Dollar: the exchange rate delay on the banks of the Uruguay River

Dollar: the exchange rate delay on the banks of the Uruguay River

The presence or not of exchange rate delay is once again the topic of discussion and will surely continue to be so in the coming months. The arguments on both sides of the new rift are multiple. In my opinion, it is an issue to worry about. Argentina is getting more expensive in dollars.

Last year one of the notable economic phenomena was shopping tourism. Uruguayans, Chileans, Brazilians, Paraguayans… everyone who was next to an Argentine border crossed with dollars, exchanged them in the free market and destroyed the shelves. Argentina was very cheap.

The effect was so intense that some neighboring cities had an economic boom. The Catholic University of Uruguay reflected this in its report on border prices that it has been preparing since the end of 2015. In this report, the UCU demonstrated the existing price gap for a large number of products representative of a consumer basket between two bordering cities on the coast. : Concordia in Entre Ríos and Salto in Uruguay, separated by the Uruguay River, but joined by the Salto Grande Hydroelectric Dam bridge.

The concern on that side of the pond was the harmful effects of Argentina’s exchange disorder, which generated a permanent flow of Uruguayans traveling almost daily to Concordia to shop at the supermarket, go to the pharmacy, the doctor, the hairdresser, eat and even sleep. THE effect reached its peak in the record gap months of 2023, when Concordia was more than 60% cheaper than Salto.

But, since the change of government, the direction of the effect suddenly reversed and, according to the same survey, Concordia is increasingly “less cheap” than Salto. While on November 23, Concordia was 61% cheaper than Salto, in January of this year it dropped to 49% and last March to 33%.

What is worrying is not the March level, but the trend. How quickly we went from 60% to 30% has a good explanation: The disappearance of extreme uncertainty caused Argentina to return to something more like normality. But, projecting the months of May and July, the price gap between both blue cities would drop from 33% to 27% and then 22%. That is, Concordia is more expensive than in 2018-2019.

But what would happen if we measured the gap at the official exchange rate and projected it for the same months? Assuming crawling of 2%, stable gap and average inflation of 6% between May-July, Concordia would be 13% cheaper than Salto in May and only 4.5% in July.

That is to say, the relative level of prices between both cities would be worse than at the end of 2017, at which time there was considerable consensus regarding the rise in prices in Argentina, which was causing a current account deficit that reached 8% GDP.

Of course, these observations still support the same arguments that the government applies to the analysis of the real exchange rate: a moment of fiscal deficit is not the same as one of equilibrium, of low or high terms of trade, etc.

However, these arguments should not forget that there are experiences of external crises fundamentally caused by the private and non-public sector. It is not the rule in Argentina, but it could happen.

On the other hand, the profound structural reforms, which would generate a jump in Argentina’s productivity and make the level of the real exchange rate compatible, for the moment are more promises than certainties. Structural reforms take time to arrive and mature and, in the process, “Concordia”… becomes more expensive.

Economist, director of the Economics unit of the consulting firm Invecq and of the Argentine Economic Congress.

Source: Ambito

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