In Argentina, it is hard to perform a seemingly trivial task: determine the value of the US dollar in the national currency – the Argentine peso. Usually to do that we look at the official exchange rate published by the Central Bank. However, in the case of Argentina, this will not help: the dollar at the official exchange rate is practically inaccessible to individuals.
There are more than a dozen dollar-peso exchange rates in Argentina. Each of them applies in different situations. For example, if you go to a bank to exchange your Argentine pesos for dollars, you can only buy up to $200 a month and you will have to pay a tax of an additional 65% of the Central Bank exchange rate. In case you want to buy more than $200 a month, you will have to go to the underground market where the exchange rate is nowadays approximately 85% higher than the official one (data as of 25.12.2022) and this gap is constantly widening. Another example: when using your credit card for purchases in dollars, you have to pay a tax of 75% of the official exchange rate if you spend less than $300 a month. If you want to spend more, there is an additional tax of 25% on top of the 75% tax.
The official exchange rate is set by the Central Bank at a very low level making the peso artificially strong. Dollars at the Central Bank rate can be accessed only by importers that obtained permission to import from the government. The exporting companies, in turn, are obliged to sell all the dollars they receive from abroad at the official, artificially low, rate. Some exceptions are made for specific industries in order to encourage exports: for instance, tech companies have to sell only 70% of the gained dollars and can sell them at a higher exchange rate.
The Argentinian capital controls system is in practice managed by the government as the country’s Central Bank is not independent. The government is continuously expanding currency controls to keep up with arising economic challenges. For instance, the additional 25% tax on credit card payments was imposed just before the start of the football championship in Qatar to discourage Argentinians attending the tournament from spending too much.
Capital controls are not a new thing in Argentina. The first capital restrictions appeared in the country in 1985. Since then they have been delated and reimposed again many times.
The recent history of capital controls in Argentina can be clearly seen in the graph above which shows the dynamics of the dollar-peso official and underground market (also called Dollar Blue) exchange rates. Currency controls were in place in Argentina from 2011 to 2015. In 2016, the new President of Argentina, Mauricio Macri, a big proponent of the free market, lifted all the capital controls. Unsurprisingly, after that, the official exchange rate converged to the “real” underground market rate. The Argentine peso remained a free-floating currency for three years. Macri’s economic policy of taking excessive government debt led to a financial crisis in Argentina: the inflation rate exceeded 50% and the peso was rapidly depreciating. The Central Bank had to intensely sell its foreign reserves to mitigate the peso depreciation. In August 2019 the reserves fell by 20% in just one month. In September 2019, three months before the end of his presidency, Macri imposed back some currency controls in order to stop the depletion of the Central Bank’s foreign reserves and stabilize financial markets. From that moment all Argentinian companies had to get permission from the Central Bank to buy dollars to make foreign transfers. This, initially temporary, measure opened a gap between the official and the underground market exchange rates. Further, the next Argentinian President Alberto Fernandez (still in power today) has kept making the controls stricter. As we can see in the graph, the underground market exchange rate has been moving further and further from the official one over time.
The goal of the Argentinian government when imposing capital controls was to stop the depletion of the Central Bank’s foreign reserves and avoid the peso depreciation. In theory, capital controls limit the ability of companies and individuals to buy foreign currency, in particular, the US dollar. Therefore, the demand for dollars decreases and the peso stops losing value. This way, the Central Bank no longer has to burn its foreign reserves to support the peso. However, in reality, the plan did not work since the capital controls did not influence the underlying reason for the peso depreciation – the lack of faith in the Argentine peso.
Argentinians historically had little trust in the national currency due to multiple economic crises when the peso value crashed overnight (see for example the crisis of 2002). The unsustainable government debt and huge inflation aggravated the problem. The capital controls imposed in September 2019 did not restore faith in the national currency but rather motivated Argentinians to buy more dollars while they still could do that. Because of this, the demand for dollars increased a lot and the Central Bank still had to sell its foreign currency reserves in an attempt to avoid rapid depreciation of the peso. In November 2020, when the supply of dollars was weakened by the Argentinian exports contraction due to COVID-19, the Central Bank’s foreign assets even fell close to zero! In that situation, the Central Bank had to allow the peso to depreciate more. Nowadays the situation is more stable, the Central Bank’s foreign reserves are around 40 billion dollars (data as of 20.12.2022) but they still have fallen 11% since the introduction of capital controls in 2019.
The most evident macroeconomic effect of Argentinian currency controls is the discouragement of foreign lending. After the capital controls were introduced, it became a lot harder for Argentinian companies to refinance their debt denominated in foreign currencies as they now have trouble maintaining their hard currency deposits needed to pay foreign debt. In 2018, before the introduction of capital controls, around 70% of Argentinian corporates’ cash deposits were in US dollars, and in 2020, the fraction of cash deposits in dollars decreased to 40% due to capital controls. The raising refinancing risk means that in the future Argentinian corporations will have to rely mostly on domestic lending. This puts a significant constraint on the economic growth of the country.
At the same time, foreign investors can still freely buy Argentinian bonds and shares at a free-floating exchange rate called Dollar CCL. Therefore, Argentinian corporations have some access to foreign credit and capital even though capital controls are in place.
To conclude, from Argentina’s case we can see that capital controls can achieve their objective only if people’s trust in the national currency is not totally lost. Currency controls can act as a temporary measure to limit currency speculation. However, they will have adverse macroeconomic effects if used for too long. As the IMF recently said in its statement on Argentina, capital controls are not a substitute for a sound macroeconomic policy.
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12. https://estadisticasbcra.com/reservas_internacionales_argentina (in Spanish)
15. https://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/reservas1.pdf (in Spanish)