Transition strategies to recover the currency

with the in 3-digit inflationthe Argentine currency has ceased to function as a savings instrument, giving rise to a regressive inflationary tax.

The indeterminacy of the value of money also dilutes the value of the information conveyed by prices for consumption and investment decisions. hello is equivalent to a negative shock on the productivity of the whole of sectors of the economy.

Rigorous policies require agreements between precision to achieve intertemporal budget balance or, at least, ensure debt sustainability. The governments do not want to pay the political costs of making an adjustment because in addition to compromising its popularity, given the lags in the results, the benefits will pay off to the next.

This is how the (inevitable) unpopular measures are transferred to the next administration; the election winner, in turn, often makes announcements that destabilize the top management’s markets.

Countries with stable currencies have explicit or implicit agreements to avoid budget overruns. There are 93 countries that observe some type of intertemporal fiscal rule; 40% of them allow adjusting the fiscal goal based on the economic cycle. Chile, with a structural balance target (between +/- 1% of GDP), is a good example.

This makes it possible to accumulate assets in good times and use them countercyclically in times of crisis. Chile recently also introduced a prudential borrowing restriction (45% of GDP).

In Argentina, recent history suggests that, even if there were an inter-party agreement, its compliance would face reliability problems. Only time, to the extent that the facts support the commitments, will allow it to be recovered.

Therefore, the convergence towards an economy with price stability will be, in the best of cases, gradual. Inflationary inertia is incorporated into inflation expectations that are manifested in defensive remarking of the prices of producers, merchants and workers.

Even if there were still an inter-party agreement in Argentina, its compliance would face reliability problems.

The resulting volatility of relative prices, compounded by price distortions (tariffs and exchange rate) relative price uncertainty increases; this gives rise to an uncertainty premium that is added as an additional cost factor in pricing.

The orthodox precision strategies have failed when fiscal austerity did not accompany monetary restriction. This gave rise to sharp interest rate hikes shifting the cost of adjustment from the public sector to the private sector – calling into question the legitimacy of the security program.

The heterodox policies in turn incorporate price and wage controls with the intention of coordinating downward inflationary expectations. Said coordination task is completed by initial price distortions and because, prior to controls, there are usually preventive remarks. The monetary-fiscal inconsistency He ends up shooting down those planes too.

Transition strategies to recover the currency

The chronic (historic) weakness of the peso, associated with the flight to the dollar as a liquid store of value, has been another recurrent destabilizing factor.

A security program should have the following elements:

  • United Nations fiscal convergence pact between parties-coalitions transcending the planning horizon of a government
  • a monetary restriction commensurate with the fiscal one
  • a consistent path of exchange unification and rate normalization
  • structural reforms aimed at sustaining the budget program, deepening trade integration and restoring incentives to formal private activity
  • coordination of the trajectory of prices and wages consistent with the program of fiscal, exchange, monetary and tariff reforms associated with the effective plan.

During the transition, to reduce the loss of utility of the currency as a unit of account, the option of index some prices with the evolution of the CER Index (Daily adjustment index calculated by the BCRA based on the Consumer Price Index). The CER could be applied to bank deposits, loans and bonds; service contracts, rentals, location of works and network services (including rates); to the sale of goods and inputs that require extended production processes over time; to the purchase and sale of assets such as real estate, etc.

The use of the CER as a unit of account could be extended to reduce the high economic cost implied by the uncertainty of relative prices

This would allow replace a price system qwhich incorporates subjective inflation expectations and relative price uncertainty by a system expressed in units of CER with more stable relative prices – helping to reduce the uncertainty premiums implicit in prices.

The benefits, in addition to allowing the price system to once again provide information for efficient savings-investment decisions, include: reason for public finances (the rates would stop suffering from the chronic delay); extension of the term of the contracts; dollar substitution as unit of account in the sale of assets including real estate (reducing the volatility of asset values ​​relative to buyer-seller income); and a savings option that is safer than the dollar (which has no adjustment for inflation) allowing, incidentally, to reduce the local cost of seignorage of the dollar issued by the Federal Reserve.

exist costs/risks too, but these are mitigable or minor. The extension of the use of the CER as a unit of account could generate inflationary inertia; but this depends on the indicated indexing replace.

As we argued, insufficient indexing is high in the current context. Another risk is the unreliability of the instrument; that is why the expansion of the legal use of the CER must be approved by law.

The extension of the use of the CER as a unit of account could also generate inflationary inertia

In Argentina, inflation has functioned as the main fiscal adjustment mechanism when public spending is not indexed. More indexing means fewer liquefaction opportunities. In any case, inflation liquefaction is not an efficient system of fiscal adjustment.

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Another risk of indexing public spending is that – due to the lag in the adjustment – it generates a perverse incentive to increase inflation to reduce real spending. This could be remedied by adjusting spending based on current inflation.

In summary, the certainty process requires an intertemporal fiscal agreement between the main political forces and representative institutions of the business and labor sectors. It implies waiving interests and all sectoral privileges; the parties must be persuaded that the sacrifice will be temporary and that it will be compensated by a better functioning of the system.

In particular, the dismantling of the control system (traps, protection and tariffs) will make it possible to deactivate chronic privileges with important improvements for social welfare.

After the normalization of relative prices -and in the transition towards a low inflation regime- the use of the CER as a unit of account could be extended to reduce the high economic cost that implies the uncertainty of relative prices associated with inflation.

A joint negotiation between the government and the opposition with the main external creditor of Argentina – the IMF – would give an important signal of the verification process. The exceptionally adverse conditions derived from the drought and the proximity of the elections would provide a perfect excuse for such an initiative.

*PhD in Economics from the University of Oxford, Former World Bank Lead Economist, Former BCRA Monetary and Financial Analysis Manager, Real Estate Developer.

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