BUEONS AIRES — Earlier this month, Argentina’s Central Bank officially banned the purchase of U.S. dollars for savings, making official what had already been a de facto government policy following months of tightening controls on the foreign-exchange market as a way of protecting foreign reserves. Now only those traveling abroad are allowed to buy foreign currency provided they get permission from the government tax agency first.
The prohibitions mark the latest in President Cristina Fernández de Kirchner’s whack-a-mole approach to policy. The government imposes palliative measures to deal with problems of its own making, using tactics that only make them worse in the long run. The problem at the heart of the new currency policy is the government’s inability and unwillingness to deal withinflation. (Stagflation might soon be a more accurate term, considering that the economy contracted in May for the first time since 2009.
Since its spectacular economic collapse a decade ago, Argentina has enjoyed years of having one of the world’s highest growth rates. Yet that rapid expansion, fueled by lots of government spending, came at a cost of rising prices. Since 2007, the government has cooked official data, severely underestimating inflation to the point that almost no one believes the official numbers that are released every month. Opposition lawmakers say cumulative inflation since 2007, when the government began its dubious accounting practices, was 193 percent, 136 percentage points greater than official figures.
Mere legal mandates aren’t going to suddenly solve these problems, nor will they end the Argentinian love affair with the dollar. Argentinians have turned to the U.S. currency in times of uncertainty, and in a country with numerous boom-and-bust cycles over the past half century, that has meant most of the time. In 2006, the U.S. Treasury Department estimated that somewhere around $50 billion in dollar currency is held in Argentina. [pdf] (In contrast, Brazil had $1 billion.) Even Kirchner had more than $3 million in the bank before announcing last month that she would convert them to pesos in what she qualified as a patriotic gesture that others should follow.
Since the announcement, the black market for the dollar has soared as Argentines are increasingly willing to pay a hefty premium to get their hands on the greenback. Last week, the Dólar Blue, as the illegal rate is known in local parlance, reached a high of 6.80 pesos (it has since declined to around 6.40 pesos). The under-the-table market that moves an estimated $20 million per day may be illegal but it’s hardly hidden. Newspapers publish the rates daily and money changers can easily be spotted in downtown Buenos Aires. The high demand isn’t difficult to understand. Even for the few who can buy the dollar at the official rate, it’s a good deal, since the peso has failed to keep up with inflation.
There’s little doubt the peso will continue to weaken as there’s no sign the government will moderate its penchant to print cash. So far this year, the number of notes and coins in circulation soared by 24.5 billion pesos, a staggering 36 percent.
Critics beware: If you disagree with the government in Argentina, you might get audited.
But that’s not a problem for the government. After all, the president of the Central Bank, Mercedes Marcó del Pont, recently affirmed that “it’s totally false’’ to say that printing money generates inflation. The statement likely seems surprising to anyone with any rudimentary knowledge of economics yet it follows a proud tradition by Argentinian officials of dismissing uncomfortable truths.
Until the government begins to be up front about what’s going on in the economy, and adjust its variables accordingly, Argentines will continue to see the greenback as the only way to protect whatever money they might have left over at the end of the month.
Dollar fever won’t go away just because it’s illegal.