Report Nº: 103327/09/2023
Devaluation is a painful remedy with no guarantee of success. Accompanying it with improvised and opportunistic measures led to a jump in inflation and the loss of government authority. The objective of improving the real exchange rate was not achieved and the risks of further inflationary acceleration increased.
As part of its strategy to repress inflation, the government had been applying small daily devaluations on the official dollar below the inflation rate. The main consequence was that the value of the official dollar lagged (became cheaper), discouraging exports and encouraging imports. Despite the increasingly strict obstacles to accessing the official exchange market, the Central Bank’s reserves were depleted.
The unsustainability of this dynamic led to a big devaluation the day after the PASO. This made it possible to resume the agreement with the IMF to receive from this organization the USD 7.2 billion that Argentina had paid at the end of July, temporarily alleviating the drop in the Central Bank’s reserves. Almost simultaneously, a series of measures were taken which implied greater monetary issuance (bonuses to government employees, retirees, and beneficiaries of welfare benefits) and greater pressure on private companies (bonuses to private employees, freezing of the price of prepayments). The impact was that prices automatically shot up and the monthly inflation rate reached 2 digits per month.
How was the real exchange rate after this devaluation and inflationary jump? According to data from the Ministry of Economy it is observed that:
These data show that the official dollar after the devaluation is still cheap compared to its historical value. In fact, at this inflation rate, in a few more weeks it will have –in real terms– a lower level than the one it had before the PASO devaluation jump. Nor did it serve to narrow the gap with the dollar in the black market. On the contrary, it is necessary to go back to the end of the 80s, when a hyperinflationary process was unleashed, to find a value of the dollar in the black market similar to the current one.
Applying a devaluation jump is a complex, painful, and risky process. For this reason, accompanying policies aimed at moderating the impact on prices are decisive. This is the way to raise the real exchange rate, improving the country’s export prospects and the opportunities to produce competitively with imports. On the contrary, if the impact of devaluation on domestic prices is not minimized, not only will competitiveness not be improved, but pressures in favor of accelerating inflation will be added.
This was the path chosen by the government. Due to political opportunism, it delayed the devaluation jump until the day after the PASO, and the population was informed that it was imposed by the IMF. The IMF was asked to make the disbursement for which the organization had to forgive the non-fulfillment of all the targets and make a new agreement. Then, almost immediately, measures were taken to expand fiscal spending in the opposite direction. The operation served to overcome the stumbling block posed by the agreement with the IMF, but the internal consequences are threefold negative.
On the one hand, the real exchange rate did not improve, so the pressing shortage of foreign currency will continue, reaching extreme cases such as, for example, the lack of supplies for hospitals. On the other hand, inflation jumped to double-digit monthly levels. Finally, the credibility and authority of the government deteriorated even more. The rebellion of governors and mayors (including those of the ruling party) in paying the announced bonus and the price increases and co-payments that are taking place in private medicine, regardless of the announced freeze, testify to this institutional degradation.
The poorly done devaluation deepened the crisis and increased the challenges for the next government. A new step in a long, generalized, and deep deterioration process. Therefore, more important than designing a new monetary regime is to have a strategy to comprehensively reorganize the State. The possibility of halting the current deterioration and reversing the economic decline depends on its consistency and its swift implementation.
