Argentina's Next Steps on the Long Road to Economic Stability and Growth: Controlling the Peso and Managing Debt as well as Expectations

Caputo and Bausili Announce a Plan to Shift Debt Burdens and Control Monetary Emission While Delaying the Lifting of Currency Restrictions

Economy Minister Luis Caputo held a press conference alongside Central Bank President Santiago Bausili on Friday evening. They announced an acceleration in the process of transferring the Central Bank's debt (Leliq and repos) to the Treasury through specific instruments. The aim is to gain the freedom for executing monetary policy, in particular to raise the interest rate (to ensure it is positive in real terms) without impacting the monetary authority's balance sheet, by having to issue money to pay the interest on this debt.

In this context, the officials provided explanations regarding why the Central Bank is selling reserves and when the PAIS tax will be reduced, something Caputo had already promised. “We will reduce the PAIS tax, as we said from day one. It will be as soon as the foundational law is regulated and implemented, and the Treasury starts receiving the revenues from the fiscal package. It will likely be between August and September,” the minister assured.

He added that the best way to generate competitiveness is to “lower taxes, inflation, and the cost of capital (interest rate),” and completed: “This is how we think of gaining competitiveness, achieving a fiscal surplus and returning that surplus through lower taxes to the people. Our goal is that by the end of our term, we will have been able to reduce 90% of taxes.”

In this way, he ruled out an immediate devaluation and postponed the lifting of currency controls “for a third phase.” “We want to give more certainty and solidity to the economic program so that there is no anxiety regarding the lifting of currency controls. We have not fallen in love with the controls. What we have fallen in love with is macroeconomic order, not causing problems for Argentinians,” clarified the head of the Treasury, emphasizing: “Lifting the controls is a third phase that will be one of growth. We have not set a date; we have set parameters that imply macroeconomic order to be as sure as possible and avoid any shocks that pose a risk to people.”

One of the market concerns in recent weeks, which has caused volatility, was the constant sale of reserves by the Central Bank, to the point where June is the first month closing in red in this regard. “It is a seasonal issue. In fact, it is expected that around USD 3 billion will be lost from now to September. June’s issue was because the winter came early and there were more gas imports,” Central Bank President Bausili explained, saying that what is happening with the reserves “is not a surprise” but “part of the designed plan” as also established in the latest IMF staff report.

Second Stage

Caputo asserted that the economic program has entered a second stage, with the primary goal of reducing issuance to continue lowering inflation. In the first phase, financing the deficit through inflation was ended, as there was a surplus between January and May. “We are in the second stage of this stabilization plan, which consists of shutting down the second tap of monetary issuance. We have three taps of monetary issuance: one is the fiscal deficit, the second is the interest the BCRA pays on remunerated liabilities, and the third is when the BCRA buys dollars, which is the only issuance effect that is not harmful,” he illustrated. In this sense, the aim is to no longer issue money to pay the Central Bank's debt interest, leading to the decision to transfer these liabilities to the Treasury, increasing pressure on the Economy Ministry to achieve a fiscal surplus.

The ultimate goal, as mentioned, is to be able to use the interest rate as a monetary policy tool without harming the Central Bank's balance sheet. One option, for instance, would be to raise it so that it is positive in real terms and attract pesos to stay away from the dollar. “This measure means fewer currency problems since with the fixed amount of pesos, currency volatility decreases and contributes to the disinflation process,” Caputo indicated.

He also confirmed that there will be no devaluation. “The 2% monthly crawling peg remains, the 80/20 rule remains, and there is no devaluation project. It is also not true that the IMF asked for this. We will lift the controls when the conditions are right. We want to reach that date giving the market the greatest certainty possible,” he explained.