- Title: ARGENTINA: Argentines brace for economic slide as peso plunges
- Date: 24th January 2014
- Summary: BUENOS AIRES, ARGENTINA (FILE) (REUTERS) VARIOUS OF IMPORT-EXPORT CARGO VARIOUS OF FUEL CARGO AT PETROL STATION VARIOUS OF PEOPLE GETTING ON BUS
- Embargoed: 8th February 2014 12:00
- Location: Argentina
- Country: Argentina
- Topics: Economic News
- Reuters ID: LVAE9CJ4QJRH8VSZ9V6EVW1X9SGO
- Story Text: Just one day after Argentina suffered its steepest currency decline in 12 years, consumers and businesses in Latin America's third-largest economy are bracing for turbulent times after the government announced it would loosen strict foreign exchange controls, a policy reversal forced by high inflation and a sharp fall in the country's currency.
The leftist government announced Argentina would reduce the tax rate on dollar purchases to 20 percent from the current 35 percent and allow the purchase of dollars for savings accounts, measures that would go into effect on Monday (January 27).
The move comes as the country's Central Bank this week abandoned its policy of supporting the peso by intervening in the foreign exchange market, having reportedly shed more than 30 percent of its reserves last year.
Director of the Liberty and Progress Foundation, Aldo Abram, told Reuters the Central Bank could not keep on losing reserves.
"Everything that you buy in the supermarket, everything that is good, that you import or buy is quoted in dollars. If I hold an artificially cheap cheap, I also am holding prices of those goods artificially cheaper. This has a political benefit but is unsustainable over time. The only way to do it is to have eternal reserves but the Central Bank does not have infinite reserves. It has to end at some point. And this has benefited (the government) so far. Now, correcting this benefit will unfortunately involve the opposite. Now it all depends on the official value of the dollar, which will go up and by a lot," he said.
Analysts said the government was forced to abandon one of its signature policies due to its inflationary consequences as consumer prices are expected to rise by 30 percent in 2014.
The currency controls had largely backfired by fuelling a scramble for dollars on the black market, which in turn contributed to one of the highest inflation rates in the world.
Argentina's key grains sector has reportedly held back exports as farmers hoard their crops rather then expose themselves to the swooning local currency. This contributed to the scarcity of dollars that has debilitated the peso.
But with the peso currency's official rate having already fallen 20 percent against the dollar so far this month, pressuring inflation even higher, tensions could rise as labour unions demand pay hikes in line with private economists' 2014 inflation estimates.
President Cristina Fernandez has mentioned neither inflation nor the peso's plight in recent speeches, leaving her cabinet to announce policy changes.
The next presidential election will be held next year with Fernandez unable to seek a third term and the main early candidates offering more market-friendly policies.
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