Exchange Rate Gap: Measures To Reduce It And Prevent Prices From Hitting It

Exchange Rate Gap: Measures To Reduce It And Prevent Prices From Hitting It

,The steel industry tripled its prices in the last two and a half years, It is often said that this is an area that is vulnerable to global inflation and changes in prices based on the exchange rate. But if the increase in imported inputs used by this activity is taken into account and you add up the variation in the exchange rate, the prices should have been multiplied by 2.5 and not by 3. That is, they not only transferred the variation in prices and exchange rates to the totality of the final product but they did it so far. it is This allowed Tekint to increase its profitability from about 10 percent of sales in 2019 to 42 percent today. And, since it is a broad input, it has impacted you in all areas of production (construction, automotive and machinery). The sector does not need to be devalued to be competitive. The oil tanker didn’t either,” he recounts Busted Pablo Manzanelli, Researcher at the Center for Training (CIFRA) and Economy and Technology Sector of FLACSO.

Manzanelli’s analysis is part of his current research and provides a framework for the various proposals made in this note. Strategy that minimizes the exchange rate difference between the official dollar and the parallel, which distorts economic activity and puts pressure on prices. The exchange rate differential is clearly one of the main imbalances facing the Argentine economy. The gap, which widened over four decades after Martín Guzmán abruptly stepped down as economy minister, discouraged liquidation of foreign currency and fueled demand for imports.

The gap slows down growth due to external restrictions and reduces the productivity of the economy. The parallel dollar for sale rose from 235 pesos in early July to a peak of 328 pesos at 22 pesos (up 40 percent), ending the month at 286 pesos. The difference is the difference between the official dollars that importers can use to buy their products (also called wholesalers) and cash with parallel prices, such as blue, liquidation and MEPs (or stock exchanges)., The increase in the gap typically responds to financial imbalances, dollarization and additional liquidity from some economic actors seeking speculative operations. “A difference of the order of 100 percent is one of the main problems to be solved in exchange cases: it reflects uncertainty in the short and medium term, raising expectations of devaluation and the resulting demand for foreign exchange for hedging,” An EcoLatina consultancy report says.

formalizing a scheme of multiple exchange rates, A “Dead Cow” Bonus Discuss energy consumption, become better at price control, create incentives to avoid continuing to import high levels of energy, to capture savings in pesos and take pressure off the greenback (raise the interest rate so that it is positively real with respect to inflation) for saving, setting the destination mechanism of Detection of fraudulent operations in the marketEffective punishment of offenders and, of course, stockpiling, highlights the measures and tools consulted by experts Busted To reduce the exchange rate differential and avoid devaluation.

“The prospect of creating a more formal multiple exchange rate scheme may help but does not solve the current problem, unless it is done in favor of high-productivity sectors that are exporters, as was done with ‘ .soybean dollar Now but more formally. That way you can have more dollars and solve the stockpile issue a bit, but at the cost of increasing prices and benefiting a sector that already has very positive results,” Manzanelli says. that an immediately applicable measure could be in the tourism sector.” It will work in the current context. consolidate some scheme that allows tourists entering the country to settle dollars in a formal clause“, he assures.

“However, the problem is different now. The point is that exporters, in this context, don’t want to sell because they don’t know what to do with the peso. There, the easy way out is that the Central Bank is trying, which The interest rate is to raise. As an alternative, I think what needs to be done is to take out a bond tied to the production of natural wealth, which would primarily be like a “dead cow” bond, with a high The rate of interest that allows these sectors to be attractive, directs the return on that natural wealth and production of those resources. It has to be an interest rate that competes with the financial sector. In this complex situation, it will allow you to use unconventional tools to solve a problem that requires multiple approaches.“, says the CIFRA researcher.

“Once part of those pesos have been captured, different truck rates can be applied. The point of doing this now is that you do it in a very defensive position, in which you tend to overcharge those people. We’re going to give exchange rates that don’t need it and you contrast it with industrial sectors that need protection. Then I’ll do it within the framework of an industrial strategy”, Manzanelli explains. “And, above all, become better at controlling prices,” says the sociologist.

For Hernan Lecher, director of the Center for the Argentine Political Economy (CEPA), getting dollars is key. ,If you don’t get the dollars, there’s no choice”, assures the economist. “Regarding the issue of inflation, what is observed is that there was already a price effect without devaluation. It is now certain that if there was a devaluation, it would have gone up in prices; With which, there’s not much to do,” he explained to Medium.

The head of CEPA recalls that Currently “the rate of monthly depreciation is around 5 percent, which makes it impossible to think of an inflation rate of 3 percent”. cents.” “After all if I have dollars I can appreciate myself; If not, it’s impossible. If I have dollars so I can fight the gap, I calm exchange rate volatility and then I discuss micro-economy,” Lechert explains. “Many people today are already anticipating August inflation. I am going to record again. Why? Imagine if there is a devaluation at the top. This is not possible at the moment,” insists the economist.

The former head of the Central Bank, Alejandro Vanoli, assured that “it is not rude that an increase in the exchange rate differential generates a devaluation.” “A set of consistent political measures must be taken which include incentives for savings and sanctions for those who commit crimes,” he explained. Busted, The National Securities Commission and also in charge of the ANSES say, “Even if you devalue, it has to be in a comprehensive framework that includes a stabilization plan to be credible and not go to price.”

The former official remembers what happened in 2014, when the devaluation by his predecessor at the Center triggered the gap and increased prices. In January 2014, the then President of Central Juan Carlos Fabrega took the dollar from 6.5 to 8 pesos in a single day, representing a jump of 15 percent. The exchange rate gap remained and inflation rose to 40 per cent. “In October of that year, there were negative expectations without external financing and with commodities declining. In the two months, from October to December, the exchange rate differential fell from 96 to 40 percent, while reserves strengthened. To this end, incentives were implemented, such as raising the interest rate so that it is positively real, and establishing various mechanisms to detect fraudulent operations in cash with liquidation and to impose effective sanctions on offenders. .“, Senala Vanoli.

“Expectations turned sharply, reserves recalibrated, liquidity and illiquid cash fell, and devaluation expectations subsided, all of which slowed inflation to 25 per cent,” says the former central banker.

in his blog The current Secretary of Commerce (Interior and External), Mattias Tombolini, offers an approach to the problem of exchange rate differentials. “The gap is a serious problem, equal to, or perhaps even greater than, inflation. High levels of exchange rate differentials are destabilizing for the economy, at the aggregate level. On the one hand, it discourages liquidation of foreign currency by exporters (or leads to under-invoicing) and, on the other hand, it pushes up import demands – a situation that puts pressure on the dollar in Central Bank coffers. . Following this logic, growth will be disrupted and the productivity of the economy will fall,” highlighted the post published late last year.

“On the one hand, we can expect the next devaluation—knowing that, perhaps, the remedy is worse than the disease—on the other hand, greater pressure on inflation (due to the pass-through of the increase in the parallel currency), of reserves. Losses, decline in productivity and slowdown in growth (…) However, in parallel with this, the situation worsens as investment in periods of high lag (…) is strongly discouraged, i.e., the gap is resolved. to be considered one of the priorities”, summarizes Tombolini. Controlling under-invoicing of exports and over-invoicing of imports is crucial in the fight to bridge the gap between the official dollar and the parallel dollar.