The exchange rate delay: key macroeconomic inconsistency of Javier Milei

Its strategy under the “crawling peg” scheme (gradual adjustment of 2% monthly), has resulted in an appreciation of the peso that consumed the initial devaluation of 118%, which, in the short term, has hindered the competitiveness of the sectors. exporters, especially against Brazil. An economic program may have some contradiction, but the delay in the exchange rate is pure inconsistency, that is something else. The exchange rate policy represents the weakest point of the Milei-Caputo scheme, especially when it is abstracted from the economic and social cost that citizens are paying. Although it is argued that in an unlikely future, an economy with fiscal balance, deregulated markets and structural reforms, including a more competitive, less distortionary tax structure and a more efficient and smaller State, is possible; The truth is that this vision could not coexist in a short time with an appreciated currency according to the theoretical approach of the president and the Minister of Economy. In the long term a lot can be conjectured, but the only truth is the current reality.

The multilateral real exchange rate has fallen 7% since September, losing almost all of the exchange rate improvement obtained with the 118% devaluation of December 2023. This retrocession is significant, considering that the current multilateral real exchange rate is 35% below of the value that the IMF suggested in August 2023, when it determined the viability of a disbursement of US$6.4 billion at a 20% devaluation to former Minister Massa. Furthermore, in relation to Brazil, the real bilateral exchange rate has reached minimum levels since the explosion of the Convertibility plan, we all know it, some say it quietly. Caputo has announced a reduction in the pace of devaluation to 1% monthly, although this measure will likely deepen the appreciation trend of the peso, and add to the additional strengthening of the dollar globally, which could continue to pressure the appreciation of the exchange rate. multilateral real, given that the peso remains linked to the dollar.

This exchange rate delay, along with the continuity of the current exchange rate policy, are not objective for the economic policy chosen by the government. Despite the unfounded growth expectations, based on “political and network marketing,” the transition to a more productive and competitive economy seems distant.

Understanding this context is crucial why an artificially delayed exchange rate could be an anchor for the aggregate growth of the economy. The exchange rate policy, designed to restrain inflation, is generating an unfavorable environment for the national productive sectors, since, with the strong peso, Argentina’s competitiveness in international markets is eroded.

Similarities and differences with the “exchange table” of Martínez de Hoz

The phenomenon of exchange rate delay is not new in Argentine economic history. During the administration of José Alfredo Martínez de Hoz, between December 20, 1978 and March 2, 1981, an “exchange table” scheme was implemented that established a gradual devaluation of the peso, in an attempt to contain inflation and attract investment. The result was that inflation fell proportionally, much less than expected, because it never went below 3 digits. In that period, early devaluations led to credit expansion and financial speculation, but the results were disastrous. The industrial sector weakened, the external debt grew and the economic collapse was of phenomenal magnitude throughout 1981 and until 1984.

The similarities between the “tablita” and the current scheme are notable and Arriazu, its perpetual intellectual author, is there. Both models are based on an exchange rate that today does not reflect the economic reality of the country: negative net reserves, insufficient gross reserves, maximum debt/GDP ratio, projection of a 50% reduction in the trade balance in 2025). A spurious balance is being generated that, in the long or short term, will prove unsustainable. Although in the speech, Milei’s program seeks to reduce the size of the State and promote a more competitive economy, exchange rate policy is a crucial weak point of this model, especially when the exchange rate does not respond to the natural parameters of the market. They are forgetting that to lower spending, they had to generate a mega devaluation and their own initial inflationary stampede, of almost 50% in 60 days.

Competitiveness and international reserves

Since the end of 2023, the multilateral real exchange rate has lost almost all of the improvement obtained with the initial painful devaluation, placing the Argentine economy in a disadvantageous position compared to its competitors. This loss of competitiveness is particularly serious, as it threatens to discourage exports and key industrial sectors. Furthermore, the exchange rate delay prevents the Central Bank of the Argentine Republic (BCRA) from accumulating the necessary reserves to stabilize the economy, and comply with what the IMF asks of it. Today it was learned that there would be no news on supposed support until April or May 2025. Although in recent months there have been extraordinary capital flows, such as money laundering and new private debt (more than 4.5 billion in the third quarter), These dollars are very volatile and cannot replace the constant flow of foreign currency from the genuine resources that exports represent.

Pressure on fiscal policy

The appreciated exchange rate also creates additional pressure on fiscal policy. In order to maintain it, taxes should be lowered. However, if taxes are lowered, expenses would need to be lowered proportionally, which seems very difficult, given the context of more than 50% poverty, in an election year. Here the only asset supposedly reached “zero deficit” is at risk. The cost of maintaining an appreciated exchange rate could put at risk this debatable fiscal balance, arising from calculating it on a “cash” basis, instead of “accrual”, with capitalization of interest in Treasury debt instruments (post-dated monetary issue). . The policy of eliminating the PAIS tax, and private projections of tax revenue, show the difficulties in maintaining fiscal objectives while trying to contain inflation through an exchange rate policy that is not consistent with the structural needs of the economy.

Economic opening and deindustrialization

The impact of an appreciated exchange rate combined with economic openness is another major risk that wreaked havoc in the Martínez de Hoz years.

In a protectionist global economy, opening markets with an appreciated currency can trigger an extraordinary loss of competitiveness in the industrial sector, especially in local small and medium-sized companies. Sectors such as textiles and other local consumption sectors are already showing signs of exhaustion, with drops in production and job losses. If this scheme is maintained, there is a risk of accelerated deindustrialization that will affect countless families and social stability.

The sustainability of the model and the need for reforms

In practice, Milei’s model faces a fundamental contradiction: exchange rate policy can generate problems with the sustainability of international reserves, which could slow down economic growth. For Argentina to achieve a more competitive and productive economy within the orthodox liberal approach, it will be necessary to adopt deeper structural reforms that are difficult to achieve, both in the fiscal and exchange areas. Furthermore, the interaction with international actors, such as the International Monetary Fund (IMF), puts Argentina in a delicate situation. Although debt renegotiation is possible, it is not certain; The country will have to demonstrate capacity (intertemporal fiscal solvency) in addition to expressions of will to comply with its commitments, which could become a high challenge under an exchange rate scheme that continues to push upwards.

The exchange delay implemented by the Milei government, within its theoretical framework, shows a key macroeconomic inconsistency, perhaps even “malpractice”, and puts at risk the questionable boasts, in terms of fiscal and inflationary achievements. Like the “exchange table”, this policy could be unsustainable and generate economic distortions that are difficult to correct. To achieve a more robust economic model, it will be necessary to rethink the exchange rate policy without loss of time, at the risk of changing the economic program and the economy minister. It is necessary to open the debate on competitiveness and adjust fiscal expectations to a more balanced economic reality that is coherent with the structural needs of the country.

Again, so that it is fixed in the analysis; The government’s current exchange rate policy, by maintaining a semi-fixed exchange rate and deepening the appreciation of the peso, is presented as a crucial obstacle to the competitiveness and sustained growth of the Argentine economy. Although the commitment to a model of fiscal balance and structural reforms could, in theory, coexist with a strong currency in the long term, the reality of the transition towards that model is complex and is marked by immediate economic risks. The appreciation of the peso, fueled by an exchange rate lag, undermines the competitiveness of exports, exacerbates the loss of competitiveness against trading partners such as Brazil, and limits the government’s room for maneuver to adjust macroeconomic variables effectively. Without a profound adjustment in exchange rate policy and the implementation of coherent measures to avoid a deterioration in competitiveness, the government could face serious difficulties in achieving the economic development and fiscal sustainability objectives it proposes.

Director of Esperanza Foundation. https://fundacionesperanza.com.ar/ UBA Postgraduate Professor and Master’s Degrees at private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books.