70% of the increase in Leliqs and repos are from its own interests

The dollar in the black market has reached $200 and inflation is not easing. The main reason is the fiscal deterioration. The national government manages with great effort to finance debt maturities with new debt in the local market. The fiscal deficit, instead, is financed with money issuance. For example, between January and September 2021, the primary fiscal deficit was 1.8% of the GDP and the debt interest payment was 1.5% of the GDP, which makes a total fiscal deficit of 3.3% of the GDP. In the same period, the Central Bank transferred to the Treasury 3% of GDP, that is, an amount equivalent to the total fiscal deficit.

In order to mitigate the effect of monetary expansion on inflation and the dollar, the Central Bank absorbs with Leliqs and repos the excess of pesos. This is the most powerful tool used by the government to prevent the money excess from going to prices and the black market’s dollar. One limitation of these instruments is that they pay interest and therefore it operates as an additional factor of monetary expansion.

The question is how long the government can go on using Leliqs and repos. To shed some light, it is useful to look at the Central Bank data. According to this source, between January and September of this year:

• The stock of Leliqs and repos grew by 4.2% of GDP.
• The interest paid on the stock of Leliqs and repos was 2.9% of the GDP.
• This means that 70% of the growth of the Leliqs and repos is explained by the interest payments generated by these instruments.

These data suggest that the capacity to absorb excess pesos with Leliqs and repos is running out. The reason is that the Central Bank not only has to absorb the pesos it issues for the national Treasury to finance the fiscal deficit, but it also issues Leliqs and repos to pay for the interest accrued by these two instruments. The fact that most of the new Leliqs and repos come from their own interest suggests that a saturation point has been reached. This leaves the government without its main tool to mitigate the effect of the money excess on prices and the dollar.

Persistent high fiscal deficits without access to credit fatally lead to inflation. The Central Bank can temporarily attenuate the pressure on inflation absorbing the excess of the money supply with Leliqs and repos. But at the cost of generating more problems due to the interest accrued by these instruments. In this context, pretending to reduce inflation with price, tariffs, and exchange rate controls accelerate the deterioration. Negotiations with the IMF are not very relevant either since they are unfocused concerning the central problem, which is the fiscal deficit.

The degradation of the public sector is deep and that is why it is necessary to address its integral reorganization. It is mandatory to recover financial solvency and professionalize public management. On the one hand, it is necessary to advance in tax and functional reorganization, eliminating taxes and expenses overlapping among the three levels of government (federal, provincial, and municipal). This should include the elimination of co-participation so that each jurisdiction is financed by its own taxes. On the other hand, it is necessary to move forward in a pension reform, including not only the national regimes but also those administered by the provinces and local governments.

The comprehensive reorganization of the public sector will not solve the fiscal deficit issue immediately. But, if credible, it will improve the access to credit in order to finance the fiscal deficit more sustainably. Had the Cambiemos government ordered the State, the foreign exchange crisis produced by the Lebacs would have been avoided. Now, the Leliqs and the repos are the Lebac’s successors and if there is no change in the strategy, they will be the ones that will deepen the inflationary crisis of the current government.