During February and March the fiscal accounts deteriorated, but the Government argues that it still has ways to prevent them from deteriorating further before the STEP. This does not guarantee that they will continue to do so after the PASO, if it clearly emerges from them that there will be a significant change in direction. What happens in the transition will not only depend on what the outgoing government does but also on what those who are projected as likely winners say.
The resources that the Government has and continues to use to prevent the worsening of the present inflationary situation increase the distortion of relative prices and generate more repressed inflation. This is the case of the suspension until the end of the year of the prerogative of not having to pay VAT and profit advances for importers who have accumulated tax credits and the cancellation of the authorization for oil distillation companies to increase the 20 percent fuel prices as of April 1. Also the decision to put a dollar soy III for 30 days and a dollar for exports from regional economies for 90 days, instead of eliminating withholdings.
It is almost certain that the economic reorganization proposed by whoever is most likely to be elected president will include the unification and liberalization of the exchange market as a prerequisite for launching a stabilization plan.
In order to avoid a total lack of control of the exchange rate and an explosive inflationary acceleration during the transition, it is important that the outgoing government changes the exchange management in the direction that I have been suggesting since the exchange controls were imposed.
In this report, after reviewing the fiscal accounts, I am going to try to explain as clearly as possible why I propose an exchange rate unfolding that allows the operation of a totally free market without restrictions on the purchase and sale of currencies and limits the control of changes and the official management of the exchange rate for exports and imports of goods.
In addition, I explain that if the official exchange rate, which would become the commercial exchange rate, adjusts to the rhythm of inflation, when a credible government committed to the readjustment of relative prices and fiscal balance makes its announcements and begins Once these changes are implemented, the unification of the exchange rate will take place much more due to the appreciation of the free exchange rate than due to a strong exchange rate jump in the commercial exchange rate.
tax accounts
Spending, revenue, the primary deficit, and the total deficit increased during January and February at a rate close to double what had been forecast in the approved budget for 2023.
The Budget provided for an increase of 64 percent less than that which had occurred during 2022 (71 percent), but during January and February 2023 the increase, with respect to the same months of 2022, was 103 percent and If the behavior for February is observed, the month in which the increase compared to February 2022 was 195 percent, it must be concluded not only that primary spending is increasing a lot, but that it seems to be doing so at an accelerating rate.
A comparison of the figures from the Ministry of Finance, which uses a cash basis, with the one published by the Congressional Budget Office, which works with accruals, may lead one to think that the increases in January and February reflect a lack of control over the last months of 2022 that caused a sharp increase in floating debt towards the end of the year. This is the most reasonable technical interpretation of the differences. Both the expenses, as well as the income and the accrued deficits in the months of January and February appear well below those actually paid. Surely the data as accrued is being used to convince the IMF that the fiscal adjustment committed to that institution will take place throughout 2023.
The important items in which the accrual during the months of January and February increased much less than that of total expenses are Economic Services, Transfers to Provinces and Capital Expenditures. It is very difficult for the Government to manage to produce such an adjustment in these areas, when the actions it would need to implement to achieve it -increasing service rates, not attending to the claims of the provinces and significantly reducing the pace of the construction of roads and houses – are unthinkable in a pre-electoral period.
Consequently, fiscal accounts should not be expected to improve in the coming months.
exchange system
Some reports that came out in the press of a supposed exchange rate splitting proposal as an ingredient of a new economic organization that I would have made in Punta del Este have created confusion among liberal friends. I hasten to clarify it.
I am not proposing that a dual market system be the form of exchange organization for a future stabilization plan. On the contrary, the effective stabilization of the economy can only begin the day that the unification and complete liberalization of the exchange market have been achieved.
I tried to explain how to go from a situation like the current one, which starts with many different exchange rates, all set directly or indirectly by the Government, to a truly single and free exchange market, with no restrictions on the movement of capital.
With the current system, the government will continue to lose foreign currency and will have to impose more and more restrictions on imports. The expectation of a devaluation jump in the official market will be accentuated. I have been proposing that exchange control be limited to foreign trade in goods. Now I insist that it will be essential to do so after the PASO if the result makes it clear that the future government considers that a single free exchange market should be reached. In the commercial market, the exchange rate will continue to be determined by the Central Bank until complete unification. Of course, you’ll need to adjust it at least to keep up with inflation, to prevent it from suffering a real appreciation.
All other exchange transactions will be carried out through a free market, without any type of restrictions and without the intervention of the Central Bank at all. Those related to real and financial services will be traded in this market, including collections from service providers abroad, capital transfers, including repatriations and dividends, but also income decided by direct or financial investors and hoarding without limitation of amounts.
The exchange rate that will result in this free market will have the ceiling imposed by the desire of holders of dollars in the country or abroad to supply it because they are attracted by the high price that they will be able to obtain by selling their currencies in the present in comparison with what they expect them to be worth in the future.
The announcement by a new government that progress will be made towards unification and total liberalization will mean that, from a certain price of the free dollar, the trend will be towards real appreciation, not depreciation. This trend will be accentuated when the new government begins to adopt decisions that restore the balance between relative prices and fiscal accounts.
The important thing about this exchange scheme for the transition is that the convergence towards the single and free exchange market will take place through the appreciation of the free exchange rate and exporters will have no reason to delay their exports because it will be clear that the unification of the exchange market will not imply a significant devaluation jump of the commercial exchange rate.
