Argentina’s new centre-right government has announced it will relax currency trading rules. The move is expected to cause a devaluation of the country’s national currency, the peso, and an increase in exports.
Argentina’s new President Mauricio Macri, inaugurated last Thursday, is moving quickly with economic reforms intended to jump-start growth in South America’s second biggest country. On Wednesday, Economy Minister Alfonso Prat-Gay announced a loosening of currency controls – foreign exchange trading restrictions that had propped up the official value of the peso since 2011, and given rise to a thriving forex black market.
“The Finance Ministry announces… the lifting of the currency exchange control,” the Economy Ministry said in a statement.
The Argentine peso was officially traded at 9.8225 pesos per US dollar on Wednesday. But on the black market, the rate was 14.43 peso to the dollar. Once forex controls are lifted and the peso is allowed to float freely, analysts expect an exchange rate of between 13.5 to 15.0 pesos to the dollar.
Citizens and businesses are expected to trade a lot of pesos for dollars once it’s again legal to do so freely. Savers prefer dollars as a safe haven from the high inflation – which is at an annual rate of about 25 percent currently – and financial instability that has characterized Argentina during the past couple of decades.
The previous President, Cristina Fernandez, a leftist populist, had imposed limitations on access to US currency in order to protect waning central bank dollar reserves, using a set of controls collectively called the “cepo”.
Along with a new President, Argentina has a new central bank governor, Federico Sturzenegger, an economist with a PhD from the Massachusetts Institute of Technology who previously was head of the Banco Ciudad de Buenos Aires, a city-owned bank, and a top official at an Argentine university.
The central bank said it hiked interest rates on short- and medium-term fixed peso deposits by eight percentage points, in anticipation of a sharp devaluation of the currency – in an effort to induce depositors to leave their peso deposits in place, rather than make a collective run to the dollar.
Other reforms, and a puzzle
Among other reforms, President Macri also cut a string of taxes on exports, including an end to taxation of wheat and maize expors, which previously had been taxed at 23 and 20 percent respectively. The tax on soybean exports has been cut from 35 to 30 percent.
A five percent tax on industrial exports was also scrapped.
Despite the tax cuts and free-market reforms, Macri has vowed to keep popular social programs in place.
Argentina has vast natural resources, a large agricultural and ranching sector, fossil fuel reserves and a large labor force with many highly educated people. A perennial puzzle for political economists has been to explain why the Argentine economy has struggled with high inflation, an unstable currency, low growth and repeated government insolvencies over the past hundred years, despite its many natural advantages.
nz/hg (Reuters, AFP)