In terms of how the government handles the exchange rate, this is a time of definitions. It is well known that the current plan to control and maintain the relationship between the peso and the dollar has failed and that major changes are needed. Maybe even large-scale ones. But the Executive also knows that the International Monetary Fund must be consulted before making any changes to this important part of the country’s economic policy (IMF).
Even though the design and implementation of the exchange rate policy is not one of the main goals of the Extended Facilities Agreement signed with the IMF, it was one of the goals set by Martn Guzmán and the technical staff of the Fund before the agreement was signed. So, any change to the official strategy for the dollar, no matter how small or big, must be discussed with the organisation regularly.
The IMF can’t stop the country from making any kind of decision about the dollar control strategy, but Washington has the right to give its opinion every time an IMF audit mission finishes its job and makes a general conclusions paper on the performance of the Argentine economy. This work is then sent to the board, which is in charge of approving or not approving the goals and objectives for each quarter. This means that the IMF may or may not release the dollars to cover the maturities of the previous stand-by.
The good news is that Martin Guzman’s approach to negotiating at the IMF spring summit in April in Washington, D.C., means that the goals will be reviewed every year if an agreement is to be reached. This doesn’t mean that if the Fund doesn’t like something, it won’t be written in the reports after each mission. And it’s clear that the exchange rate policy is part of these chapters. Even more so when we consider that one of the goals set with the Fund is to reduce the difference in exchange rates so that it doesn’t go over 50% this year. When there is a difference of more than 150 percent between the official exchange rate and the financial dollar, this goal seems like a utopia.
So, it’s important to tell the IMF staff in detail when the second mission happens, which would be in August. To get this mission, which could be virtual again, the government knows that the Ministry of Economy will have to explain how the Executive plans to use the policy of controlled devaluation of the official exchange rate so that the exchange rate doesn’t fall behind inflation. This is in addition to the exchange measures of crossed and multiple cepos and permissions for tourists and other sectors to receive quotations similar to the MEP. This is the real goal that Guzman told the IMF about in the talks that ended with the agreement on March 25. It means that the government has to keep the peso from falling behind the dollar as prices go up, which is what has been happening so far in 2022. In fact, and in addition to the exchange run that has been going on for six weeks, the official exchange rate dropped by 25%, leading to a total inflation rate of 36.2% in June, which could go up to almost 45.2% in July.
The government could tell the IMF what is going on with both legal and illegal dollars. It could also show that it is not involved (at least until 2022) in the Ministry of Economy’s “crossed traps” policy, which is being used in these complicated times. But the controls will get tighter as inflation builds up and the official rate is pushed back.
On this point, the government officials who will have to talk to the IMF people will have to give good reasons why they did what they did. For now, the government is sure that there will be understanding and that asking for an annual waiver won’t lead to harsh, direct, or final criticism in the Extended Facilities. The government is still sure that a final inflation increase of 70% for the whole year is justifiable, which, Buenos Aires thinks, would be fine in the middle of the storm going on right now.
In this case, the most important thing is that the Fund considers the two-month period from June to July to be forgotten and very bad, but that the situation will be better in August. Buenos Aires is sure that this won’t mean that the agreement will fall apart, that Washington will accept the default, and that the variable can be renegotiated at a more realistic percentage. So long as the main promise doesn’t change. That is, a budget deficit of no more than 2.5% of GDP. This goal has also become hard to reach.
