Report Nº: 111713/04/2025
Exchange rate easing is a sensible response to currency appreciation. It is likely to have a negative, but controlled, impact on the disinflation process and recovery of production and incomes. Nevertheless, the weakest aspect of the announcements is the scant references to the structural reforms of the May Act.
The government finally relaxed the exchange rate regime as part of a new agreement with the IMF. There will be an exchange rate band between $1,000 and $1,400 where the Central Bank can intervene so that the official exchange rate moves around those values. There will be no more exchange restrictions for individuals. For legal entities, the restriction continues with exceptions, such as the possibility of transferring foreign currency abroad for the fiscal year 2025.
The measure was necessary because the loss of reserves of the Central Bank had been accelerating and was unsustainable. The impacts on the disinflation process and the recovery of income (salaries and pensions) and economic activity will surely be negative. However, unlike other times, the conditions are in place for the impact to be limited. The fiscal balance –an unprecedented situation for the Argentine tradition– plays in favor of preventing inflationary feeding back due to the exchange rate correction.
The relevant question is whether the new exchange rate regime will alleviate the competitiveness problems. For this purpose, it is relevant to take as a reference the Multilateral Real Exchange Rate (MIRR) calculated by the Central Bank, an indicator that measures Argentina’s competitiveness compared to its main trading partners. Taking the average of the decade of the ’90s as a base = 100 it is observed that:
These data show two very important issues. First, it confirms that mega devaluations have a short-lived positive impact on the real exchange rate. The inflationary shock it produces causes the real effect of the devaluation to quickly dissipate. This is what happened with the December 2023 devaluation. Secondly, the changes announced by the government, even in the hypothesis that the dollar is located at the ceiling of the band, is a modest correction of the real exchange rate given the severe competitiveness problems suffered by a large part of the national production.
The flexibilization of the exchange rate regime was necessary because of the unsustainability of the Central Bank’s reserves loss. However it is insufficient from the point of view of the urban productive sectors that suffer from low competitiveness. This does not question the modification in the exchange rate regime introduced by the government but warns that devaluation is an aspirin that does not solve the disease of low competitiveness.
For this reason, the weakest point of the announcements is the null reference to the May Act. This decalogue that the President proposed to society at the beginning of his government is the agenda of structural reforms that will genuinely improve competitiveness. Although the agreements with the IMF focus on short-term issues, the weakness of their contents regarding structural reforms is remarkable. Mention of labor reform is very tangential and pension reform is postponed until the end of 2026. Even on a central and decisive issue for competitiveness, such as tax reform, the agreement’s contents are half-hearted. A gradual reduction of distortionary sales taxes and the check tax is expected to begin at the end of this year. One of the few clear commitments of immediate execution is the always-promised and never materialized, unique register of social beneficiaries.
The decision to make the exchange rate regime more flexible is pertinent. It is also foreseeable that its impact on inflation will be limited, therefore, its incidence on the October elections will not be decisive. The weakest point of the government’s announcements is the lack of reference to the reforms proposed in the May Act. This is decisive because without genuine and substantial improvements in the real competitiveness of the economy, sooner rather than later, it will be necessary to raise the ceiling of the exchange rate band.
