Currency competition: to prepare the exit from the stocks, the Milei Government now points to the Peruvian model - Infobae
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Competencia de monedas: para preparar la salida del cepo el Gobierno de Milei apunta ahora al modelo peruano
El Banco Central no puede emitir para financiar al Tesoro y además está prohibido por ley aplicar controles cambiarios. El Presidente reiteró que sería posible salir de los controles cambiarios a mediados de año
www.infobae.com
March 06, 2024
The Central Bank cannot issue to finance the Treasury and it is also prohibited by law to apply exchange controls. The President reiterated that it would be possible to exit exchange controls in the middle of the year
By Pablo Wende
Gita Gopinath, the deputy managing director of the IMF, and President Javier Milei, in their last meeting in Buenos Aires
The experience of total dollarization of the economy that Ecuador carried out is no longer a priority for Javier Milei. In fact, the IMF itself had reservations about supporting a similar initiative by Argentina. For this reason, now the economic team is analyzing other schemes for exiting the exchange rate, based on other successful experiences in Latin America.
The Peruvian model appears to be the one that best adapts to the next steps that the Government wants to take in monetary and exchange matters. Peru implemented the scheme that is currently in force in the early 1990s, with Alberto Fujimori in power and in response to the hyperinflation left by his predecessor, Alan García. It was almost at the same time as the beginning of Convertibility. The difference is that in that country the model has been unchanged for more than 30 years, while the “1 to 1” lasted just over ten years.
In Peru, monetary policy has been, since 1993, framed within the National Constitution, where the autonomy of the BCRA is established along with its own Organic Charter. By law, it was established that the Central Bank is prohibited from “establishing multiple exchange rate regimes.” In other words, it is prohibited to establish exchange stocks as is happening in Argentina. In addition, the Central Bank is prohibited from financing the public sector and giving sectoral loans.
Horacio Liendo , former director of the Central Bank and former Undersecretary of Financing during the administration of Domingo Cavallo, explained that “in Peru there has been currency competition for decades, basically between the dollar and the sol. But as the economy stabilized, people increasingly preferred to operate with the local currency.” Most mortgage loans, for example, are granted in soles.
Peru's inflation remains among the lowest in the region and the president of the Central Bank, Julio Velarde Flores , has held his position uninterruptedly since 2006, despite the strong political crises that the country suffered, even with constant changes of presidents.
The “Peruvian model” would be the most similar to the one that wants to be installed for the exit from the stocks. “The dollar would become legally valid and could be used for any transaction, with cancellation power,” adds Liendo. Of course, the President also explained that the currency competition (which in the first stage includes the peso), could end in dollarization if the public prefers to hand over their pesos in exchange for foreign currency.
The other possibility is that this bimonetary scheme coexists, as happens in countries like Peru, Paraguay and Uruguay. Other countries in the region are managed directly with local currency such as Brazil, while in Chile there is a unit of account (the UF) that indexes for inflation to make contracts and credits (similar to the UVA that is applied in a few cases in Argentina). .
The sharp reduction in the exchange gap, which is already below 20%, generated all kinds of speculation regarding the possibility of speeding up the exit from the exchange rate. However, Milei himself took care of this possibility yesterday at Expoagro and reiterated that it could only be done in the middle of the year. Meanwhile, the objective is to continue accumulating reserves, taking advantage of the large harvest, and eventually negotiate an agreement with the IMF that gives greater solidity to the future monetary and exchange rate scheme.
The Fund's own deputy managing director, Gita Gopinath , gave her thumbs down to eventual dollarization, which would hinder possible Government plans to move in that direction, something that is already ruled out for the short or medium term.
