Over the past week, unofficial reports from the Kirchner government have insinuated they are considering a dual exchange rate policy.
I’ve been playing with this idea for a few days – how much different than today’s parallel economy for dollars would two exchange rates actually be?
For example – currently there is the official rate (4.5 ARS/USD) and the black rate (5.8 ARS/USD as of May 21)
What would the breakdown of people who actually can buy dollars at the white rate look like? I assume its a very small set of well connected importers who have some kind of import license. Last year I met a few guys who for example do construction as contractors for the government, and at that time they made quite the profit off buying dollars at the white rate and selling them at the black rate.
If i’m correct and the majority of people with access to white rate dollars are licensed importers, would it really make that much of a difference on the street if this situation were formalized?
I think yes. I think that a large percentage of people hold on to their pesos NOT because they think the situation will improve and they will have access to the white rate at some point. They hold their pesos because they are afraid of the consequences if they are caught participating in a black market transaction.
There are rumors and fears of Argentina going the way of Venezuela – and this fear is not limited to potential countrywide economic consequences. I think there’s a real fear among many Argentines that goes beyond losing money or being reported to AFIP (Argentina’s tax agency – think the IRS with a touch of laziness and a few thuggish elements). Argentines are risk averse, and to some operating in the black market carries risks beyond potential monetary losses. It carries unacceptable potential dangers to reputation and safety and the ability to create a secure environment for your family.
Imagine if on Monday they announced that the rate for importers would be fixed at 4.5 and the rate for everyone else would float between 6 and 8 but could be traded freely. I’m quite sure that even with the peso trading at 8 to the dollar, there would still be considerable demand from Argentines loathe to hold the peso. That extra 2 pesos per dollar would be an acceptable price to pay to remove the risk of operating illegally.
With that hypothetical situation in mind, and acknowledging that there is currently an informal dual exchange rate, I highly doubt the government would put in place an official dual exchange rate. Firstly, Venezuela’s flirtation with dual rates barely lasted one year and did nothing to curb the black market rate that still exceeded the official unfavorable rate. Secondly, dual exchange rates provide the textbook example for rent seeking, whereby those with the ability to trade that the favorable rate exploit the difference by selling at the unfavorable and buying at the favorable. That already occurs, and would become more easy to accomplish in the event of official dual rates.
Finally, the cost of attempting to implement and enforce this system would vastly outweigh any benefits the Kirchner administration would gain. Cristina Kirchner has put in place expensive policies that do not bring monetary benefits, but they serve to bolster and strengthen public support and political popularity. A system that gives IMPORTERS a benefit over workers would be politically unpopular, expensive to administer, and ultimately useless in stemming the flow of dollars from the country.
In short, I do not see this as a likely policy choice for Cristina any time in the near future. My guess is she would rather let the peso depreciate and pay some form of subsidy to importers of critical materials. This would have the same final effect without the negative consequences.