FOR EVERY 1% INCREASE IN GDP, IMPORTS GROW 3.5%

The Central Bank faces difficulties in accumulating reserves. Evidence from the exchange rate balance, i.e. the difference between dollars in and out of the Central Bank, is very suggestive. In 2024, several factors (among others, the strong devaluation of the official exchange rate in December 2023, the PAIS tax and the tax pardon undeclared savings) played as a tailwind, but even so there was little accumulation of reserves. More worrying is that in January the exchange balance shows a loss of reserves of USD 1,826 million.

This is undoubtedly the issue that most complicated the negotiations with the International Monetary Fund (IMF). In Argentina’s favor is the application of an unprecedented fiscal adjustment achieved through a sharp reduction in public spending, which made it possible to achieve a financial surplus. But even with this excellent fiscal performance, the Central Bank has not been able to overcome a balance sheet that shows negative net reserves. Besides the dollars that the IMF can provide, the exchange rate situation raises doubts about the possibility of boosting a process of sustained economic growth.  

One question is how many dollars are needed to make economic growth sustainable. Taking the last two periods of sustained GDP growth experienced by Argentina, data from the Ministry of Economy show that:

• Between the years 1992 and 1998 the economy grew 4.3% per year and imports 13%.
• Between 2003 and 2013, production grew by 4.9% per year and imports by 18%.
• This implies that for every 1% growth in the GDP, imports grow by 3.5%.

These data show that economic growth is highly demanding of foreign exchange to finance imports. The explanation is that 85% of imports are capital goods, inputs and spare parts essential to mobilize the productive machinery. Moreover, when the economy grows, the population’s income rises, which increases the consumption of imported goods. The conclusion is clear: a sustained growth process needs foreign currency to finance the increase in imports. 

In the 1990s, an important part of the dollars required for economic growth came from capital inflows. A similar process was seen with intensity in the short-lived recovery between 2016 and 2018. In the 2000s, the increase in demand for foreign exchange due to economic growth was financed by high international export prices. The result of these experiences suggests that to make economic growth sustainable, it is advisable not to rely exclusively on capital inflows or high international prices. This highlights the importance of increasing competitiveness so that the increase in exports is the main source of financing for the increase in imports.

There indeed is much to be done in the management of companies to improve competitiveness. But it is also necessary to relax exchange controls to have a more favorable exchange rate for exports. In any case, the most important and complex challenge is to improve the environment that conditions the competitiveness of national production. Among the key points are the elimination of distortionary taxes, the elimination of bureaucracy in regulations, the modernization of labor institutions, the improvement of infrastructure and overcoming the precarious educational training of human resources. 

Competitiveness depends on virtuous policy coordination between the federal and provincial governments. Eliminating tax distortions means unifying national and provincial taxes. Labor legislation is under national jurisdiction, but provincial judiciaries are the ones that apply it, often generating litigation. Infrastructure deficits require national and provincial actions. Educational deficits are due to the poor quality of basic (provincial) and higher (national) education. In short, there will be no improvement in competitiveness without a coordination agreement between the nation and the provinces.