EXCHANGE RATE DEVALUATION IS NOT A SUBSTITUTE OF STATE ORDERING

At the end of last year, the media showed the influx of foreigners into Argentina to shop in supermarkets, fill up gasoline and enjoy the good local gastronomy. There was even a bonanza in the cities adjacent to the border countries. At present, there are signs of movements to the contrary. Argentines are going abroad and buying goods, particularly clothing and electronics. 

Along with this reversion, economists have been discussing the level of the exchange rate. While the official view welcomes that the dollar in the black market tends to close its gap with the official dollar and lower the inflation rate, other voices warn that the daily devaluation rate (crawling peg, in the jargon) that the Central Bank prints to the official dollar should be accelerated so that it goes more in tune with inflation. The concern raised by critics is that, if the delay of the official dollar continues to deepen, it will be necessary to resort to a mega devaluation sooner or later that will rekindle inflation. 

The question to be asked is what was the trend of the monthly inflation rate and the inflation-adjusted dollar since the current government took office. According to official information, it is observed that:

• In December the monthly inflation rate was 26% and in April it is expected to be 10%.
• In December the official dollar was $1,325 at current prices and in April it is $870.
• In December the parallel dollar was $1,987 at current prices and in April it is $1,000.  

These data show that the official dollar fell 35% in real terms and the parallel dollar fell 50%. Inflation is decreasing as a result of a strong exchange rate appreciation associated with decisions taken by the government. On the one hand, the Central Bank applies a daily devaluation rate of the official dollar below inflation. On the other hand, it maintains the wide and complex set of rules that comprise the exchange rate “trap” that prevents or limits the access of companies and families to buy official dollars and to buy dollars in the formal parallel market (CLL or MEP).

The crossroads is posed. Keeping the dollar price contained contributes to lower inflation. But, to achieve this, access to dollars must be repressed, which implies repressing economic activity. For economic activity to be reactivated, it is necessary to reactivate imports of goods and services and to allow the mobility of capital to and from abroad in order to revitalize investment. The issue is that eliminating the exchange rate “trap” generates uncertainty as to what may happen with the price of the dollar and how this may impact inflation. The dilemma seems to have no solution: if the exchange rate policy is made more flexible, inflation reduction is put at risk; if exchange controls are maintained, reactivation is put at risk. 

To get out of this dilemma, less importance should be posed on the exchange market and more about the structural transformations that the government has been announcing and that, for the time being, it has not found a way to implement. With the current exchange rate, the competitiveness of the Argentine economy would be much higher if the tax system were rationalized based on the unification of taxes, the modernization of labor institutions, the reorganization of the social security system and the replacement of co-participation by a mechanism that induces the provinces to improve the administration of public funds. In other words, the solution is not to accelerate the devaluation of the official exchange rate but to accelerate the implementation of the May Pact so that through productivity increases the competitiveness of the Argentine economy can be enhanced.  

Devaluations in Argentina have been used historically to compensate for the consequences of bad public policies rather than to solve problems. Therefore, the priority is to reverse bad public policies. In this regard, the government has been showing great capacity to propose ambitious transformations, but low capacity to put them into practice.