Argentina is dismantling its currency controls and allowing the peso to fluctuate ahead of a $20 billion IMF deal. $12 billion will be disbursed soon, with additional funds from other organizations aimed at stabilizing the economy.
Argentina is undertaking significant changes to its currency controls, as the central bank prepares for a $20 billion deal with the International Monetary Fund (IMF). The central bank announced that from Monday, the peso will no longer be subject to a fixed currency peg and will instead fluctuate freely within a specified range of 1,000 to 1,400 pesos per dollar, down from 1,074 pesos at Friday’s close.
In a move to boost investment, Argentina will also dismantle critical aspects of the capital controls, commonly referred to as the “cepo,” which have previously limited access to foreign currency. This includes allowing companies to repatriate profits from this year onward. Economy Minister Luis Caputo stated, “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.”
The new exchange rate system may permit a significant depreciation of the peso, possibly weakening by nearly one-third if it reaches the lower limit of the allowed range. However, the central bank is expected to deploy measures to stabilize the currency. The width of the fluctuation band is set to expand by 1% each month.
This policy shift occurs as Argentina awaits the IMF board’s final approval for its 23rd financial program, a decision anticipated later on Friday. The country requires these funds to rebuild its dwindling foreign currency reserves, which have been adversely affected by persistent inflation and rising country risk metrics.
The abolition of currency controls could precipitate local market volatility, exacerbated by ongoing global trade tensions. Economist Ricardo Delgado commented, “This is a devaluation, which rather goes against what the government would have intended to calmly get to elections.”
Minister Caputo detailed that the $20 billion IMF agreement includes an immediate disbursement of $12 billion expected by next Tuesday, with an additional $2 billion available by June. He also announced forthcoming multi-year allocations from other international bodies, including $12 billion from the World Bank and $10 billion from the Inter-American Development Bank. The IMF funds are intended to help stabilize the central bank and facilitate improvements in currency health, continued efforts to reduce inflation, and enable tax reductions.
Argentina’s decision to loosen currency controls marks a pivotal step toward stabilization as it negotiates a substantial IMF deal. The removal of restrictions is anticipated to foster foreign investment and address economic challenges, including inflation and foreign reserves depletion. While significant risks may arise, the government is optimistic that these measures will enhance the economic landscape heading into the election period.
Original Source: www.marketscreener.com
