December 28, 2014
Economist Facundo Spotorno says gov’t must implement a broad anti-inflation planSaturday, January 25, 2014
‘All sectors of the domestic economy suffered’
Why has the government decided to lift the prohibition on purchasing foreign currency for savings?
The government decided to put an end to the gap between the official dollar and the illegal one by allowing people to buy dollars for savings. Not implementing it would have led to a deeper drop of the Central Bank’s international reserves or a continuing devaluation. Nevertheless, the details are still not clear and we’ll have to see how much money the AFIP tax bureau lets people buy.
Has the government changed its economic strategy? What factors led to this week’s deep devaluation?
The government decided to start a slow devaluation last year after almost no devaluation and a high inflation rate throughout 2012. Until September of 2013, the inflation had not grown excessively from previous levels and the government kept devaluing at an average of 2 percent per month. Yet, everything changed in November and December when both the inflation and devaluation broke new records. The Central Bank has lost lots of international reserves so far this month so they decided to implement this new measure.
Why did the government feel it was necessary to implement restrictions on foreign currency purchases in the first place?
Back in 2011, a large part of the market was expecting a devaluation and because of that began to buy a lot of dollars, which were really cheap back then. But instead of devaluing, the government decided to implement foreign currency restrictions, with the boost of the illegal market as the main immediate effect. Former Domestic Trade secretary Guillermo Moreno was worried the effects a devaluation could have on inflation. Now after more than two years the government has the same problems that led to the restrictions: high inflation, drop of international reserves of the Central Bank and a higher trade deficit.
What effects did the foreign currency restrictions have in the domestic economy?
Almost all the sectors of the domestic economy suffered a negative impact from the foreign currency restrictions. One of the most affected was the real estate sector, which experienced drops almost every month. Imports were also affected. The restrictions stopped capital inflows almost entirely.
Do other measures need to be taken after authorizing people to buy dollars?
The ideal scenario is that the government can work toward a complete elimination of the foreign currency restrictions, not just a partial one. But to do that a much more complete economic programme is needed to solve monetary and fiscal issues and the current high inflation. Achieving an agreement with the Paris Club and other international organizations are factors that could help to achieve that goal.
The government has aimed fire at farmers for holding on to their crops and speculating by later selling them at a higher dollar rate, obtaining more income. Will this scenario change now, leading to the Central Bank obtaining more international reserves?
Yes, I imagine farmers and exporters will start selling their crops since now they have a higher dollar rate. Nevertheless, I don’t agree that much with the speculation idea. Not that many of them have the capacity to hold on to their crops.
Will the domestic economy be affected by this higher dollar rate?
This week’s dollar increase will lead to a higher inflation, which will be seen soon in prices in stores. Last year the inflation reached a 25 percent annual rate and now I imagine a 30 percent for January. Wage negotiations will be also affected by a higher dollar, leading to union asking for higher increases. Nevertheless, the private sector has reached a stop and now no new jobs are being created. There’s a limit on what unions can demand.