More is spent on Leliq interest than on pensions

Given the critical level of the Central Bank’s reserves, the government has introduced a new dollar-soy. On this occasion, exporters of certain products are offered, for 45 days, a preferential exchange rate of $300. The scheme augments the distortions and is only a palliative for the lack of foreign currency in the Central Bank since, although it will obtain fresh foreign currency, it does not discourage the over-demand for dollars caused by the low value of the official exchange rate ($210). 

A very important aspect of the dollar-soja is that it forces to increase money emission. The Central Bank prints pesos to buy dollars at $300 and absorbs pesos by selling dollars at only $210. The difference ($90 for each dollar-soy settled) is more pesos in the market. Due to the inflationary impact of this monetary excess, the Central Bank induces banks to subscribe Leliq with their clients’ deposits. The enormous liability that the Central Bank accumulates in Leliqs is inflation that will be suffered in the future. While a general devaluation would have immediate inflationary impacts, with the dollar-soy and the Leliq issuance the inflationary impact is deferred.

One way of measuring the problem is to compare the amount of Leliq interest paid with pension payments, the main expense of the national government. According to data from the Central Bank and the Ministry of Economy, in the 1st quarter of 2023 it is observed that:

• Spending on pensions was AR$660 billion monthly average.
• Spending on Leliq interest was AR$700 billion monthly average.
• This implies that the Leliq interests spending already exceeds pensions spending.  

These data show that in 2023 the Leliq interest became the main expense of the national government. As a reference, in June 2022 the interest on Leliqs represented less than half of the expenditure on pensions. After the dollar-soja I, they accounted for 80%, and with the dollar-soja II, they exceeded 100%. With the new version of dollar-soy III, Leliq interest expenses will increase even more, aggravating future inflation. 

The dollar-soy is an “ingenious” instrument to defer problems, particularly a greater acceleration of inflation. But it does so at the cost of aggravating the competitiveness problems of the rest of the exporters, who do not have access to this preferential exchange rate and stimulating the foreign currency demand for imports and expenses abroad, by keeping the official exchange rate low. Therefore, further restrictions to production –which suffers many restrictions to import inputs and capital goods– are to be expected; also the upward trend of inflation.

The use of Leliqs to absorb excess monetary expansion goes against the idea that the problem in Argentina is the “crack”. According to this view, Argentina’s decadence is due to political rivalries that prevent agreeing and sustaining “State Policies”. However, the reality is that the governments of Cristina Kirchner, Cambiemos, and the current one, appealed to use the same tool (Leliqs) to postpone the inflationary consequences of a chronic deficit in the public sector. This suggests that, although they are not made explicit, there are “State Policies” in Argentina. Among the most important and harmful are those of maintaining the chronic fiscal deficit and using Leliqs to postpone its inflationary consequences.

It is essential to be disruptive dismantling the consensus on these mistaken ideas. Fiscal and public management deficits are chronic because they derive from the poor organization of the State. Since this is an organizational problem, orthodox fiscal adjustment is ineffective and an eventual change in the monetary regime will be insufficient if the functioning of the State is not improved at the same time. For this reason, the fundamental and most challenging step is to address a comprehensive reorganization of the public sector that will make it possible to achieve fiscal balance with substantial improvements in the quality of public management.