Argentina’s opposition parties, despite their differences, have united around the urgent need to eliminate the country’s complex system of multiple exchange rates. This system has caused concern among investors and has severely impacted the economy. Both mainstream opposition candidates, Patricia Bullrich and Horacio Rodriguez Larreta, have proposed dismantling the various preferential exchange rates in Argentina, which are designed for specific transactions such as travel expenses and wine exports. Meanwhile, another contender, Javier Milei, has suggested replacing the Argentine peso with the US dollar as a solution.
Unlike most countries, Argentina’s exchange rate is artificially fixed by the government rather than determined by market forces. This has led to the emergence of a parallel currency market, where the peso is traded at a rate of less than half the official exchange rate against the US dollar. Additionally, the government has limited access to foreign currency in an attempt to prevent further depletion of the central bank reserves, a measure commonly referred to as the “dollar clamp”.
Economists warn that any attempts to address this distorted currency market and remove the artificial restrictions that are hampering growth and investment would likely result in higher short-term inflation, increased poverty, and social unrest. Ignacio Labaqui, a senior analyst at Medley Global Advisors in Buenos Aires, stated, “It is clear that the current exchange regime is a hindrance to the economy and has failed both to prevent an acceleration in inflation as well as preserving foreign exchange liquidity.”
The main challenge for a new government lies in the potential “inflationary consequences” in a country where annual inflation rates are nearing 116%. In 2015, former President Mauricio Macri implemented a policy of freely floating the peso, which led to a 28% devaluation. However, this decision eventually weakened Macri’s support and forced him to reintroduce currency controls in 2019.
Bullrich, a former security minister under Macri, advocates for unifying exchange rates and lifting currency restrictions on the first day of her term, according to her economic advisor, Luciano Laspina. Larreta, the current mayor of Buenos Aires, shares a similar goal but proposes closing the gap between the official and parallel exchange rates within his first year in office. Milei focuses on a currency-based solution through devaluation and the establishment of a single exchange rate.
Despite the urgency to address the issue, these reforms are not popular among an electorate already burdened by inflation. The current Peronist administration, in power until the October 22 presidential election, is committed to avoiding a significant devaluation. Analysts predict that the next administration may not implement all the proposed reforms simultaneously, although there is consensus within the opposition economists about the need to devalue the official exchange rate.
(Reporting by Lucinda Elliott and Anna-Catherine Brigida; Editing by Christian Plumb and Sharon Singleton)
Credit: The Star : News Feed
