Reserves in free fall: Does it make sense to avoid devaluation?

Lautaro Moschet

ÁMBITO FINANCIEROIn recent weeks, a phenomenal drop in the value of the net reserves of the Central Bank (BCRA) has been confirmed. They have not been left out of the chaotic dynamics that we have experienced in the country. The mistrust generated after the departure of Martín Guzmán caused a bank run, an outflow of deposits and a notable intervention by the entity led by Miguel Ángel Pesce to maintain stability in the official exchange rate.

From the beginning of July to the present, more than US$5.5 billion has been lost. Much of this is explained by the payment of US$2,495 million to international organizations and the intervention in the foreign exchange market for around US$2,100 million. In addition, there were other public sector operations that generated foreign exchange outflows of almost US$1,000 million. As a result, the stock of net reserves is around US$1.2 billion.

Now, we must not forget that the arrangement with the IMF includes the accumulation of net reserves as a goal. In the review prior to the end of the second quarter, it was established that, at the end of September, the Central Bank should have accumulated US$4.1 billion. However, it can be seen that, in this aspect, we are going in the opposite direction. Since January 1, nearly US$950 million have been lost. It is also true that days before the end of the third quarter there will be a new disbursement of US$4,180 million that will leave the position of the monetary entity much closer to the objective, although in the same way, they will have to make an effort to get the difference and prevent it from continuing the bleeding of dollars.

In this context, the Ministry of Economy announced a series of measures to strengthen the reserves of the Central Bank. In the short term, it seeks to stimulate the liquidation of foreign exchange from exports. To this end, the issuance of a “Letra” in dollars was approved so that exporters can use this instrument to make a profit, in exchange for the liquidation of foreign currency obtained by pre-financing in advance. In this way, the Central Bank could increase its reserves much more quickly, but we must not forget that they are not increasing exports, but rather advancing their payment. Consequently, the dollars that come in now will result in fewer dollars later. In other words, it is gaining a little more air without solving the underlying problem.

Although this measure may generate a marginal income of foreign currency, the truth is that it does not in any way encourage producers to want to export. The real problem is much simpler to identify, since it lies in the exchange rate gap and export duties. The exporter sells his dollars at $134 pesos but when he wants to repurchase them in the financial market, he has to do so at more than double the value. But the situation is even worse if we take into account export duties, which in many cases are above 30%. With this, it is clear that the true anti-export bias is set by the government itself through its exchange and tax policy.

The seriousness of the matter becomes more relevant if we look at the excellent exchange terms Argentina is going through at the moment and that are slowly dissipating. An opportunity is being wasted that will not be repeated in the near future, given the lower liquidity that the world will face.

With all this on the table, it is necessary to ask why the Central Bank is still willing to defend an exchange rate artificially below the market value, when the only thing it is achieving is continuing to lose reserves and creating a disincentive for exports. The official response is that releasing the exchange rate would generate greater pressure on prices. But this diagnosis is also wrong, since inflation is determined in the peso market and not in the dollar market.

Therefore, a jump in the exchange rate may generate a one-time increase in the price of tradable goods, but the dynamics of inflation will continue to be marked by the excess money supply in an economy that repels pesos. Consequently, sustaining the current economic policy does not generate any benefit, although it does cause distortions that discourage the entry of dollars.