November 27, 2014
Big economic changes on the way
Incoming minister Kicillof has advocated for multiple exchange rates
After shaking up her Cabinet, President Cristina Fernández de Kirchner is readying a set of economic measures, among which creating multiple exchange rates could be included. Sources told the Herald that an announcement would come in the next few days or hours and include several changes after officially swearing in the government’s new economic team: Axel Kicillof as the new Economy minister, Jorge Capitanich as Cabinet chief, Juan Carlos Fábrega as head of the Central Bank and Juan Ignacio Forlon as head of Banco Nación. Additionally and above all, Domestic Trade Secretary Guillermo Moreno’s resignation may represent the end of an economic era in the Kirchnerite administration.
Sources close to the government told the Herald that a debate is currently raging among government economy officials in order to establish when and which measures will be implemented. Creating multiple exchanges rates, reducing subsidies to public services, changing credit policies of the Central Bank and new agreements with international agencies could be announced soon in order to stop the drop in the Central Bank’s foreign currency reserves.
“Numerous issues are being discussed now and there could be announcements soon,” Agustín D’Atellis, economist and member of the pro-government group La Gran Makro, told the Herald. “The government is considering a set of options, among which creating multiple exchange rates could be included. But it wouldn’t be the only change. The government could start working on achieving agreements with international agencies and the Central Bank could change the regulation on banks.”
The idea of creating multiple exchange rates relates to a paper published by Kicillof years ago, before he was a government official, titled “National Economic Plan,” which includes several types of dollars for different economic activities.
Kicillof has advocated for more interventionist policies and, as an academic, gave classes and wrote about the theories of economists including John Maynard Keynes and Karl Marx.
“The paper was published a long time ago with the objective of maintaining soy exports, a different goal to today’s,” Ariel Setton, economist and member of Plan Fénix, told the Herald. “He wasn’t a member of the government at that time and didn’t know the situation. Nevertheless, him being the new Economy minister and Fábrega the head of the Central Bank confirms a train of thought.”
The changes to Cabinet imply the consolidation of Kicillof’s ideas and his role in leading the government’s economic team, including Fábrega. Nevertheless, Lorenzino’s long-held priority of reaching agreements with international agencies in order to increase the current low reserves will not be abandoned, and an agreement with the Paris Club could be announced soon.
“Boudou and Lorenzino said a devaluation could lead to more inflation and because of that they wanted to get loans abroad. (Outgoing Central Bank head) Marcó del Pont wanted to devaluate but gradually and above inflation rates,” Juan Paladino, an economist at Ecolatina agency, told the Herald. “Economic changes are due to come, and based on Kicillof’s way of thinking, creating multiple exchange rates would be the first measure.”
A dollar for tourism
The idea of creating multiple exchange rates for different areas of the economy responds to the drop in the Central Bank’s foreign currency reserves. Last week, the reserves plunged below the US$33 billion barrier, thus slipping to a seven-year-low and accentuating a two-year trend of depletion that has been accelerating. Several rates existing at the same time would help to save reserves by accepting a higher rate for certain goods or services.
Economists agree that through circumstances, tourism is one of the major causes of the drop in reserves, a problem that could be solved by implementing a tourism dollar rate. The existence of a black market intices tourists to change their dollars at higher rates, with most of that money not entering Argentina’s economy. Only one in three dollars from foreign tourists is currently exchanged in the legal market.
“I imagine this kind of measure being announced soon. It’s a direct consequence of the change in the government and responds to what Kicillof has previously said in his papers,” Juan Pablo Ronderos, head of Business Development at Abeceb agency, told the Herald. “Having a different dollar for tourism is a necessary thing to do. Nevertheless, the government doesn’t usually take several decisions at the same time so I imagine announcements will be made gradually.”
A tourism dollar would help to deactivate the current black market and encourage foreign tourists to exchange their money in the legal market. Nevertheless, a lot of questions remain including if the government could implement quotas per citizen to access dollar and which would be the requirements in comparison to the current ones.
A tourist dollar would likely not be the only exchange rate created, economists said, since Kicillof mentioned more than 20 different rates in his paper. Luxury items like imported cars could be next in line.
“The government will probably not just implement a tourism dollar but also create a dollar for some luxury items like imported cars,” Paladino said. “But this won’t be the only measure since Lorenzino will continue looking for dollars abroad by negotiating with international agencies.”