At the end of January, the remunerated debt of the Central Bank (BCRA) exceeded $10.5 trillion. This value represents approximately twice the monetary base and is equivalent to 8.6% of GDP. In dollars at the official exchange rate, it is about US$55 billion; more than 12 times the net international reserves.
This debt accrues annual interest for $7.8 trillion; which is equivalent to 28% of the budget of the National Public Administration for 2023 and several times what is budgeted for basic functions of the State. It is 13 times what was assigned to Internal Security, 4.5 times what was budgeted for Education and Culture and 70% of the projected expenditures on retirement and pensions.
The origins of this veritable debt snowball must be traced, like those of all public debt, in fiscal imbalances. In the past three years, the BCRA has been used intensively as the monetary accomplice of the deficit. In 2020 monetary financing achieved 7.4% of GDP, in 2021 3.7% and in 2022 more than 4%.
To sustain the demand for pesos and avoid the inflationary escalation and the jump in the exchange rate that would mean changing this financing directly to a monetary issue, the BCRA increased the volumes of its debt. Debt that, we must remember, has extremely short maturities, less than thirty days.
In addition, in order to attract more and more funds from the private sector, funds that at the end of the day finance public spending, the Central must gradually increase its interest rate. In the last year, the monetary policy rate went from 38% to 75% (TNA), while the Passive Repos rate rose from 32% to 70% during 2022 and in recent days it reached 72% ( TNA) . For its part, the TEA stands at 107.35% for the first case and 105.3% for the second. Consequently, the remunerated debt of the Central Bank becomes more expensive and its stock grows at a greater speed. This is how it went from $4.7 trillion at the beginning of last year to $10.5 trillion today.
The consequences on the private sector. The monetary financing of the fiscal deficit has a direct consequence, which is the acceleration in the rate of depreciation of the peso, that is, inflation. Argentina is on the podium of the most inflationary countries in the world, with a record that is close to three digits. This volatility implies that the economy loses a main computer in terms of economic efficiency, which is the price system.
Simultaneously, the expansion of public debt was displacing credit to the private sector. An increasing amount of the resources available in the financial system turned to financing the public sector. And, by contrast, less and less was left for private investment. Within this, the largest absorption came from part of the BCRA debt. Today, around 70% of the assets of the financial system are in credit to the public sector.
All this was enhanced by the ad hoc measures that were taken to patch up the situation. The most distorting of them, the exchange rate. But also complemented by restrictions on exports, “management” of imports and internal price controls.
There is no possible economic growth under these rules of the game.
The dynamics of the coming months and the legacy of December. Within this framework, the central bank’s own debt acquired a volume and dynamics that were even more worrying than those of the Treasury deficit. Again we are discussing how to solve the quasi-fiscal deficit, like in the 1980s.
If the current monetary policy is maintained, the remunerated debt stock would reach almost $18 trillion by December, when the next government takes office. It would have remained up to 2.7 times the monetary base at that time.
This situation places this government (and the next) at a crossroads. If the BCRA does not want to continue with the explosive growth of remunerated debt, it will have to increase its issuance rate and, consequently, be ready for the consequent acceleration in prices. This, taking for granted that there will be no recovery in the demand for real balances under this government. On the contrary, if it maintains the current issuance rate, or if it decides to decrease it, the BCRA will have to further accelerate the rate of expansion of Leliq and Passes to “pay” interest and principal maturities with more debt.
For a monetary authority that is already insolvent, this is equivalent to further aggravating its future financial situation. Let us not forget that, historically, the bankruptcy of the BCRA has been accompanied by monetary, exchange rate and political crises.
If the first strategy is adopted, in which the Central Bank maintains the current remunerated debt ratio on a monetary base, issuance should increase at a year-on-year rate of 79% for October and close the year with a growth rate of 71%. It must be taken into account that the current issuance rate is around 45% year-on-year. Of course, this is not only incompatible with a drop in inflation, but would cause a significant increase in inflation, even with hyperinflationary risks.
On the contrary, if it is decided to maintain the rate of issuance of the monetary base at current values (around 40% per year), remunerated debt should grow steadily to close 2023 at $17.9 trillion, rising to 266%. of the monetary base. The BCRA’s financial situation would become critical. And the same for the Argentine financial system, which would further increase the proportion of its resources, which are finite, supported by public credit.
The dilemma, then, is to let the growing dynamics of remunerated debt continue, keeping the issuance rate stable, but threatening a bankruptcy of the BCRA. Or, conversely, issue a higher rate to contain remunerated debt, at the cost of higher prices.
The challenge of the next government. For now, the stocks and the network of exchange and financial distortions that are in force act as a retaining wall that allows the current government to continue accumulating debt and postpone the definition of the underlying economic problems. But this is done at the expense of continuing to shrink the private sector and reduce its productivity. This means less economic activity and greater poverty and marginality.
There are two certain things. The more the BCRA’s current indebtedness scheme is extended, the more likely the probability of entering into a macroeconomic crisis, and the more severe it will be.
The dynamics that we mentioned before will leave the next government, in an optimistic scenario, with little margin for gradualism. And it is that gradualism requires financing, something that is hardly available.
The only solution is to make the necessary adjustments to meet three objectives: rapidly restore solvency to the public sector, lower inflation, and return incentives to private and productive investment. Note that I avoid talking only about fiscal and monetary issues, which is what the regulations refer to when talking about certainty plans. Although it is not a small thing, without reforms being built to establish competition and free market rules in Argentina, the certainty plan that is implemented will hopefully be temporarily successful, as past experiments have shown us.
*Chief Economist of the Libertad y Progreso Foundation.
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