Report Nº: 99420/12/2022
The long history of high and persistent fiscal deficits financed by money issuance explains people’s rejection of the peso. This rejection is what makes monetary printing inflationary. In this framework, expecting that inflation will go down when the dollar-soja –which increases issuance– is reinstalled is very contradictory.
Money printing generates inflation when people do not accept it. If the Central Bank issued pesos and citizens kept them, this printing would not generate inflation. But with the background of more than half a century of systematic fiscal deficits and a strong tendency to finance them with monetary printing, there is a natural tendency among the population to reject pesos. The rapid release of pesos generates pressure on prices.
One way to mitigate the inflationary impacts of excessive issuance is to induce banks to use the money they collect from deposits subscribing to Central Bank’s debt securities (Leliq). This allows the Central Bank to take the excess of money out of circulation, attenuating its inflationary impact. The money continues to belong to the people, but instead of using it to lend to families or companies, the banks lend it to the Central Bank. This feeds back into the more money printing since the Central Bank issues pesos to pay accrued interest to the banks for the Leliqs.
In order to measure the refusal to keep pesos, it is relevant to compare how many of the total amount of pesos issued are in circulation and how many were redeemed by the Central Bank through Leliqs. According to Central Bank data it is observed that:
These data show that only 1 out of every 3 pesos issued is in people’s hands while the remaining 2 pesos had to be rescued by the Central Bank with Leliqs. Last year the distribution of the pesos issued, between those in circulation and those rescued by the Central Bank, was approximately 50/50. In other words, the rejection of pesos, besides being high, is increasing. The situation is aggravated because the excess of issuance responds not only to the fiscal deficit but also to the growing interest accrued by the Leliqs.
In this context, the government implemented a new version of the dollar soybean. The objective is to avoid inflationary pressures that would be generated by a devaluation of the official dollar. With the dollar-soja, the State buys dollars at $230 and sells them to importers at $170. This forces it to issue $60 for each dollar settled by exporters. As this issuance is rejected by the people, the Central Bank has to absorb it with Leliqs. In the first version of the dollar-soja, implemented in September, the number of pesos held by the population remained constant at approximately AR$4 trillion while Leliqs rose from AR$7 trillion to AR$8.5 trillion. In other words, all the pesos issued for the losses generated by the dollar-soja were rejected and had to be absorbed with Leliqs.
It is very inconsistent to pretend to reduce inflation while unwanted monetary issuance continues to accumulate. Leliqs accrue an interest rate of over 100% per annum. This forces additional issuance that puts a very high floor on inflation. Therefore, even assuming that the IMF fiscal deficit targets are met, inflation will remain high due to the monetary issuance generated by the Leliqs’ interest and the losses generated by the differential dollars.
The government is resorting to price agreements, multiple exchange rates, and deepening exchange rate controls (the cepo) to manage the shortage of reserves. The result will be more inflation and recession. To reverse this decline, a change of approach is needed that takes as its central axis a comprehensive reorganization of the State. With an ambitious and credible State transformation plan, financial solvency and public management capacity can be restored. In addition, it will no longer be necessary for the Central Bank to continue getting into debt with Leliqs because it would increase people’s willingness to keep their pesos.