In accordance with section 42 of the Central Bank's Charter """prior to the beginning of each financial year, the Bank shall publish its objectives and plans regarding the implementation of the monetary, financial, lending and foreign exchange policies. Should significant changes in its objectives and plans occur, the Bank shall be required to disclose the underlying causes and the steps accordingly taken”.
On December 12, the Ministry of Economy announced the economic program of the new administration. It underscores the importance of making structural changes to the inherited economic regime to reverse the spiral of instability and stagnation that has been affecting the Argentine economy.
The cornerstone of the program is to remove both the fiscal deficit and its funding through money issuance. The goal is to achieve financial fiscal balance in 2024. It is also essential to remove regulations, restrictions and bureaucratic hindrances, and to correct relative prices, in particular, the exchange rate. This is the only way to restore external balance. Additionally, it is vital to put the BCRA’s balance sheet into healthy footing by recovering the level of international reserves and finding a way to the dynamics of remunerated liabilities. Thus, fiscal and external balances, together with the restructuring of the BCRA’s balance sheet will serve as the foundation for future macroeconomic stability.
Foreign Exchange Market Normalization
As part of the transition process towards a regime that ensures macroeconomic stability, the Ministry of Economy has announced an ARS800/USD rate in the Free and Single Foreign Exchange Market (MULC, in Spanish). The exchange rate adjustment will temporarily play the role of an anchor supplementary to inflation expectations until the new administration’s commitment and fiscal efforts are fully acknowledged. The BCRA has set an exchange rate path of 2% monthly in order to provide a nominal anchor beyond the relative prices adjustment period. This measure seeks to move in the direction of the fiscal anchor.
The BCRA has established new conditions for importers of goods and services to access the MULC. These conditions seek to make an ill functioning market marked by accumulated commercial debts revert to normal.
The BCRA also streamlined the system for paying imports of goods and services by removing any authorization requirements under the Argentine Imports Systems (SIRA, in Spanish), and by lifting the requirement of a certificate of foreign trade unique account at the Federal Administration of Public Revenue (AFIP, in Spanish).1 Moreover, it established different payment terms—according to the tariff position of the imports of goods and services involved. This measure seeks to manage the flow of foreign currency in the coming months characterized by seasonally-low exports. The BCRA has announced the conditions for subscribing the new instruments made up of three series of Bonds for the Reconstruction of a Free Argentina (BOPREAL, in Spanish) with the aim of making importers' payments of accumulated commercial debts predictable.2 These Bonds have already been offered as vehicles to channel the demand for foreign currency by importers of goods and services with commercial debts for transactions having customs registration or services rendered until December 12, 2023.3
The BCRA offers, through the auction of these new instruments, an orderly solution to the crisis triggered by the accumulation of importers’ commercial debts which are hard to handle with the stock of available reserves in the short term. This measure is expected to be temporary until the level of international reserves coming from the surplus of the trade balance foreseen for the next years is restored. In this sense, importers have a chance to acquire these bonds out of their liquidity in pesos to meet their commitments held abroad, receiving in exchange a certain amount in foreign currency from the BCRA.
The adjustment of the exchange rate and the removal of a significant part of regulations and bureaucratic barriers to access the forex market are of vital importance on two grounds: they foster production and exports, and discourage the artificial increase of imports. A genuine improvement in the trade balance will be a key driver in the recovery of the BCRA’s liquid international reserves. Credibility will only be fully restored once the inherited monetary imbalances are corrected, importers' accumulated commercial debts are paid back, and international reserves are rebuilt to the extent that the still-existing exchange controls and capital restrictions are removed. Only then, the foreign exchange market will be ultimately unified by undergoing an orderly normalization process.
Monetary Market Normalization
The demand for money is not expected to recover in the short run as long as “stagflation” caused by the legacy of imbalances is overcome. Against this backdrop, monetary balance calls for addressing the two main root causes of money issuance simultaneously: direct and indirect financing of fiscal deficit, and the BCRA’s own quasi-fiscal deficit. The BCRA has decided against continuing to resort to liquidity bills (LELIQs) auctions. Instead, it will draw on reverse repo transactions as an instrument for absorbing monetary surpluses. The overnight reverse repo rate, which was set at 100% APR on December 13, 2023, turned into the monetary policy rate.
By drawing on a single instrument and setting the policy rate as the only benchmark interest rate, the BCRA seeks to give an unmistakable signal of its monetary policy, and to strengthen the transmission of the monetary policy rate to the remaining interest rates in the economy.
As for liquidity injection transactions, the BCRA may, at its own discretion, continue entering into repos and offering put options on Treasury’s instruments.
The securities eligible for sale to the BCRA under a put option—which have been auctioned since December 18, 2023—will be excluded for calculating the limit of the lending to the financial public sector, since the BCRA is the bank’s buyer of such securities under a put option.
The BCRA will continue drawing on all monetary policy tools to reach monetary stability and reduce inflation. In addition, it will keep on monitoring the development of the general level of prices, the dynamics of both the forex market and monetary aggregates to adjust the interest rate and to manage liquidity flows.
First Results and Future Perspectives
The adjustment of the exchange rate and the removal of bureaucratic barriers to access the forex market have unfolded a process to unlock foreign trade flows in order to restore the full functioning of the production chain. This allowed the BCRA to accumulate foreign currency purchases of around USD2,900 million in the first 12 trading sessions, thus undergoing a process of rebuilding international reserves in a promising way.
The end of LELIQs' issuance is a significant step to encourage banks to resume their role as financial intermediaries that take deposits to provide credit.
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 principal when due out of the funds disbursed for that purpose. Uncertainty revolves around Argentina’s failure to comply with the targets set last August, compelling it to make a formal request for a waiver. 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 current financing conditions.
Basic macroeconomic balances coupled with the adjustment of the BCRA's balance sheet are a prerequisite for creating lasting stability, a conducive environment for production, innovation, foreign trade, and the generation of more and better jobs in Argentina.
Macroeconomic stability will bring about genuine credit offerings to the private sector, an essential input for financing investment and fostering growth. The BCRA will keep micro- and macro-prudential regulations up-to-date in line with best international practices, without neglecting the intrinsic characteristics of the Argentine financial market. Moreover, the BCRA will continue monitoring financial institutions in order to foresee and address any potential vulnerabilities, thus, preserving adequate levels of liquidity and solvency of each and every financial institution.
Last, the BCRA will persist in doubling its efforts to promote financial inclusion, the modernization of means of payment, and improved access to and use of financial services (transactions, payments, savings, and credit) at a reasonable cost and safely for consumers, and sustainable for service providers.