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Argentina Concedes Chink in Currency Control Armor

By: Sofía Ramírez Fionda - Jan 24, 2014, 4:58 pm

EspañolAccording to Jorge Capitanich, the president’s cabinet chief, Argentina’s government is set to eliminate a ban on the purchase of dollars for saving purposes. During a brief presentation Friday morning, Capitanich announced the decision will become effective from Monday.

As a result of Argentina’s historic high levels of inflation and monetary instability, the purchase of dollars for saving purposes has been a common practice among Argentinean citizens. In July 2012, however, the government banned this type of transaction, only allowing the purchase of foreign currencies for tourism, health care, and educational purposes. Purchases of dollars requires previous authorization from the Federal Administration of Public Revenues (AFIP), who are responsible for tax revenues and customs controls on foreign trade.

Last week, Argentina’s government established that dollars purchased by tourists in the official foreign exchange market would carry a 35 percent tax. However, according to Capitanich’s announcement today, the tourist tax will be reduced to 20 percent.

By utilizing these tax revenues, the government is narrowing the difference between the cost of a dollar at the official rate and on the black market. Since Argentina’s government started implementing foreign currency controls, the dollar has consistently been rising in value. Yesterday, when the official value of the dollar peaked at AR$8.00 (Argentinean pesos), it simultaneously hit AR$13.00 on the black market (as shown in the diagram below).

Carlos Maslatón, financial markets analyst and journalist, explains how and why the Argentinean government reached this critical situation with foreign currency.

“The government has been suffering currency flight for almost two years. Amid this flight, the government decided to restrict dollar supplies to not to run out of reserves. The central bank hastened to sell physical currency and went through various levels of restrictions, but it always gave people ad companies the right to buy small amounts of foreign currencies [for particular purposes]. Then, the demand of dollars overwhelmed the central bank, and it withdrew completely from the market.”

The analyst argues that the impact of these restrictions on the dollar exchange rate were to be expected: “Obviously, these decisions made black market prices rise. So far in 2014, prices on this market increased by 35 percent.”

In recent years, Argentina’s central bank has lost reserves on an ongoing basis. Lately, reserves have fallen to US$29.7 billion — their lowest level since November of 2006. However, Capitanich — who merely read the announcement and did not allow questions from reporters — justified the measure on the grounds that the government “believes that the price of the currency has reached an acceptable level of convergence with the objectives of economic policy.”

Maslatón, however, believes that the new measure will result in a drain on currency reserves, which are already low, since the central bank will be selling dollars at a subsidized price.

Foreign exchange purchases, and their size, still require AFIP authorization to be performed. In order to make this decision, AFIP performs a still-unknown calculation — an “algoritm,” according to the authorities — based on the declared income of the taxpayer. So, the market is far from being “liberalized.” Since there are no official guidelines, Argentineans do not know how changes will work from Monday.

In this regard, Maslatón believes this situation will not be sustainable and that the government should liberalize the foreign exchange market entirely in order to solve this currency market problem.

“The only way the government can ensure that the situation is balanced,” he explains, “is to establish a free market access, in which everyone can buy and sell at a market price resulting from supply and demand. This is the only way to end with an absurd exchange rate system, contrary to the prevailing systems around the world.”

Sofía Ramírez Fionda Sofía Ramírez Fionda

Based in Buenos Aires, Argentina, Ramírez Fionda is a former Spanish-language editor and journalist with the PanAm Post. She holds degrees in political science and international relations, and you can follow her on Twitter @SofiFionda.