Milei and his team announce new measures on national television
The "new phases" of this government's economic plan, never being announced with sufficient anticipation, seem to be changes in the economic plan in general that the government implements when it realizes that the adopted scheme is unsustainable. To avoid damaging its reputation or losing credibility, and above all, to be able to surprise economic agents at the right moments, the authorities had already made a similar move last July when they announced that they would start selling dollars in the MULC to absorb a greater amount of pesos after observing that inflation was not falling as quickly as they would have liked.
In this case, on one hand, there should be at least some suspicion that the "exit" from the restrictions may have been a tacit admission that the exchange rate scheme could not be sustained forever and that the loss of reserves that dominated the front pages of newspapers in recent months was not an exceptional issue but a strong sign of exhaustion. On the other hand, as the president stated, the release of the restrictions and the partial floating may have always been on the agenda, and it was merely a question of maintaining the initial plan until the necessary amount of funds was obtained to carry them out.
The government, by its own merit, managed to secure important loans from the IMF, the IDB, the World Bank, and other institutions, thus saving itself from a potential implosion that would have severely harmed it in the upcoming elections. However, the change in the exchange rate policy—made possible by those loans, since without such a spectacular increase in reserves the new floating with bands could not be sustained—responds, evidently and although the government wants to present it as a self-made and premeditated decision, to the economic debate that dominated the scene in recent months: the issue of "exchange rate lag." This was one of the concerns of the IMF, alongside which the new exchange rate scheme was designed. Unless the government provides a reasonable alternative explanation as to why the sharp losses of reserves observed in recent months were not due to an inconsistency in the value of the official exchange rate but to certain exceptional circumstances or seasonal factors, common sense would indicate that an artificially low official exchange rate has been fostering imports and discouraging exports, consequently reducing the reserves held by the BCRA.
While the debate on "exchange rate lag" deserves to be further developed, on this occasion it is advisable to make some clarifications about the change in economic policy announced on Friday, April 11, in order to better understand the direction the Argentine economy is taking in monetary-exchange matters.
Firstly, it is necessary to clarify why the new measures, despite what the authorities and the media say, are not actually a complete "exit" from the restrictions, and why if they were, Argentina would have already exited the restrictions months ago.
We must begin by defining the concept, and in Argentina, the "exchange restrictions" is the name assigned to a whole set of regulations regarding the official or legal buying and selling of foreign currency. Among the most known and important are the limits on the amount of international reserves available for purchase by an individual from their commercial bank, or the impediments when it comes to transferring dividends—the distribution of a company's profits among its owners/shareholders—abroad in the case of corporate entities—companies.
The restrictions, by limiting the amounts of local and international currency exchanged (officially), inevitably affect the exchange rate (official), but it has nothing to do with it in principle. Above all, it should not be confused with the establishment by the government or the Central Bank of a determined exchange rate, of which there are many examples that we wouldn't call "exchange restrictions"—for example, the gold standard that operated until the early twentieth century, the gold-exchange standard that replaced it later, or the currency board that Argentina had during the 90s. However, by imposing limits and prohibitions on the buying and selling of foreign currencies, two distinct exchange rates are inevitably generated: the official one, in which those restrictions prevail, and the parallel one, in which they are not in force.
Having defined the restrictions in the way they are generally understood, as set of regulations that restrict the buying and selling of foreign currency, the elimination of the restrictions can only be realized by repealing all such norms, or at least the most important ones; otherwise, only partial liberalization will be discussed. As the statement from the Central Bank of the Republic of Argentina makes clear, for corporate entities, several of the impositions that make up the exchange restrictions are still in place, so it cannot be asserted that the most recent economic measures signify an exit from the restrictions without partially lacking the truth. It is true that one of the most palpable prohibitions for most of the population has been lifted, but not all of them. If it were only a matter of repealing some of the related regulations, the government should have announced the exit from the restrictions some time ago, as it had been gradually lifting several of the restrictions that composed it during 2024—so much so that Juan Carlos de Pablo had said: "the impression I have [...] is that as they keep lifting restrictions, one day they will end up lifting the restrictions and no one will notice."
The second clarification is that it is not correct to equate exchange rate bands with price controls or exchange controls.
The restrictions on corporate entities remain in place because, as the transfer through the Central Bank is mandatory for paying pending dividends from years ago and conducting other operations, if they were to buy all the dollars they need, it would cause a significant loss of reserves and likely drive the exchange rate to a level higher than the current one. In this sense, it is correct to assert that the government still exercises control over the exchange market, and this is the closest thing to a "price control" that can exist in that area.
However, the same cannot be said for the band scheme, even though at first glance it seems that a maximum and minimum price has been imposed on the currency. It is a mixed exchange rate scheme, that is, it floats in a certain sense—its value fluctuates as long as it is within the determined bands—but also fixed—it does not allow its value to fluctuate beyond certain established limits. While intuitively many relate a floating exchange rate to letting the value of the currency be determined freely by supply and demand, and a fixed exchange rate to an intervention by the monetary authority in the market through price fixing, in reality, both schemes are, a priori, equally "interventionist."
If the state fixes the exchange rate, it cannot control the amount of currency issued nor the amount of reserves in its possession, as both must automatically respond to the purchases and sales of foreign currencies in such a way that the established exchange rate remains stable. But in the same way, if the exchange rate is allowed to float freely, the government has direct control over monetary issuance and, of course, becomes an important and influential actor determining price in the exchange market by moving large volumes of the currency in question.
In fact, liberals often prefer the application of a fixed exchange rate over a floating one when it comes to currencies issued by the state, as it is a liability—a debt—of the Central Bank or the monetary authority to the users—creditors—of that currency, and given that the strict compliance with contracts is an essential pillar of liberal philosophy, it is unacceptable to allow the issuer of that debt to have the ability to erode its value and thus cheat its clients, something that the flexible exchange rate allows and the fixed exchange rate prevents. All of this is clearly explained in an old article by the liberal economist Juan Ramón Rallo.
The mere fact that the currency of an economy is issued and controlled by a Central Bank or a government forces the state, as the supplier of that currency, to determine its value in one way or another through the establishment of an exchange rate that its authorities deem preferable. Even with dollarization, it is not possible to escape this scenario; only one issuing state is exchanged for another. The only way to avoid it would be to completely separate the state from the currency, which would require eliminating the Central Bank or the monetary authority and the forced circulation of state currency while allowing the free competition of currencies offered by companies, banks, or private actors—which would also determine how much to offer according to demand, as happens with practically any other good.
What this band floating plan allows the government is to accumulate reserves more sustainably through a lower need to intervene in the exchange market. Again De Pablo: "Fiscal balance is the backbone; the rest of the economic policy are byproducts of that." Letting it float is a way for the Central Bank to isolate itself a bit from what happens with the exchange rate. Of course, this is a luxury it can afford now that reserves have increased as a result of various loans, and even then it reserves the right to do so to prevent sharp changes and instability—selling dollars when the value touches the upper band, or buying at the lower one.
A few last clarifications are precautionary rather than theoretical.
The partial exit from the restrictions and the continuity of stability in the exchange rate are important victories for the government. They are signals that lend greater credibility to the promises of the president and the minister of economy that economic stability, the encouragement of incoming investments, and the disinflationary path are real realities that have come to stay.
However, the government must not rest on its laurels nor fall into a complacency effect. All the inflation that this administration is managing to avoid—although it remains debatable whether it is doing so sustainably—by maintaining a strong peso should not be underestimated, but the latest monthly figure—3.7%—serves as a reminder that inflation is still high. Alongside the stabilized exchange rate, it is contributing to an appreciation of the Argentine economy that, beyond affecting exports, does not seem sustainable: aside from deregulations and disinflation that is virtually a constant reduction of taxes and distortions, there is not much reason to believe that the productivity of the economy has increased.
The opening of the economy to international trade is still timid, attempts to loosen labor market constraints have stalled, the project for tax reduction and simplification has not yet been presented, much less legislated, and the opportunities for carry trade with an interest rate in pesos above the sum of devaluation and inflation rates continue to hinder the shift from a financial mentality to a productive mentality in companies. All this is not necessarily a criticism, as such important reforms take time, but rather a list of reasons why it is difficult to believe the official narrative that the appreciation of the economy in dollars is 100% due to changes in real factors.
Additionally, and in line with De Pablo's frequent warnings, the danger that the economy has evolved from a scenario of "there is no money" to one of "there is a little money" must not be underestimated, especially in an election year. The president has generated enough credibility to convince a large part of the country that he will not change course due to sectoral or campaign pressures, but given that the economy and politics are strongly related in Argentina, it is not impossible to envision a deviation from the...The guidelines announced by the plan remain in effect. There are still uncertainties about whether the government seeks to dollarize the economy someday de jure, following the Bausili-Caputo report of 2023, or eventually move toward a "currency competition" or "endogenous dollarization," as the president once mentioned, and how they plan to do it. What is clear is that this government, unlike almost all previous ones, is thinking about a long-term economic project for the country and is proceeding with patience and certainty, which is no small news.
Finally, the question raised at the beginning of this article— to what extent the change in economic policy is a concession to critics regarding the existence of exchange rate lag and the consequent inconsistency of the medium-term plan— deserves a separate article dedicated exclusively to the discussion. However, the evolution of events sometimes offers some non-trivial clues about the answer, so it is imperative to closely follow the developments over the coming months.
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