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The Argentine Government Faces a Crucial Decision: To Devalue or Not to Devalue?

ByEditor

Feb 10, 2024

The non-approval of the Omnibus Law has created a macroeconomic challenge of large magnitude. Although it is currently under control, it will become a significant issue in the near future. The focus now turns to exchange rate policy as the Central Bank is faced with the difficult decision of how to proceed. Each available alternative comes with its own set of costs and challenges, making the decision a complex one.

When discussing exchange rates, it is crucial to consider the real exchange rate, which adjusts for Argentine inflation and that of the main trading partners. With an expected inflation projection for February of around 15-17%, it is clear that achieving a 2% monthly depreciation will be difficult with higher inflation anticipated in the coming months.

The argument that the economy will benefit from a lower exchange rate due to reforms aimed at increasing long-term productivity is understandable, but it is important to recognize that such productivity gains take time to materialize. While certain improvements have been made, there are still many unresolved issues within the economy.

Continuing with the 2% monthly depreciation may help reduce inflation in the short term, but it could also lead to a significant appreciation of the exchange rate. A strong peso could hinder the trade surplus that the Government needs to improve the negative situation of the Central Bank’s international reserves.

Another alternative may involve increasing the speed of depreciation, which would come with its own set of challenges and consequences. The Government will have to carefully weigh the options and make a decision in the next few months, understanding that no alternative will be without its drawbacks.

By Editor

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