The government has adopted a new turn in its macroeconomic policy, partly acknowledging the inconsistency of its exchange rate policy. And it has recognized the importance of accumulating reserves at the central bank as a mechanism for reducing sovereign risk.
As announced, the accumulation program will take place within the framework of the “remonetization phase” of the economy, in which the issuance to purchase dollars will take advantage of the seigniorage arising from the growth of real GDP and the demand for pesos linked to the inflation tax (implicitly, as announced, to purchase the 10,000 million dollars that the government envisages at an estimated GDP growth of 4-5%). What is required is an inflation rate that should still be above 20% per year until 2026).
What stands out here is the idea, never explicitly accepted, that without constraints, it is the demand for pesos that determines the amount and rate at which reserves are accumulated, regardless of the mechanism used. And the ideological concept that issuing pesos to maintain monetary balance is a “crime” is being abandoned..
Chronologically speaking, until the restrictions on people’s access to the official market were lifted, the central bank had the “monopoly” of buying the net supply of this market.
From mid-April this year, with the hasty complete lifting of restrictions on people purchasing in the official market, The central bank faced strong competition for dollar demand.
Dollarizing portfolios removed all dollars from supply, including increasing them through export tax cuts. The central bank also began selling dollars that were not its own, and the Treasury Department used dollars originally intended to pay off debt. He “frontloaded” of the IMF ($ 15,000 million) during a year in which no capital was paid in also fell in the opposite case. Finally In order to prevent a more serious crisis in the foreign sector, it was necessary to resort to Trump-Bessent’s help.
The acceleration in dollar demand from individuals began long before the election results in Buenos Aires province were known.which ultimately led to an improvement. This was a “non-electoral” demand This is clearly related to the uncertainty created by an exchange rate system that, beyond official rhetoric, would be changed sooner rather than later.
The most recent announcements lie within this framework. From January next year, the band cap will be changed based on past inflation (t-2). (The proposed floor was never in use and is definitely irrelevant.) The rate of creep of 1% per month, which was fundamentally a tool to influence inflation expectations, and an indexation of the band cap is assumed.
We move from an exchange rate at the upper limit of the real fast-falling band to a price that sets in real terms the value at which the central bank (or the US Treasury?) is willing to sell dollars when that upper limit is reached.
Below this ceiling, the exchange rate fluctuates, but now, with the additional demand from the monetary authority, there will be one this time.”Pricing”?
The question is legitimate, because in addition to the Central Bank and foreign companies transferring profits, another demander of dollars in exchange for pesos should be included: the Ministry of Finance for the payment of interest on the debt. But The latter is not clear from either the Minister of Economic Affairs’ remarks or the letter of the Central Bank’s own statement.
Apparently the intention is to finance not only the principal due, but at least part of the interest, in order to “enable the accumulation of reserve purchases on the central bank’s balance sheet rather than using them for debt relief.”
If this is really the case, Capitalizing interest does not seem to be the best strategy for reducing country riskgiven Argentina’s historical pathology (a strategy already applied to the debt in pesos, which will no longer be liquidated, unlike the first months of 2024).
On the one hand, it is about reducing the country’s risk by demonstrating the accumulation of reserves to cope with external shocks, making any exchange rate regime more credible and honoring dollar commitments. However, if this procedure is confirmed, part of this objective would be lost as debts increase due to unpaid interest.
A final note on the transition from a disinflationary regime based on an exchange rate anchor to one based on the control of monetary aggregates.
International experience shows that these transitions to “pesification” (toward the national currency) of the economy and to inflation similar to international inflation usually take a long time. Credibility and reputation must be built in the central bank, and part of this credibility comes precisely from the accumulation of reserves in the assets of this institution.
It is also worth noting, as the books and the protagonists themselves explain, that prioritizing the accumulation of reserves in almost all cases forced maintaining monetary balance through debt borrowing (sterilization) of part of the resulting issuance. accept slower disinflation, Given the fact that asking for money alone is sometimes not enough.
Key to these liquidity management measures is the setting of a central bank policy rate that promotes the persistence of a positive real interest rate for local currency savers (always relative to expectations of currency devaluation).
The Central Bank statement proposes both these sterilization operations “with conventional tools” and their replacement with an “interest rate set by the BCRA”. Without saying so explicitly, a system that was unnecessarily scrapped mid-year and caused so much instability in the peso market in the third quarter is being reversed.
In addition, the path to faster disinflation becomes difficult if we consider that we are still in the middle of a process of changing relative prices – for example, price adjustments for public services are now over-indexed to reach a level that fully reflects costs.
And since the monetary issue of accumulating reserves “competes” with the need to normalize bank reserves and renew the public debt in pesos, managing supply requires the complex art of managing the interest rate and open market operations.
We must not ignore that we are just beginning a structural adjustment that must incentivize a strong public-private productivity shock As part of the necessary reforms, any suspicion of the use of exchange rate lags as an anti-inflationary tool must be eliminated.
The change in position regarding the need to accumulate reserves goes in the right direction of the macro and macro order Leave behind the absurdity of debating “what reserves are for.”
But as already mentioned, implementation faces challenges that must be met with patience, prioritizing objectives and avoiding overly ambitious targets which, if not achieved, will cause those who formulate them to lose credibility.
About The Author
