Argentina cries for openness and foreign investment

Argentina cries for openness and foreign investment

For the last three years, Argentina has banned access to currency exchange for individuals and companies based in the country. While this ban started as a way to discourage use of the American dollar in the Argentine economy, it resulted in a very unhealthy blockage that has affected the normal flows of money in the country’s financial system.

The currency exchange ban in Argentina was originally implemented through three main policies. The first aimed to forbid access to foreign currencies in the exchange market, has devolved into a flourishing black market.

The second strategy was designed to block most of the transfers to accounts located outside of the country in a move to prevent capital flight. And finally, a very tight control of imports was established that, among other negative outcomes, resulted in the exit of numerous foreign companies due to the lack of possibilities to import their products.

These have proven to be a lethal combination of measures,creating deep stagnation and high levels of inflation. Unofficial annual statistics, produced independent of the government, showed Argentine inflation being close to 35% by the end of 2014.

Change coming?

On January 18, the president of the Argentine Central Bank said he believed that “in the short term, the currency exchange restrictions could be easily eliminated,” producing a lot of noise in the media. However, the next day, he spoke again stating that “there were no plans on making any changes to the current exchange system.”

In the first week of 2015, Argentina’s Minister of Economy Axel Kicillof insisted that “Argentina is a very open economy, where nearly $3.7 billion was exchanged in the currency’s market in 2014.” However, businesses and people need an authorization from the National Tax Division to buy only a limited amount of dollars per month.

It is difficult to believe Mr. Kicillof’s words about Argentina being a “very open economy” when as recently as 2008, right after the beginning of the global financial crisis, $23.1 billion was exchanged from Argentine pesos to American dollars. Although the situation between those critical years and 2014 is not the same, it is quite evident that the government is limiting the amount of currency that can be acquired.

Tinkering tips

Eliminating any of these restrictions should be preceded by an active effort from Argentina to increase the Central Bank’s international reserves – currently at a level of $31.3 billion – together with assuring better conditions for foreign investments, supporting the export sector, and issuing debt.

By adjusting these restraints, the national industry would see an immediate improvement on its production capacity since countless companies have been affected by the import limitations; finding themselves unable to produce due to the scarcity of raw materials.

At the same time, offering better conditions for foreign investments could lead to bigger steps towards a much-needed energy self-sufficiency. The current energy deficit is a big problem for the Kirchner administration due to the constant need of fresh American dollars to pay for the imported energy resources.

Despite this economic situation, both national and international companies are getting ready for Cristina Kirchner’s exit in December 2015. Mrs. Kirchner cannot run for reelection after serving her second term as the President of Argentina, and people are waiting for signs of change to come out like the sun on a new horizon.

Categories: Economics, Latin America

About Author

Miguel Ferreyra de Bone

Miguel is a guest lecturer of Macroeconomics at the Universidad del Salvador in Buenos Aires, Argentina. His past experience includes an advisory role at Banco Galicia, the largest private bank in Argentina by AUM, and as a commodities analyst at both Cargill and Ledesma. Miguel is proficient in Spanish, English, and Portuguese.