It seems like only yesterday we were making quinceañera and sweet sixteen jokes about the blue dollar rate going up with no end in sight. But since the beginning of 2015 the blue dollar has hovered between ARS $12.5 and ARS $13.5 per US dollar. And just this week it slipped to between ARS $11.6 and ARS $12.4.
Since the rising gap between the official and blue rate was a sign of the government losing control and the economy heading towards a crisis, it’s easy to see why many think the rate falling and the gap closing is a sign that the Kirchner administration’s policies are on the right track.
Not so. Rather than address the causes of inflation and the gap between the official and blue exchange rates, this government has effectively shrunk the peso dollar market, thus making it much easier to control.
There is a gaping hole between fiscal spending (think – subsidies to state-owned companies, government salaries, transportation, etc.) and what the government brings in (taxes, tariffs). The government has been using a mixture of tools including monetary policy (what the central bank does) to plug this hole. This includes offsetting the effects of printing money (in econ-speak: sterilizing monetary expansion) by selling short term treasury notes called LEBAC. This delays inflationary effects of printing money for 30, 60, and 90 days. The Government has also used bank deposits of public companies to finance their spending; according to Cronista, the use of these deposits has multiplied 46 times since last year. Yikes.
But if the Government can’t pay for its spending, why would the rate go down? The Government does not have enough money to bring the blue rate in line with the “official” rate they make up. But they do have the ability to make the playing field more manageable.
Think of a reasonably sized economy as a lake, and the Central Bank as a lifeguard. The lifeguard does his best to set and enforce sensible rules, and jumps in to save the day in the event of an emergency. In the lake that is Argentina’s economy, sensible rules have not been set and rather than enforce even this lax set, the BCRA has been printing money and dipping into public funds to finance the government’s expenditures. Rather than admit a problem and put things in order, Argentina has done the equivalent of rope of a small portion of the lake that it can control – and then use this to demonstrate its ability to keep the economy in line.
Argentina has effectively shrunk the foreign exchange market by blocking imports, delaying payments for imports, and has now begun actively pursuing companies who pay external service providers as well. In the past three months we have had seven days with no work, six of them sanctioned by the government and one a national strike.
And now that the market is smaller, the government can move the exchange rate with a relatively small amount of money.
A private source estimates that by selling US $5 and 12 million dollars per day in the market, the Government can keep the blue rate around the ARS $11-12 mark. And that is a small price to pay for the illusion of stability that makes people think that the economy is heading in the right direction.
The question remains whether the proverbial shit will hit the fan before or after Cristina Fernandez de Kirchner leaves office, and most people I talk to think it will not. The effects of inflation and running dual exchange rates can be put off by a President who has somehow convinced the population that traveling overseas and importing materials are criminal offenses and anti-Argentina.