable, bad internal policies have lead to an “external constrain” that once again puts limits on potential growth.

The government’s strategy to overcome the external constraint was to accelerate the rate of devaluation of the exchange rate. This would reduce labor costs in real terms, and in this way, improve the profitability of the export sector. In addition, there may arise a benefit for public finances, because of the loss of value, in real terms, of wages and pensions. But the success of this strategy needs wages and pensions not to be updated at the same rate of devaluation and inflation. Thus the authorities are trying to reissue the “productive model” of 2003-2008 whose main foundation was the deep loss of value of real wages and public spending caused by the 2002 mega devaluation.

For this strategy a key issue is that the Ministry of Labor presses on the collective wage negotiation, so that wages deteriorate relative to the increase in the value of the dollar and on prices. This is the only way to attempt to put at work the “model” as it has been carried out since 2003, and that has lasted in its dynamism until wages regained the level they had prior to the 2002 crisis.

The visible signs of the economic team’s inexperience can lead to the confusion that the solution to the current critical situation depends on change of minister. Quite on the contrary, the current crisis is intrinsic to a “model” whose bases are the real devaluation and low real wages that are resisted politically and socially. This is why the relevant issue is changing the model, not the officials.