Argentina to ease foreign exchange controls after peso slump

Cristina Fernandez, Dec 2013 The economy has grown during Cristina Fernandez de Kirchner's presidency, but inflation has soared

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Argentina is to relax its strict foreign exchange controls, a day after the peso suffered its steepest daily decline in 12 years.

Cabinet chief Jorge Capitanich said the country would reduce the tax rate on dollar purchases and allow the purchase of dollars for savings accounts.

The measures would take effect from Monday, he said.

On Thursday, the peso fell 11% against the dollar, its steepest fall since the country's 2002 financial crisis.

The central bank had been acting to support the waning currency amid a loss of investor confidence in the country. But the bank abandoned this policy on Thursday, sparking the peso's fall.

Despite efforts to support the economy, inflation has soared and many analysts expect it to reach about 30% this year.

That erodes confidence in the peso, prompting investors to put their money into US dollars rather than the sinking domestic currency.

Analysis

Behind Argentina's current economic strains there lurk problems with the balance of payments and inflation.

The official figure for price rises is around 11%, but independent economists reckon it's more than twice that.

One reason this affects the exchange rate is that Argentines want to protect their finances by getting their hands on dollars, which means selling pesos.

A more flexible peso could well weaken further. This might help by making Argentine businesses more competitive, but the cost could be even higher inflation.

Taking a step even further back, this episode fits into a persistent pattern of relative economic decline for Argentina.

A century ago, the country was richer - in per capita terms - than France or Germany. Now Argentina is about half their level.

Mr Capitanich said the government would reduce the tax rate on dollar purchases to 20% from the current 35%.

He said: "This decision reflects the government's belief that in the context of a floating exchange rate, the price of the currency - that is, the dollar - has reached an acceptable level for the objectives of economic policy."

BBC economics correspondent Andrew Walker said: "Argentina seems to be moving towards a more flexible exchange rate system, which could mean further weakness for the peso.

"That would help the country's competitiveness, but the danger is that it could aggravate what is already a serous inflation problem."

Concerns about Argentina hit financial markets around the world amid worries that other emerging economies are struggling. The currencies of Turkey, Russia, South Africa, and Mexico fell against the dollar.

The FTSE Emerging Markets index fell more than 1% in morning trading on Friday. Shares in investment firm Aberdeen Asset Management, which has exposure to emerging markets, fell almost 6%, the biggest casualty on the FTSE 100.

Restrictions

Under the presidency of Cristina Fernandez de Kirchner, Argentina has introduced a number of restrictions on transactions with foreign currency.

This week, it introduced new restrictions on online shopping as part of efforts to stop foreign currency reserves from falling any further.

Anyone buying items through international websites must sign a declaration and produce it at a customs office, where the packages have to be collected.

The government now limits tax-free purchases to two a year.

Argentina's reserves of hard currency dropped by 30% last year, making support for the peso increasingly unaffordable.

In 2002, millions of Argentines saw their incomes and living standards collapse amid a crisis that included a government default on international debts and 41% inflation.

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