The multiple exchange rates in Argentina: how do they work?
It will be enough to ask any more or less informed Argentine child to find out how much the dollar is worth. The child will have no idea of the official price, the one published by Banco Nación, but rather the parallel or blue market. You will know it because you will have heard it at home; It is also possible that from time to time it is a topic of discussion in school, because that online game they asked for became unaffordable for their parents, who will have to pay their credit card with a 30% tax for the currency exchange. If the person questioned does not have resources, he will not be interested in the exact value of the dollar, but he will know that the currency is behind the inflation that eats up his salary and the increases in the supermarket. If you talk to someone with a high income, they will enthusiastically recount the financial maneuvers you perform to convert your excess pesos into dollars.
In any case, everyone will have something to say. The dollar is a topic of conversation in Argentina. And understand their multiple quotes, a serious matter. This week, the exchange rate used in the informal market, known as the blue or black dollar, reached 197.5 pesos, just 0.5 pesos from the record reached on Thursday. Only five years ago, they reached 15 pesos to buy a dollar. But the blue is not the only exchange rate in Argentina, where there are at least seven others. The official one, the one that is valued as savings, the one used to buy and sell bonds on the stock market, the one used by exchange agencies, the one offered to export and service companies, the one used by companies to pay their debts in dollars and the so-called “contado con liqui”, which is used by people who exchange pesos for dollars abroad. They all quote different prices.
To understand the reason for the different exchange rates in Argentina, you have to start by learning how the government divides the demand for dollars between “good” and “bad”, explains Paul McNamara, investment director of the GAM fund, who specializes in emerging market bonds and foreign exchange. “People who want to buy essential goods are considered a good demand for dollars; while people who want to have their savings in dollars or abroad is what they would consider as a bad demand for dollars, ”explains McNamara by phone from London.
To prevent savers from taking refuge in foreign currency, the government limits the amount of dollars that can be purchased per person per month to 200. “What they try to do is divert the supply of dollars that they have, which comes mainly from exports, towards people with what they would consider a legitimate demand for dollars, which is only a small fraction of all the demand for dollars in Argentina.” . But dollars are bought through different channels, so the government imposes rules, taxes, and limits on each channel, such as the use of credit cards or financial instruments, among others. Each imposition or rule generates a specific market with its own exchange rate quote.
A currency is, in Argentina and throughout the world, a certificate of trust. A buy-sell works because both parties trust that the money being exchanged has and will preserve value. This does not happen in Argentina. Decades of spiraling inflation, devaluations, and mismanagement of public finances have eroded citizens' confidence in the currency. The Government, whatever it is, is then forced to limit the use of another currency, issued by another country, in which it does trust: the dollar (or, the euro, the pound sterling, or others issued by developed economies with strong central banks).
“The government does not have enough dollars”, Argentines commonly say when talking about their particular situation, one that forces them to make complex and sophisticated financial decisions on a daily basis. But "enough" is relative, says Sergi Lanau, deputy chief economist at the Institute of International Finance (IIF). In countries where the inhabitants do not desperately seek to put all their wealth in foreign currency, this is not a problem. "Not having enough dollars means that they are not enough to maintain an exchange rate when everyone wants to save in dollars." The case of Argentina is not unique, notes Lanau: Lebanon and Sri Lanka suffer from the same dysfunctions.
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“Multiple exchange rates are a bandage that allows a severely dysfunctional economy to continue to more or less function,” summarizes McNamara, “if you're going to rip off the bandage, you need to do something that will probably be quite painful in the short term and possibly in the medium term and especially for the poor.” For example, a devaluation that allows all exchange rates to be reunited. Which, the expert admits, has been done many times before and it's a matter of time before black markets spring up again. Given the makeup of Argentine politics at the moment, McNamara says, it is extremely unlikely that they will act to reunify exchange rates.
Lanau agrees. "Right now, the only possible way to start fixing things is one that Argentines don't like, which is a program with the International Monetary Fund (IMF) where little by little less money is printed to finance the government, with as inflation starts to drop. With this, people will want to buy fewer dollars to save. But of course, that is a complicated process that the Government did not want to do until now.
President Alberto Fernández said on Wednesday at a massive event: "If we have not closed an agreement with the Monetary Fund yet, it is because we are not going to kneel." El País negotiates new terms for the payment of 44,000 million dollars of debt that is coming up. Two weeks before a presidential election, the President makes it clear that, at least for now, this is not a possibility.
By devaluing the currency and equalizing exchange rates, imports become more expensive, for example. “Obviously this is very expensive and everyone knows it, because we are not talking about importing my luxury car being more expensive, we are talking about all the imported food and medication being more expensive, and very close to a choice is simply impossible. Politically it is very easy to understand why the government does not want to devalue right now”, concludes Lanau.
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