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OP-ED | 29-04-2023 05:41

Bucking the trend or a new weight for the peso?

The giddy oscillations of parallel exchange rates and the relentless acceleration of prices are moving too fast to leave any margin for gradualism, thus making shock treatment inevitable.

The giddy oscillations of parallel exchange rates and the relentless acceleration of prices are moving too fast to leave any margin for gradualism, thus making shock treatment inevitable – a conclusion which should always be accompanied by the warning that there is bad as well as good shock treatment. The government can always argue that the problems stem from the overrated importance attached to what is an illegal exchange rate at the end of the day and that there is no justification for price increases if imports are paid at the official exchange rate, but then the onus falls on them to produce the real dollars to discredit the alternatives – instead Economy Minister Sergio Massa has been multiplying exchange rates ever since he took office. Yet this onus also falls on those advocating dollarisation who have to answer the question: How do you dollarise without dollars?

The obvious point of reference for any new monetary regime is the decade of convertibility as from 1991 when Argentina had nine consecutive years of single-digit inflation (there have only been eight other such years in the last eight decades). Yet the stability of pegging the peso to the dollar has to be measured against the sacrifice of monetary sovereignty leaving the currency vulnerable to the outside world, a vulnerability only enhanced today by the past four years with the global turbulence caused by the coronavirus pandemic and the Ukraine war. In the end the wheels came off convertibility because of the external shocks of Asian flu, the Russian crisis and Brazilian maxi-devaluations between 1997 and 2001, but even without these it would have probably not been sustainable in the long term since the monetary rigidity denied the capacity to devalue or otherwise adjust the exchange rate to make exports more competitive. Against the negative experience of convertibility, advocates of dollarisation might argue that Washington’s currency has been sustained in both Ecuador and El Salvador for almost quarter of a century despite governments of all types ranging from the extreme right to the far left in both cases.

Yet neither convertibility nor dollarisation need be the only alternatives for stabilising the currency. Far closer to Argentina than the United States and with a far more comparable economy to the extent of having an interwoven auto industry lies the giant neighbour of Brazil where last month’s inflation was measured at 0.6 percent for an annual rate of 4.4 percent or just over half Argentina’s 7.7 percent only in March – and all this without a market-friendly government entrenched in Brasília. But if Argentina does not want to place all its eggs in one basket, it could always opt for a multiple basket, adding to the US dollar and the Brazilian real the Chinese yuan of the world’s other economic superpower and the euro whose zone covers an even larger population than the greenback – this combo of all Argentina’s main trading partners would offer more flexibility, evening out the risks. But whatever the monetary regime, it would need to be accompanied by other measures such as making the Central Bank independent in all aspects except for being forbidden to print money to finance the Treasury deficit.

Nevertheless, the deficits will form a tricky part of any transition – not so much the fiscal deficit as the quasi-fiscal with that huge snowball of the Leliqs and other bonds issued to “sterilise” the extravagant money-printing more than doubling the money supply at some 13 trillion pesos. Yet that task may not be as formidable as it seems – if a bond swap is designed to exchange this obviously unpayable debt otherwise subject to an infinite series of rollovers for obligations which can actually be paid, it might well find so many takers that the problem will be solved. In general, the return of confidence can do the trick, as already seen in so many Latin American countries.

Any drastic action is widely expected to await the next government with an administration headed by a man who has just relinquished his presidential candidacy almost universally written off. Is there a case for moving now, in preference to subjecting the country to several more months of the current rot?

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