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New Foreign Currency Controls

by on November 1, 2011

Argentina has always had a fluctuating relationship with foreign currencies, with its linkage to the dollar in the 1990’s on a 1:1 ratio. After the debt default and currency devaluation in 2002 (a 3:1 peso to dollar ratio), the peso has slowly lost value against the dollar to its current value of 4.26 pesos for every dollar.

The slow loss in the peso’s value, coupled with unofficial statistics of 25% annual inflation (official estimates of 10%), capital flight, and tax evasion prompted the newly re-elected Kirchner government to institute currency controls on Monday. Now, to convert a peso to a dollar, euro, yen, etc. every citizen will have to provide:

  • DNI (National ID Number, only available to Argentine nationals)
  • Tax number (registered in the national tax ministry’s-AFIP-database)

They will then get approval based on their income and wealth as reported to AFIP.

The problems with this plan are obvious. Argentina, while reporting greater numbers of citizens legally paying taxes, still has 1/3 of economic transactions based on cash and unofficial means. With so many people having large amounts of cash that are not held in banks or reported to AFIP, the government has lost substantial amounts of money it wants to recoup. Many people, distrustful of banks and the government access to their money since even before the 2001 crisis may become even more desperate for foreign currency, and push the value down substantially of the peso. Half of Argentina’s annual GDP (around $160 billion) is in foreign bank accounts, and while some of this is due to capital flight, a majority of Argentines keep money abroad as a buffer against the peso’s instability.

The current chase after tax dodging and loopholes comes as the government runs low on hard currency supplies and reserves. A sale in $1.78 billion in government reserves during October was meant to help stem the tide of dollars flowing out of the country. The parallel exchange market, criticized by the government, was all but shut down after this policy change. Perhaps this is a step against the largely business-backed opposition parties, who have been a threat against CFK’s control of the money supply.

Besides a possible short-term surge in the dollar’s value against the peso, this will make buying many goods more difficult in Argentina. Several big-ticket items (namely homes, sometimes autos) are listed in dollars, which will now require previous approval to acquire. Firms trying to buy internationally will need to wait. Argentines wanting to go abroad will be less tempted, as their non-Argentine assets will count against them. More importantly, it cuts out the parallel market from being the arbitrator of foreign currency.

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