Argentina Eases Currency Controls Ahead of IMF Agreement

Argentina is loosening its currency controls ahead of finalizing a $20 billion IMF deal. The peso will now fluctuate freely, and companies can repatriate profits. The reforms aim to stabilize foreign reserves and promote investment as Argentina faces inflation and rising country risk.

Argentina is reforming its long-standing currency controls, as announced by the central bank, facilitating the country’s efforts in finalizing a $20 billion deal with the International Monetary Fund (IMF). Starting Monday, the peso will no longer be fixed, allowing it to fluctuate between 1,000 and 1,400 pesos per dollar, transitioning from Friday’s closing rate of 1,074.

The central bank will revoke critical elements of the “cepo” capital controls, enhancing access to foreign currency. Companies will now be able to repatriate profits, a significant development aimed at fostering investment opportunities. Economy Minister Luis Caputo stated, “As of Monday, we will be able to put an end to the foreign exchange restrictions which were imposed in 2019.”

This strategic exchange rate adjustment could lead to a devaluation of the peso, as it may approach the lower limit of the new band. The central bank is expected to implement intervention measures to manage this process effectively, with the band expanding by 1% monthly.

The groundwork for this policy is linked to an anticipated endorsement from the IMF board regarding Argentina’s 23rd program with the organization. Argentina requires immediate financial support to stabilize dwindling foreign currency reserves and address rising inflation amidst increasing country risk.

The removal of currency controls could enhance local market volatility amid global trade tensions. Economist Ricardo Delgado commented, “This is a devaluation, which rather goes against what the government would have intended to calmly get to elections.”

Minister Caputo revealed further details about the IMF agreement, including an initial disbursement of $12 billion expected by Tuesday, and an additional $2 billion available by June. He also highlighted forthcoming financial support from other multilateral entities, namely $12 billion from the World Bank and $10 billion from the Inter-American Development Bank, which aim to strengthen Argentina’s central bank and support ongoing inflation reduction.

In summary, Argentina’s decision to dismantle currency controls and accommodate a fluctuating exchange rate is pivotal for securing a $20 billion IMF agreement. This policy shift is intended to stimulate investment and stabilize the economy as it grapples with declining foreign reserves and inflation. The upcoming financial support from the IMF and other multilateral organizations signifies a crucial step forward for Argentina’s economic recovery.

Original Source: www.marketscreener.com