Argentina’s Central Bank had to issue US$15 million for the soybean dollar and the rescue of public securities

The Economy Minister’s program deepened all monetary imbalances, promising more future inflation. Although the Government will not fail to meet the monetary issue goal with the IMF, for practical purposes it has lost relevance in the fight against inflation.

The measures announced by Minister Sergio Massa as of August were aimed at guaranteeing compliance with the agreement with the International Monetary Fund to contain Country Risk, and strengthening the Central Bank’s reserves to reduce devaluation expectations. But really only the adverse effects were delayed.

The Treasury promised not to use resources as temporary advances from the BCRA (which is direct monetary assistance), and in practice it did not resort to the transfer of fictitious “profits” due to the devaluation of the official exchange rate.

It was intended that these measures would meet the issuance goal set with the IMF in order to contain inflationary expectations, but in practice the Central Bank systematically expanded the money supply and issued up to $2.6 billion (US$15 million) by other means. The Treasury’s commitment was limited to meeting the Fund’s goals, and not to attacking the inflationary problem of the Argentine economy.

THE SOURCES OF MONETARY ISSUE UNDER THE MASSA PROGRAM

The Central Bank of the radical Miguel Ángel Pesce undertook an aggressive policy of monetary issue explained by two main sources: the purchase of public debt from the Treasury (the one that the private sector no longer wants to refinance) and the purchase of dollars due to the liquidations of the Soybean Dollar I and II.

The first tool is common in developed economies and, in fact, it was mainly responsible for the high inflation that is experienced worldwide. The so-called “Quantitative Easing” of the Central Bank was articulated to rescue the Treasury’s public debt in the face of the failure of the peso tenders with private sector creditors. The IMF agreement does not include any type of restriction on issuance for this purpose.

The second way of explaining the strong monetary issue was the soybean dollar, since the Central Bank had to issue enough pesos to acquire the dollars from the liquidation of the producers. It is a measure that strengthens reserves but, at the same time, jeopardizes the expansion of monetary aggregates.

All this required indirect monetary assistance that was perfectly compatible with the IMF agreement and with Massa’s promises in August, but openly contrary to the stabilization of the general level of prices.

IS THE EMISSION TARGET WITH THE IMF RELEVANT?

The main objective of the goal was to generate a limit on direct monetary assistance, and link that limit to a fiscal anchor set by the quarterly goals. The IMF established a ceiling equivalent to 1% of GDP in the amount that the BCRA could issue to transfer resources to the Treasury for temporary advances and profits in 2022. This system was intended to reduce inflationary expectations during the duration of the program.

But expectations have not only not moderated, but have been completely unanchored in the last year. And the reason is simple: the issuance of the BCRA to rescue the public debt and buy dollars for the preferential liquidation of soybeans reached 3% of GDP, according to estimates by the consulting firm Equilibra.

In other words, the indirect monetary assistance that was not regulated by the agreement with the IMF tripled the amount of direct assistance that was achieved by the agreement. There was no monetary anchor capable of moderating inflation expectations.

WHY DID INFLATION SLOW IN TANDEM WITH INCREASED MONETARY EXPANSION?

Although year-on-year inflation rose at a dizzying pace and without pause during Sergio Massa’s tenure, jumping from 71% to 92.4% year-on-year, monthly inflation moderated very slightly from 7.4% in July to an average of 6, 25% between September and October, and 4.9% at the end of November.

Retail prices are rising at a pace well above that of the first half of the year, but they do not seem to have responded directly to the strong monetary expansion of the second half. This is due to the sterilization policy of the Central Bank, the issuance of debt through the placement of Leliq and Passes.

Debt is placed to withdraw pesos from the economy and offset the effect of the issuance. Massa’s management opted for an irresponsible increase in the remunerated debt of the BCRA, allowing very little positive results in the short term but a latent and severe danger for the future.

The remunerated liabilities of the BCRA jumped from 160.4% of the monetary base in July to 222% in November, and in terms of GDP the debt increased from 9.8% to 11.2%. Both ways of measuring remunerated debt show the worst results observed since March 1989, and there is no empirical evidence to suggest that this process can be sustained over time under this growth dynamic.

With information from La Derecha Diario