Argentina’s surge in foreign reserves risks reigniting inflation

There are, by all appearances, more than enough dollars flowing into Argentina for the country to fulfill its pledge to replenish its depleted foreign reserves. Each week, they pour in, the result of factors such as a boom in commodity exports and corporate bond sales. 

The problem, analysts say, is that accumulating reserves swells the supply of pesos in the economy and could, in turn, exacerbate a recent pick-up in inflation. This makes top aides in President Javier Milei’s administration nervous. Their biggest policy achievement has been the taming of hyperinflation, and the last thing they want to see is for prices to start soaring again.

That creates a quandary for the Central Bank: ideally, officials would prefer to amass reserves at a slower pace. The bank has already added some US$3 billion in gross reserves this year, putting it on track to hit objectives agreed on with the International Monetary Fund. The bank’s officials are confident that dollar inflows will remain robust enough to allow them to ratchet purchases back up later in the year, according to a person familiar with the matter who asked not to be identified.

For now, however, policymakers are constrained by the lack of genuine demand for pesos in an economy dogged by uneven growth. Wage growth, when adjusted for inflation, remains weak, loan delinquency rates are rising and banks are becoming more selective about who they lend to. Although Milei has been flagging signs of recovery since the beginning of the year, Economy Minister Luis Caputo said in a local radio interview this week that the economy should start to accelerate in May and June.

Policymakers, as a result, risk exacerbating the inflation spike if they print more pesos – through their dollar purchases – than the economy needs. While the Central Bank’s daily dollar purchases are down this month to an average of US$124 million from US$138 million in April, they have picked up over the last few days, according to data published on its website.

Some acknowledgment of that tension came earlier this week, when Central Bank Governor Santiago Bausili said that money demand is not recovering as quickly as officials had projected in a public presentation last December.

Recovering money demand was “was an assumption, not a promise,” he said.