Argentine Government announces the extension of the swap with China for another US$5 billion

After the dramatic loss of international reserves and the critical situation in terms of supplies, the Government of Alberto Fernández announced the extension of the currency swap with China for an amount equivalent to US$5 billion.

Fernández took advantage of the meeting with president Xi Jinping at the G20 to unblock the negotiations and increase the stock of foreign debt of the country with the Asian giant. It is an operation between the Central Bank (BCRA) and the People’s Bank of China (PBOC).

Economy Minister Sergio Massa accompanied Fernández on his tour to the G20 and supported the measures, assuring that the extension of the swap will allow reserves to be strengthened and thus be able to face the payment of imports and supplies.

“It is the decision of the Chinese government to expand the use of the swap by US$5 billion, which come to strengthen our reserves against the single and free exchange market, giving greater strength to the Central Bank and the possibility of having more tools to guarantee, especially, imports from small and medium-sized companies, from Argentine industries, which sometimes fear not being able to access dollars,” announced Massa.

But the measures are not fortuitous, they add a significant financial cost for the Central Bank. While it is inactive, a swap does not incur costs since it is accounted for within international reserves.

The problem appears when it is activated, since to do so the operation is similar to that of a loan, and therefore an interest rate must be paid.

Until now, the BCRA used up its own reserves, restricted its gold position, used short-term export revenues or borrowed backing from dollar deposits, but from now on it will seek to consume swap reserves at the cost of incurring larger financial costs than complicate the position of the next government in 2023.

The country is on the verge of productive exhaustion and emergency due to the lack of inputs necessary for production.

The exchange trap generates a drain on reserves since all operations to finance imports must go through the Central Bank, at the same time that exports are systematically penalized.

The extension of the Chinese swap makes it possible to postpone the eventual collapse of the exchange rate, avoiding having to resort to more extreme measures such as a greater devaluation of the official exchange rate or a greater tightening of import barriers.

The Government is committed to maintaining the exchange scheme without any type of change, maintaining the crawling-peg system of periodic micro-devaluations for the official dollar and restricting imports with non-tariff barriers.

With information from Derecha Diario