As Argentina’s new government took over, the first step it took was to scrap foreign exchange restrictions on Wednesday.
This allows citizens and companies to buy dollars freely for the first time in four years and setting up a potentially painful devaluation.
The move comes six days after pro-business President Mauricio Macri took office promising deep reforms for Latin America’s third-largest economy, which is facing warnings of a recession next year.
Finance Minister Alfonso Prat-Gay said the country “is normalizing its economy” after years of forex controls under left-wing president Cristina Kirchner.
Kirchner imposed the restrictions in 2011 in a bid to stop capital flight and tax evasion.
But four years on, they were hurting exporters, denting productivity and distorting the economy.
As of the announcement, the dollar was worth less than 10 Argentine pesos at the official exchange rate, but nearly 15 pesos on the black market.
Prat-Gay said the complex system of forex limitations for companies and individuals would be scrapped, with a single exchange rate set by the market.
“Whoever wants to export will be able to export without a permit, whoever wants to import will import. Whoever wants to buy dollars will be able to buy them, whoever wants to sell them will be able to sell them, and nobody will come after you,” he told a press conference.
He would not speculate on what the new exchange rate would be. Economists say it will likely settle close to the black-market rate — a steep devaluation.
Prat-Gay said the central bank would intervene by buying or selling dollars if necessary to avoid sharp changes.
“There’s no magic number. It’s a return to normality. The exchange rate will fluctuate,” he said.
Economists warn the country faces a rough adjustment.
“Devaluation implies a significant fall in real wages because of the increase in the cost of living,” said Hernan Letcher of the Center for Argentine Economic Policy.
But it is necessary medicine, said Ramiro Castineira of consulting firm Econometrica.
“With the currency exchange control in place, the economy can’t grow,” he told AFP.
Argentines who wanted to exchange pesos for dollars under the old system had to document where they got the money, and could only buy up to $2,000 a month.
The system put a brake on real estate markets, since Argentine apartments and houses are typically purchased in dollars.
It also led to a surge in visa applications, as those with money to travel found that shopping abroad was suddenly far cheaper than at home. Overseas credit card transactions were converted to pesos at the official rate.
– ‘Macrieconomics’ –
Macri, whose election ended 12 years of left-wing government, had vowed on the campaign trail to put an end to the official exchange rate from day one.
Argentina is in a painful economic slowdown, with inflation forecast to come in at more than 25 percent this year and more than 35 percent next year in case of a devaluation.
The International Monetary Fund forecasts the economy will contract next year.
Macri’s administration is looking to restore investor confidence and restock foreign currency reserves that have fallen to precariously low levels.
The country’s reserves have shrunk from $52 billion in 2011 to around $24 billion today.
On Monday the new president kicked off his reforms — dubbed “Macrieconomics” in Argentina — by eliminating or cutting a string of taxes on agricultural and industrial exports.
Exporters had also pushed hard for the forex restrictions to be scrapped.
Macri urgently needs the South American agricultural giant’s farmers, who have been hoarding their crops awaiting better conditions, to start exporting again — a key source of hard currency for the central bank.
Prat-Gay and central bank chief Federico Sturzenegger had held a flurry of negotiations in recent days with banks and exporters to ensure a large enough reserve cushion to lift the exchange rate restrictions.
Analysts say there is a large pent-up demand for greenbacks from companies, which for the past four years have had to resort to mechanisms such as bond swaps to access dollars.
(with inputs from AFP)