Sunday , 25 June 2017

HeaderICI    
Home » Economy » Exchange Rate Appreciation or Cheap Dollars: Who is to Blame?

Exchange Rate Appreciation or Cheap Dollars: Who is to Blame?

January 30, 2017 1:55 pm A+ / A-

By Aldo Abram, Executive Director, Fundación Libertad y Progreso.-

  Whenever someone is looking for whom to blame for the 2015/16 economic crisis their finger tends to point towards the central bank “because it has maintained high interest rates, it reduced credits for the private sector and generated an exchange rate appreciation”. However, like in the best detective stories, the butler is not always to blame.

  In first place, why isn´t Argentina´s interest rate higher? This is simple, the total fiscal deficit has been extremely high in 2016 (over 8% of Argentina`s GDP). Hence, a big part of this imbalance had to be covered taking credits in the internal market and, given the strong absorption by the state of these resources it shouldn´t be surprising that the cost of local financing is expensive and hence there is little left so the private sector can invest, produce and consume.

  If the central bank decided to set the interest rate below the one fixed by the market, people would be less interested in saving and putting money on the banks, so available financing would dwindle.  On the other hand, since credit is cheaper the number of loan applications will increase, so the central bank will have to emit money to provide for the difference and avoid a higher interest rate.

 The problem is a loan is taken to spend the money, not to save it, thus, the money emitted by the central bank is not being demanded to lower the interest rate. This excess in the demand, like it would happen for any other good, will lower the price of Argentine currency, which is the measure for the value of all goods and services in our country´s economy. If the measure by which we value the economy shrinks, we will see every price we measure with it get higher. This means a higher inflation. Since the central bank has as a main objective to fullfill the goal of a maximum price increase it can only accommodate to the market rate by trying to emit a low amount of money so the price of the peso doesn’t diminish too much.

   So we proved that the butler is not to blame, rather it was the State’s fault because there was no real reduction in public spending. Even if in 2016 it felt in relation to Argentine production as a whole (by 0,6%) because subsidies to public services were decreased by 0,8%. That is to say, it was the private sector payed for this and more since the net amount of public spending alocated to those subsidies increased.

   On the other hand, since the resources of the Federal Government and the provinces could get in Argentina were not enough, they looked for currency abroad, which they ended up spending in the local market to pay for debt and expenses in pesos. Against such an offer of dollars it shouldn’t be surprising that the local value is low.

   That is to say, there is no such thing as exchange rate appreciation, since nobody is intentionally trying to keep the value below the market level. This is a result of the abundant flow of dollars.

 The high levels of proteccionism mean that demand for currency is reduced, hence, once again, the rate of currency exchange tends to be lower. It should be noted that the level of imports is well below an acceptable level, since there are further restrictions to the purchase of hidrocarbons abroad in order to keep the minimum local price high.

 Since all this factors diminish the dollar’s purchasing power in the local market, its not surprising that in Argentina almost everything is expensive in that currency. Furthermore, the price of protected goods is particularly high. They can be as much as twice the price in neighbourhing countries because the government has decided to subsidize, though the consumer’s pocket, the earnings of unefficient bussinessmen. What’s worst about this is that the people who suffer the most are the poorest who have no possibility of buying abroad.

INFLATED COSTS:

  Finally, even goods that can be freely imported, and with low tariffs, are expensive because the cost of comercializing in Argentina is excesively inflated by high federal and provincial taxes. It is not by chance that Buenos Aires is a paradise for blanket sellers and illegal sales that use smuggling to make great profits.

   Like we can see, problems like salaries low purchasing power or difficulties in access to credit and competitiveness among producers would be solved if the State, at different levels, would spend money more efficiently, ordered the accounts, lowered the tax preassure and its demand for financing.

  However, it is difficult for this to happen because the Argentine public applauds the State’s overspending like they thought money grew on trees. It comes from our pockets and has a high cost in terms of current and future wellbeing of our families. If we really care about them, as citizens, we should start to ask our politicians to be more responsible and austere when dealing with public finances.

Exchange Rate Appreciation or Cheap Dollars: Who is to Blame? Reviewed by on . By Aldo Abram, Executive Director, Fundación Libertad y Progreso.-   Whenever someone is looking for whom to blame for the 2015/16 economic crisis their finger By Aldo Abram, Executive Director, Fundación Libertad y Progreso.-   Whenever someone is looking for whom to blame for the 2015/16 economic crisis their finger Rating: 0

Leave a Comment

scroll to top