Spring Meetings

OVERVIEW

The Governor's Talk will provide insights into the various stages of Argentina's ongoing macroeconomic stabilization plan. Governor Bausili will discuss the challenges of veering the economy away from a full-blown crisis and dismantling heavy controls, to ensuring that the early stabilization gains become sustainable overtime.

REPORT

Key Points:

• Fiscal and Monetary Challenges: Argentina faced severe fiscal imbalances, with excessive debt, a heavy reliance on monetary financing that was reaching its limits, and elevated risk of hyperinflation. The need for fiscal adjustment was clear, and central bank's strategy for addressing FX and monetary imbalances was predicated on such adjustment taking place notwithstanding the challenges. To tackle the FX and monetary imbalances, the central bank’s approach was to separately address flow and stock imbalances on both monetary and FX fronts. On the monetary front, the flow imbalance was associated with excessive monetary financing, while the stock imbalance was linked to years of accumulated flow imbalance and associated sterilization efforts that had reached their limit. On the FX front, the flow imbalance was linked to the inadequate inflow of FX to support economic activity, while the stock imbalance was associated with controls limiting capital outflows and arrears in import payments.

• FX and Monetary Imbalances: To address the FX flow imbalances, the central bank implemented surrender requirements for exporters and a calendar for supplying importers with FX. The stock imbalance arising from importer debts was addressed by the issuance of a dollar-denominated security. On the monetary front, adjusting the FX rate and restricting the supply of pesos contributed to make the currency more attractive. Initially, real interest rates were negative, but as inflation has declined, they have become positive.

• Policy Framework: The new FX and monetary policy framework entails transitioning to a free float within bands that are steadily widening, with the goal of eventually achieving a fully free-floating exchange rate. This approach was designed to accommodate Argentina's bi-monetary economy, where the population uses dollars for savings and the local currency for transactions. The framework aims to gradually remove restrictions while maintaining stability during the transition. Looking ahead, two main challenges are adjusting financial policies and business practices to the evolving economic landscape.

Quotes:

“To tackle the FX and monetary imbalances, we took a very basic approach of trying to separate flows and stock imbalances in both monetary and FX. So, on the monetary front, you had a flow imbalance associated with or linked to the idea that the central bank was printing money constantly for two reasons: to finance the Treasury and to pay interest on its own liabilities.” Governor Bausili

“Argentina is a bi-monetary economy where people have already decided that they save in dollars, they use the dollar as a unit of account for long-term assets, for real estate, for cars, for wealth calculation, but they use local currency for transactional purposes. So, we decided not to fight against that. That is a reality. That is what society is doing whether we like it or not, so we'd rather adapt policies and economic framework to what is already in place.” Governor Bausili

Contributor: Paris Gkartzonikas

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