TO DISMANTLE LELIQS THE STATE MUST BE PUT IN ORDER

The interest-bearing liabilities of the Central Bank appear as one of the most urgent challenges for the new government. In leliq (debt of the Central Bank with commercial banks at 28 days of term) and in repos (debt at 1 day of term) a liability of $23 trillion is accumulated. It represents almost 3 times the monetary base, that is, it triples the amount of money in people’s hands.

If the leliqs and repos were immediately transformed into money in the hands of the people, there would be a strong inflationary stampede. All the repressed inflation that the outgoing government did not externalize would be made explicit. On the other hand, a phenomenon that has been observed since the PASO and which accelerated after the second round of the elections is the conversion of leliqs (28 days) into repos (1 day). In the PASO, 73% of the Central Bank’s liabilities were leliqs, while today the proportion has been reversed: the repos represent 73% and the leliqs 27%. This shortening of maturities intensifies the warnings.    

The non-traumatic way to dismantle the Central Bank’s liabilities is to increase people’s demand for pesos. If the public is convinced that the fiscal deficit is being resolved, the willingness to hold pesos will increase. To persuade people that a sustainable fiscal balance phase is being entered, it is necessary to analyze the composition of national public spending. In this regard, according to data from the Ministry of Economy for 2022, national public spending is made up as follows:

• Spending on strictly national functions amounted to 15.1% of GDP.
• National spending on provincial functions was 2.5% of GDP.
• Spending on economic subsidies was 2.8% of GDP.  

These data show that the nation executes expenditures equivalent to more than 5% of GDP in areas that are not its responsibility. According to the Constitution, public health, basic education, social assistance, housing, and urban planning are local functions. Along the same line, economic subsidies should be replaced by social tariff schemes (which are part of the social policy in charge of the provinces and their municipalities). Nor should public funds be used to subsidize public companies.

To advance in this reduction of national public spending, it is essential to reach a consensus with the provinces on the reconstruction of the federal organization. The way to implement it is through a tax and functional coordination agreement. There it must be established that the national State will deal exclusively with the delegated interprovincial functions (macroeconomic stability, foreign relations, and interprovincial infrastructure), and therefore all national programs involving provincial and municipal functions should be eliminated (dismantling the administrative structures that manage them). Thus, the provinces with their municipalities will be exclusively responsible for financing and administering social services (health, education, social development, housing, and urban planning) and urban public services (distribution of electricity, water and sanitation, and urban transportation). 

As regards tax coordination, the agreement must contemplate the unification of taxes and fiscal correspondence. That is to say that, except for the most backward northern provinces which will receive assistance from a Convergence Fund, the rest of the provinces must be self-financed. In this way, citizens will have a clear idea about which level of government they pay taxes and to whom they should claim the quality of public services they receive.

The volume of interest-bearing liabilities of the Central Bank and the ever-shortening maturities lead to a lack of focus on priorities. For this reason, it is important to insist that the origin of the problem is not monetary but fiscal. If people are convinced that there will be a sustainable fiscal balance, the leliqs and repos will be absorbed by an increase in the demand for money. Here is the strategic importance of reaching a tax and functional coordination agreement with the provinces demonstrating the vocation to dismantle the national structures that operate in an overlapping manner with the provinces and municipalities. If, in addition, progress is made in the pension system to moderate the expansion of spending due to population aging, fiscal balance will be sustainable over time.