New Monetary and Foreign Exchange Policy Framework

NON-DISRUPTIVE CHANGE IN THE MONETARY REGIME

Credibility will only be fully restored once the inherited monetary imbalances are overcome, which will give way to the removal of the current foreign exchange and capital controls. This will in turn enable to achieve the definitive unification of the foreign exchange market.

All the monetary institution’s commitments should be honored to preserve credibility. This is of paramount importance amid a change of regime in order to have all the monetary policy instruments fully available.

FISCAL ANCHOR AND CORRECTION OF RELATIVE PRICES

The Ministry of Economy has presented the economic program of the new administration. The first announcements have underscored the structural changes required for the economic regime to reverse the spiral of instability and stagnation that have been affecting the Argentine economy.

To that end, the program aims at reaching immediate fiscal consolidation as a cornerstone of that change. The goal is to achieve financial fiscal balance in 2024.

Correction of prices is one of the priorities announced. The inherited regime marked by significant distortions in relative prices sought to repress and delay, rather than remove, the inflationary effects of the State’s deficit policies. The economic framework announced today seeks to eradicate inflation from Argentina.

One of the main distortions can be found in the exchange rate. As part of the transition towards a regime that ensures macroeconomic stability, the Ministry of Economy has announced a ARS800/USD rate in the Free and Single Foreign Exchange Market.

The initial deregulation of prices is essential to move forward in reversing fiscal and external imbalances. Thus, fiscal and external balances will serve as an anchor for future macroeconomic stability.

FOREIGN EXCHANGE POLICY: RESERVES ACCUMULATION

Adjusting the exchange rate brings about new important factors: the incentive to production and exports, and the disincentive to continue increasing imports on an artificial basis. A genuine improvement in the trade balance will be a key driver in the recovery of the BCRA’s liquid international reserves.

In view of the seriousness of the inherited situation, different financing options from international financial institutions are under analysis. The increased liquidity in reserves thus obtained in the short term will be channeled to normalize the repayment of trade debts and to set out conditions that may reduce the uncertainty surrounding the service of lending facilities. These tools intend to cushion the seasonal impact of foreign trade on the liquidity of the BCRA’s international reserves.

Rapid progress has been made in formal discussions with international organizations, including the International Monetary Fund (IMF), mainly seeking to remove uncertainty about the repayment of future principal when due out of the funds disbursed for that purpose. Such uncertainty derives from Argentina’s obligation to make a formal request for a waiver for having missed the targets set last August. The government will strive to reestablish the effectiveness of the agreement signed with the IMF and will conduct any additional negotiation that may help to improve the current financing conditions.

FOREIGN EXCHANGE POLICY: FOREIGN TRADE PAYMENTS

A set of measures about foreign exchange matters has promptly been adopted seeking to preserve public credit and to unlock foreign trade flows for the commodity chain to be fully operational once again.

The BCRA aims at streamlining the system for paying imports of goods and services by removing any authorization requirements under the Argentine Imports Systems called SIRA or the Argentine Imports System and Foreign Service Payments called SIRASE, and by lifting the requirement of a certificate of foreign trade unique account at the Federal Administration of Public Revenue (AFIP). Future imports may be paid within the term of foreign trade that the BCRA will establish according to the relevant tariff position.

In view of the inherited record high trade debt, the BCRA is currently working alongside the Secretariat of Trade and Industry to address the uncertainty about its repayment so as to restore predictability in accessing the Free and Single Foreign Exchange Market. In due course, importers may subscribe one or more financial instruments issued by the BCRA in pesos and payable in dollars in order to meet their business commitments. At the same time, these instruments will help to reduce the amount of remunerated liabilities issued by the BCRA in domestic currency.

FOREIGN EXCHANGE POLICY: NOMINAL ANCHOR IN SUPPORT OF FISCAL ANCHOR

In order to strengthen the anchor of the deep commitment to fiscal balance, the adjustment to the exchange rate will serve as a supplementary anchor for inflation expectations. The BCRA will continue fighting the delayed effects of monetization, both direct and indirect, of the fiscal deficit of the past few years.

This nominal anchor in support of the fiscal anchor is deemed to be a temporary need that will subside over time as the commitment and visibility of the fiscal efforts are fully acknowledged. Based on the current situation, the exchange rate change path is currently set at 2% monthly.

MONETARY POLICY: OBJECTIVES AND OPERATIONAL INSTRUMENTS

All monetary policy tools will seek to reach monetary stability and to reduce inflation.

The demand for money is not expected to recover either in the short run and during the “stagflation” period due to the legacy of imbalances.

Against this backdrop, monetary balance entails addressing the two main sources of money issuance simultaneously: direct and indirect financing of fiscal deficit, and the BCRA’s own quasi-fiscal deficit.

Following prudent and flexible criteria, the BCRA deems it appropriate to keep the monetary policy rate unchanged. This way, the interest rate on 28-day liquidity bills (LELIQs) will stay at 133%. In turn, the reverse repo rate will decrease to 100%. The BCRA will keep on monitoring the development of the general level of prices, the forex market dynamics, and the monetary aggregates to calibrate the interest rate and liquidity management policies.

December 12, 2023.