The approval of the IMF program brought calm to the foreign exchange markets but accentuated tensions within the government

ARGENTINA - In Brief 10 Apr 2022 by Domingo Cavallo

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In the last week of January, before the announcement of an understanding between the staff of the IMF and the Ministry of Economy, the foreign exchange rate in the bond swap market (CCL) and the informal ¨blue¨ market fluctuated around 220 pesos per dollar. Now, two weeks after the final approval of the EFF loan and the disbursement of 9 billion dollars, those same foreign exchange rates fluctuate around 190 pesos per dollar. The Central Bank is not intervening in the CCL market, and it is committed not to intervene in the future. Still, the simultaneous increase in the intervention interest rate and the rate of adjustment of the official exchange rate has removed the expectation of a sharp official devaluation of the peso and, consequently, the risk of hyperinflation has fallen. On the contrary, in the markets for goods and services, prices have increased at a more rapid speed, as reflected in the increase in the Consumer Price Index, which jumped from 3.7% in January to 4.7% in February and around 6% in March. Even though this may signal a worrisome trend for the annual inflation rate for 2022, over what was expected even by the more pessimistic forecasters, the higher inflation rate is helping to calm the foreign exchange market. This may seem paradoxical, but it is easy to explain: most of the new debt issued by the treasury is indexed to the CPI, and the holders of pesos predict that, in the short term, inflation will exceed the rate of devaluation of the CCL and the “blue” exchange rates. Therefore, for the time being, the flight from pesos to dollars has stopped. Despite the calmer foreign exchange market, the higher inflation is creating social tensions and acc...