Report Nº: 75723/05/2018


By taking external debt to finance the fiscal deficit, the incoming dollars appreciates the peso, discouraging exports and promoting imports. Therefore, to correct the big Argentinean external imbalance it is fundamental to accelerate the gradualism and balance the public finances. Amid the concerns caused by the persistence of high inflation, the rise to unbearable levels […]

Amid the concerns caused by the persistence of high inflation, the rise to unbearable levels of the interest rate and the volatility of the dollar, there is also another factor of concern: the huge external deficit.This is the negative balance in the current account generated by transactions with other countries. In 2017 it reached almost 5% of GDP. Therefore, many points out that Argentina has a double problem: high fiscal deficit and high external deficit.

Is it really a double problem?To clarify this question it is convenient to have a look at the official figures on the balance of payments, that is, the commercial and financial transactions of Argentina with the rest of the world. According to this source, in 2017 imports of goods exceeded exports by US $ 5 billion, the payment of services abroad (mainly tourism) exceeded sales by US $ 10 billionand the payment of remittances from foreign companies in the country and the purchase of dollars by Argentines reached US $ 15 billion. In sum, in 2017 there was a deficit of foreign currency in the order of US $ 30 billion.

Where did the dollars come from to cover this imbalance?According to the data of the balance of payments it is observed that:

  • Federal and the provincial governments took external debt for US $ 34 billionto finance their fiscal deficits.
  • Private companies took external debt for about US $ 5 billion.
  • Thus, the total external debt taken amounted to US $ 39 billion.

These data show that the dollars generated by exports and sales of services to foreigners were much lower than the dollars required to pay imports, tourism, other services contracted abroad, to hoard dollars as savings and to send remittances abroad. In turn, they also show that this imbalance was covered with dollars that were obtained by new public and private external debt.

The sum of the debt issued by the public sector, both national and provincial, plus that taken by the private sector, amounted to US $ 39 billion. The difference between the income of dollars due to the increase in foreign debt and those that were consumed by an excess of purchases abroad was about US $ 9 billion, which swelled the reserves of the Central Bank. Hence, when the Central Bank sells dollar in the market to mitigate the exchange rate volatility, it is not “giving away” dollars, as some say, but simply giving back to investors its borrowed dollars as a result of the loss of confidence in the peso.

But the most important thing is the US $ 30 billion that came in for the new debts issued by the federal and some provincial and municipal governments. The fiscal deficit financed with external debt produces an abundance of foreign currency that tends to appreciate the domestic currency (peso). If the State took less foreign debt, the exchange rate would tend to depreciate, so there would be more exports and less imports, less tourism abroad and Argentina would be more attractive for foreigners and the balance of remittances would be less unfavorable since there would be more incentives to invest in the country. In contrast, when the public sector spends in excess and borrows abroad, it brings a fictitious abundance of dollars that induces the imbalance of exports with respect to imports, incites tourism abroad and promotes sending royalties out of the country.

The external deficit will not be corrected with protectionism but by avoiding excessive external debt due to the high fiscal deficit. Therefore, in order to reduce the external deficit, the fiscal deficit must be reduced. The turbulence of recent weeks demonstrates the failure of the slow gradualism to balance the fiscal budget and points out the urgency of accelerating the balance in the public sector. This is to stop postponing decisions and cut the large amount of unproductive and inequitable expenditures that swarm in the national budget, preserving those that help the poor and the most vulnerable population.


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