There is a lot of historical evidence that show cases of countries in which A successful dollar unification It depends on the Execution of consistent policies and structural reforms that extend the role of the market in the allocation of resources. Therefore, before the exchange dilemma facing the government of Javier Milei, in terms of exit of the exchange rate, the recent, and successful according to the Institute of International Finance (IIF), Egyptian case can provide some teachings, before it is too late.
“The unification of the exchange market of Egypt, of great range, suggests that, after the important credibility profits that it obtained after a regime change, Argentina is well positioned to lift the controls within the framework of an expanded program of the International Monetary Fund ( IMF), which would help restore macroeconomic stability and to boost growth recovery ”they point out from the “Think Tank” of the International Banking.
Economists Estevão, Spanish and Iradian explain in this regard that the unification of the exchange market in Egypt in 2024 is Esclarecator: non -resident capitals and losses of reserves derived from the war in Ukraine expanded the gap between the official exchange rate and the parallel to the 56% in January 2024, which caused a radical policy change; Then in March, the Banco Central devalued the official exchange rate until it approaches the parallel and eliminated exchange restrictions and imports; meanwhile, A great foreign investment agreement and the IMF financing announcement and other international partners improved exchange liquidity.
Of course, the passage to a more flexible exchange regime implied a Important adjustment of fiscal and monetary policythey warn, which restored market confidence and gave impulse to non -resident capital entries. “The FMI Trienal Program has also included structural reforms and flexible goals to deal with external challenges (commercial disturbances due to conflict in the Middle East) and internal (the increase in social demands). Although the exchange rate has remained under control, the comprehensive and energetic political strategy of Egypt helped recover the support of investors and politicians, to replace foreign reserves and reduce the transmission of inflation to contain it ”IIF experts clarify.
Exit from the stocks to the dollar: the Argentine case
With respect to the Argentine case, although they recognize that the Milei government quickly corrected the majority of the inherited imbalances of decades of wrong policies, detailing the improvements in the different economic and financial indicators, they consider that The elimination of exchange controls after a long period of multiple exchange rates remains a challenge, And therefore they understand that the appreciation of the real exchange rate has raised concerns about the framework of multiple exchange rates.
“The main question is whether the government can safely eliminate persistent exchange controls and what rhythm”they propose from the IIF. According to Estevão, Spanish and Iradian, the evidence shows that Different approaches to eliminate a exchange gap, including “Big Bang” and gradual devaluations could succeed.
On the one hand they explain that the positive results of gradual exchange reforms are associated with situations in which: the central bank can maintain the stable inflation along the depreciation trajectory; A favorable external environment helps absorb exports; The mobile exchange rate can be adjusted depending on the inflation differential; International reserves are relatively high, which provides a positive signal to markets; and simultaneously policies are being applied to increase competitiveness.
“However, Gradual unification can be difficult in situations of high external debt, high imported content of exports, increasing prices of exports and low political credibility. In general, a position of strength with sufficient reserves would allow a gradual convergence for a better result. ”
Besides, Fragile conditions would require considerable and unique adjustment. Therefore, with still negative external assets despite the recent accumulation of reserves, Argentina’s choice between gradually lifting controls or implementing a unique liberalization depends on the reaction of the market and several economic and politics considerations.
“In this situation, the main concerns related to the elimination of controls are the limited liquidity in dollars to support external shocks and the inflationary impact of exchange rate fluctuations before the crucial elections of half of the period in October, where the government can expand its legislative base to implement more pro -market reforms ”. So far, foreign currency entries due to a successful tax amnesty program and a marked decrease in depreciation expectations have allowed the accumulation of reserves, however, “Postponing the decision could complicate the replacement of external liquidity in the midst of greater appreciation of the real exchange rate”they warn.
In this context, they remember that short -term gains of the stability of the nominal exchange rate, including rapid deflation and increased consumption, could also reduce incentives to eliminate controls and seek reforms that improve productivity, which would lead to external imbalances and lower growth.
Egypt’s recent experience shows “The importance of an integral set of measures to mitigate the transfer effect; a substantial adjustment of politics; A considerable external liquidity to gradually increase exchange flexibility in even significant challenges on this front; coherence and coordination of monetary and fiscal policy; and political stability ”.
In this context and in the ongoing conversations with the IMF to agree on a new program, the IIF believes that The Argentine government has gained sufficient credibility, mainly thanks to fiscal performance, to unify the exchange market without destabilizing effects.
“The liberalization of the exchange market, which should boost the recovery of the current growth, would require US $ 10,000 million in reservations that could come as part of a new agreement with the IMF ”, They estimate and that is why they consider that an expanded IMF program, which includes a fiscal agenda and multiannual reforms, is key.
Dollar: controlled flotation regime
For Estevão, Spanish and Iradian, a more formal controlled flotation regime, Where the Central Bank maintains strict control of the exchange rate while gradually allows greater exchange flexibility and exchange competition, it would also anchor inflation expectations and mitigate the transmission effect. “A unified change rate that balances the market would restore macroeconomic stability and strengthen investment, increasing transparency and eliminating distortions. While the continuity of the controls and the mobile exchange rate could facilitate disinflation in the short term, benefiting the government in the period prior to the elections, they could encourage external imbalances and complicate the liberalization of the exchange market in the future. ”
Therefore, Egypt’s experience not only shows the importance of an adequate environment for liberalization, but also Challenges of boosting exchange flexibility; So, “regardless of the unification path, a broad political support after the October elections will be vital to consolidate politics improvements in Argentina’s new attempt to achieve sustainable growth.”
Source: Ambito
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