Is Argentina truly prepared for dollarization?

Is Argentina truly prepared for dollarization?

The inflation does not stop. The 7.7% in March set off all the alarms and fears that, without an effective plan, the rise in the CPI would end in hyperinflation. And there are reasons to believe that the probability of its happening is high.

The jump in the price of the blue dollar showed that the calm that seemed to settle until PASO was nothing more than the desire (frustrated, by the way) of the ruling party to get better off by October.

While the programs to contain prices fail one after the other, the issuance of pesos to cover the fiscal red more than doubles the monetary base, which puts more inflationary pressure on it.

And, as if something were missing to crown a complex economic situation, tax collection and reserves are depleted by one of the worst droughts the country has suffered in decades.

Dollarization, one of the proposals

One of the problems that the country has is the lack of independence of the Central Bank. The possibility that the Executive Branch, regardless of the political flag it raises, can print without restriction is a ticking time bomb.

If the global economic and financial situation is stable, it is likely that it will not detonate. But it is clear that any unforeseen event ends up exponentially affecting future plans. Put more simply: the boom is more likely.

In this scenario, several alternatives exist and are being discussed in order to put a limit on the issuance and reduce the fiscal deficit. Dollarization is one of them and it has gained prominence in the media in recent days.

It is undoubtedly a measure that generates as many supporters as detractors. The latter state that the conditions are not right to launch a process in the country, so it is worth taking the time to analyze its feasibility.

Conditions to dollarize

The first thing to keep in mind is that to carry out this project a suitable scenario is necessary. Having a foreign currency stock of US$45,000 million to redeem the BCRA’s liabilities (monetary base plus LELIQ) is one of the requirements.

The figure seems very high (more for the current coffers of the Central). However, Argentina has possibilities of reaching this figure thanks to two variables: transitory advances and securities, on the one hand, and on the other, treasury bills and bonds.

Today, in nominal terms, they total about US$94 billion. However, their price is 25% of the nominal value, therefore, getting rid of them can get some US$23.500 million.

How could the remaining millions be obtained? There are different alternatives: one is to achieve a confidence shock, which will allow that price to rise. A 47.5% parity would imply getting the necessary US$45,000 million without much effort.

Given that confidence is an asset that is highly devalued, another option is, worth the redundancy, devalue. If the official dollar price were like that of Cash with Settlement, the sale of bills and bonds would be enough to settle the liabilities.

Another of the possible paths is through international credit organizations, although this alternative seems unlikely, considering the current indebtedness and the problems to be able to meet the payments and established goals.

a good diagnosis

Dollarization, with a view to being applied in the long term (it is useless to implement this measure if the next government then decides to put an end to it), may be one of the alternatives and, as has been said, its adoption would be viable.

However, there are other options that are not so resisted (part of the population and economists reject it). So it will be necessary to analyze well before starting any plan.

What seems to be clear is that Argentina cannot afford to continue with an outlandish fiscal deficit like the current one, much less issue without consideration to cover it. That formula is precisely what got us to where we are.

For this reason, to put an end to inflation, it is necessary to end the issuance. And for this there is no other choice than to take away from the Executive the power to do so. Only in this way will it be possible to manage the income that the State actually obtains.

It is imperative, in order to make progress on the solution, to reach an agreement. Let everyone agree that printing tickets generates a price rise. If everyone agrees on that diagnosis, we have probably taken an important step.

Sr. Analyst of Finance of Expansion Argentina

Source: Ambito

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