Domingo Cavallo A Javier Milei: You have to make credit in dollars more flexible and buy reservations to lower inflation

If the government wants to consolidate the decline in inflation and Go to the economy Towards sustained growth, it must advance in the accumulation of own reservations and in the normalization of credit in dollars. This is supported by the former Minister of Economy, Domingo Cavallo, who ultimately publicly insisted on the need to fully release financial intermediation in foreign currency and eliminate exchange obstacles that still persist.

For Cavallo, a bimonary economy can only function stable if the two coins – the peso and the dollar – compete on equal terms, and That requires both solid reservations and clear rules for deposits and dollars.

In the new publication, the former Minister of Economy offered a series of recommendations to the Government of Javier Milei focused on strengthening the process of remumding of the Argentine economy. Its diagnosis starts from a central premise: In a highly indebted country in foreign currency and without fluid access to international credit, the accumulation of own reserves is essential to sustain macroeconomic stability and lay the foundations for sustained growth.

THE KEY: Central Bank Liquid Reservations

While in theory a country with floating exchange rate and a single legal currency It would not require international reserves, Argentine reality imposes other conditions, Cavallo says. To guarantee the fluid payment of external financial imports and commitments, and to support the expansion of bank credit – especially in a bimonary system – own reserves are needed in sufficient quantity.

Cavallo insists that the remumination, both in pesos and in dollars, It must be a central objective. In particular, it considers it essential that dollars in dollars can be used by banks to grant credits through the fractional lace system, as is the case with local currency deposits. This requires not only a regulatory framework that enables it, but also a solid support in reserves by the Central Bank to avoid episodes of distrust or financial runs.

Currency competition and removal of restrictions

The economist also warns that the bimonary system can only function efficiently if the capital movement restrictions are completely eliminated. As long as there are exchange and obstacles to operate freely, there will be no real competition between the peso and the dollar, and the instability in the exchange rate will persist.

In this sense, Cavallo considers that the tax and regulatory incentives promoted by the Ministry of Economy to emerge the dollars “in the mattress” – that is, the savings in currencies kept outside the financial system – can have a positive, but limited impact. The real jump will be made when exchange restrictions are completely removed and banks are allowed freely operating with dollars.

The role of family savings in growth

One of the main obstacles to economic growth, says Cavallo, is that a good part of internal savings is not channeled towards productive investments. Hidden dollars do not participate in the financial circuit or capital market, and therefore do not contribute to the financing of working capital or the expansion of companies. Converting that savings into regularized bank deposits – and transforming them into credit – is an essential step to reactivate the growth engine.

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Cavallo to Milei: To sustain deflation, reservations and credit are needed in dollars.

According to the former minister, this was one of the implicit objectives in the proposals for dollarization and currency competence that Javier Milei promoted during his campaign, linked to his vision of economic growth “with or without money.”

Recent advances and pending challenges

In terms of monetization, Cavallo points out that both deposits and bank loans – in pesos and dollars – have returned to the levels observed before the imposition of the exchange rate in 2019. However, it warns that the Argentine financial system continues to show signs of repression: total bank deposits barely reach 17% of the GDP, well below the levels of neighboring countries such as Brazil 40%) and 60% observed during convertibility.

In addition, while loans in pesos represent 85% of deposits in that currency, in the case of dollars deposits that relationship is only 50%, a clear sign of the restrictions that still weigh on financial intermediation in foreign currency.

A promising horizon if you progress with decision

For Cavallo, the remoteization process can have a very promising horizon, especially with regard to dollar deposits, as long as deep and sustainable reforms are adopted. Remove regulations, accumulate liquid reserves and enable full financial intermediation in both currencies would not only consolidate the bimonary system, but also create a bridge between private savings and productive investment financing.

Finally, the economist concludes that the accumulation of own reserves is not only compatible with the decrease in inflation, but can enhance it. A central bank with sufficient reserves can reduce interest rates, dispel devaluation expectations and eliminate exchange risks, thus creating a more stable and conducive environment for the sustained growth of the economy.