Capital flight from Argentina reached $2.2 billion in April, Argentine newspaper Cronista reported May 13 — three times what it was in April 2012. This brings capital flight from the country up to more than $6 billion from January to the beginning of May. Also, lack of confidence in the peso has caused the black market rate of the dollar to rise to more than 10 pesos per dollar — almost double the official rate of 5.23. The difference has raised the demand for dollars exchanged at the official rate, which has cut into the Central Bank's foreign currency reserves, which have dropped by $8.1 billion to $39.4 billion over the past year.
As part of an effort to reduce the strain on Argentina's partially isolated and increasingly dollar-poor economic system, the government is debating the implementation of a program designed to entice Argentines to bring dollars invested abroad back into the official market, tax free. At least two types of bonds will be offered as a part of the program. The first is designed to facilitate liquidity in the foundering real estate market, which primarily operates on dollars. The second would be designed to use local dollars to finance the energy industry, offering a 4 percent rate of return on the dollar-denominated bond. The program would essentially permit Argentines to repatriate dollars into the financial system with no questions asked, and it would benefit the two sectors hurt most by capital flight and currency control: real estate and energy.
There are several problems with the program. Despite government statements to the contrary, it will almost certainly be used as a vehicle for laundering income from criminal activities. Perhaps more important, the likelihood of the program's success is limited. Argentines perceive the dollar as a haven and prefer to save in dollars amid inflation that hovers between 25 percent and 30 percent annually. With little to no confidence in the national financial system, many Argentines are not likely to trust this new mechanism. A similar program in 2009 facilitated the repatriation of $4 billion. Though this amount is significant, if a similar amount is repatriated with the new program it will already be outstripped by the capital flight from Argentina in the first four months of this year.
The government also is acknowledging the need to address pressing problems that have resulted from currency market instability. The government made official May 13 a fund that will be used to remit back taxes on wheat exports to farmers in an attempt to increase wheat planting in the country. Inflation and an unfavorable exchange rate contributed to a nearly 30 percent decline in wheat production in the 2012-2013 season. The government has also loosened exchange restrictions on tourist travel, permitting Argentines to withdraw cash before traveling abroad (a practice that previously had been severely restricted).
Ultimately, the issue is when — and by how much — the Argentine government will choose to devalue the peso. The currency's official value has been on a constant and controlled decline versus the dollar since around January 2010. In the past 180 days, it has devalued by 8 percent. In general, the spread between the official and the black market rate calls for a sharp devaluation. However, Fernandez's administration is likely to wait until after October legislative elections before making any major changes (although Fernandez has denied that her government would ever consider devaluation as an option). Even if a sharp devaluation is possible at that point, Argentina still faces a balance of payments challenge that requires increasing the country's trade surplus.
