As long as exchange restrictions persist in Argentina, The conversation about the exchange gap, its duration, and the Central Bank’s reserves will continue to be central in the economic analysis. The Government has made it clear that the end of the trap It will not depend on a specific date, but rather on meeting certain conditions necessary to avoid a traumatic exit. This was reaffirmed by the Minister of Economy, Luis “Toto” Caputoin his recent presentation at the IDEA Colloquium, maintaining a speech that has been constant since the beginning of his administration.
The challenge is not only to know when those conditions will be met, or what the economic cost will be to get there, but also to understand the intricate relationship between the stocks, the exchange gap and reserves. In this note, we will analyze how these variables interact under the current monetary policy and the impact they have on the accumulation of liquid reserves.
The exchange gap: a byproduct of the stocks
By definition, the exchange rate generates parallel markets. These arise to satisfy the demand for dollars that cannot be covered in the official market, which generates a gap between the value of the official dollar and the dollar that is traded in alternative markets. As this gap grows, the expectations of economic agents begin to move away from the official exchange rate, and price and contract decisions become governed by the financial dollar, to which they actually have access.
During the previous administration, that gap exceeded 200%. Currently, although more contained, it is around 20%. This gap represents a problem not only because of its impact on inflation expectations, but because it reflects the lack of dollars in the official market, which causes constant pressure on the Central Bank’s reserves.
The monetary rule and its relationship with the gap
One of the government’s main objectives has been to control inflation, and to do so it has resorted to the implementation of a strict monetary rule. The first step was to reduce the fiscal deficit, eliminating the need to issue pesos to finance it. Then, the remunerated liabilities were addressed to end the issuance that the interest payment represented, thus leaving one last quill as a result of the Central Bank’s interventions in the foreign exchange market.
Since June, faced with a growing gap that reached 50%, the Central Bank decided to adjust its dollar purchase policy. Under this new rule, every time the BCRA buys dollars in the official market and issues pesos to finance the operation, it must sell the necessary dollars in the financial market to sterilize the issue, thus managing to keep the monetary base fixed. However, this strategy has a cost: the net accumulation of reserves is lower.
The impact of the rule on reserve accumulation
Let’s look at a simplified example. If the official dollar is at $1,000 and the financial dollar is at $1,500, the gap is 50%. If the BCRA buys US$10 million in the official market, it will need to issue $10,000 million to finance the operation. Then, to sterilize the issue and keep the amount of pesos constant, you will have to sell enough dollars in the financial market. At an exchange rate of $1,500, the BCRA would need to sell $6.67 million to absorb the $10 billion issued, leaving a net accumulation of $3.33 million in reserves.
The strategy has proven to be effective in reducing the gap. In recent weeks, thanks to the intervention of the Central Bank and the settlement of credits by banks in the official market, which allows the BCRA to buy more dollars and have greater capacity to intervene, the gap has decreased. However, as the gap narrows, the capacity to accumulate reserves decreases.
The paradox of reserve accumulation
The more successful the policy is in reducing the gap, the smaller the reserve accumulation will be. Returning to the previous example, if the financial dollar falls to $1,200, which results in a gap of 20%, the BCRA would continue to issue $10,000 million to buy $10 million. However, to absorb the issue in the financial market at an exchange rate of $1,200, you would need to sell $8.33 million, leaving only $1.67 million in the BCRA.
Thus, when the gap was 50%, the BCRA could accumulate 33.33% of the purchases. With a 20% gap, you will only accumulate 16.66%. This poses a paradox: as the strategy works and the gap decreases, success in controlling exchange rate distortions translates into a lower ability to accumulate reserves.
The future of the stocks and the need for normalization
The exchange rate trap is an anomaly, and any measure to mitigate its negative effects, such as the gap, will inevitably impact other critical variables, such as reserves. Current interventions are band-aids that do not offer a structural solution. To definitively resolve these tensions, Argentina must move towards the normalization of the exchange market.
The challenge is monumental: the economy needs dollars to stabilize its reserves and reduce its external vulnerability, but current restrictions slow the ability to accumulate them in the long term. The true solution lies in an economic framework that eliminates exchange distortions and restores confidence in the peso.
Financial analyst
Source: Ambito
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