Argentina is removing currency controls and allowing the peso to fluctuate freely ahead of a $20 billion IMF deal. The peso will operate within a range of 1,000 to 1,400 pesos per dollar, with additional measures to repatriate profits. The IMF funds are aimed at stabilizing currency and addressing inflation, while concerns about market volatility remain.
Argentina is dismantling significant components of its long-standing currency controls and easing restrictions on the peso, as announced by the central bank. This strategic move comes in anticipation of finalizing a $20 billion agreement with the International Monetary Fund (IMF). Starting Monday, the peso will have the ability to fluctuate freely within a new band ranging from 1,000 to 1,400 pesos per dollar, compared to a closing value of 1,074 pesos on Friday.
The central bank is eliminating major aspects of the “cepo” capital controls that have limited access to foreign currency. Additionally, companies will be permitted to repatriate profits starting this year, which is crucial for attracting more foreign investment. Economy Minister Luis Caputo emphasized, “As of Monday, we will be able to put an end to the foreign exchange restrictions which were imposed in 2019 and which limit the normal functioning of the economy.”
This new exchange rate system may allow the peso to depreciate by nearly one-third if it approaches the lower limit of the band, although the central bank intends to employ certain intervention measures. The band will incrementally widen by 1% each month, potentially leading to market volatility. This policy shift is occurring amid expectations of a crucial vote by the IMF board on the completion of Argentina’s 23rd program with the IMF.
The urgent need for financial support stems from declining foreign currency reserves and persistent inflation, coupled with an increase in the country’s risk index. The release of IMF funds is essential for lifting currency controls, yet it raises concerns of increased local market instability, especially with ongoing international trade disputes.
Economist Ricardo Delgado commented, “This is a devaluation, which rather goes against what the government would have intended to calmly get to elections,” noting the unexpected timing of these changes amid global market uncertainty.
Minister Caputo detailed that the initial disbursement of $12 billion from the IMF is expected by next Tuesday, with an additional $2 billion to follow by June. He also mentioned forthcoming multi-year funds from various global financial organizations, including $12 billion from the World Bank and $10 billion from the Inter-American Development Bank. The IMF financing aims to recapitalize Argentina’s central bank, stabilize the currency, and facilitate continued efforts in inflation reduction and tax reforms.
In summary, Argentina is making significant adjustments to its currency policies by dismantling long-standing controls and allowing the peso to fluctuate freely ahead of a $20 billion IMF agreement. This move is expected to attract investment, though it could also increase market volatility. The initial $12 billion IMF disbursement marks a crucial step in stabilizing Argentina’s financial landscape and addressing economic challenges such as inflation and declining reserves.
Original Source: www.marketscreener.com
