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For economists, the government is wasting reserves
Ambito Financiero
July 02, 2008

The decision by the Central Bank to force the dollar down mainly as a punishment for the farm sector (a practice which already has left losses of US$33 million, the difference between the value at which they bought and then soon after sold the reserves) is strongly criticized by economists.

The analysts agree in that there are occasions when it's necessary for the intervention of the monetary authority, for example, in times of runs on banks and flight of currency. But they believe that it can't use the reserves to discipline rebel producer sectors. And the warn that having sold currency at lower prices than the market is a very risky game.

Here are the highlights of the opinions of some economists consulted by Ambito Financiero:

Agustin Monteverde: The use of reserves could be understandable for not allowing the dollar to rise. But it's contradictory with the policy that the Central Bank had been working under, that while its founding charter says it must defend the peso, in the past it's done the opposite. It's incomprehensible that the Central Bank sells dollars below the market value (up to two cents below). Another risky mechanism is to sell futures below the present value. In a context of capital flight (which began about three months ago), the intention of the BCRA to lower the dollar translates into a subsidy for its flight. It is sold at a lower price and is left to finance an interest rate that would not be the current one if it wasn't for the intervention of this entity. It would be correct if there was a desire to combat inflation, but that would then be accompanied by a fiscal and revenue policy. However, as monetary expansion grew 21% interannually, this didn't show that .

Jose Luis Espert: I believe that it's correct that the Central Bank choose a sterilization in stages of strong inflows of currency. It's also fine to sell dollars if there are runs on deposits, like has happened. Always in the total absence of a fiscal surplus. What I am sure is bad is that the monetary authority sell dollars simply with the goal that the governing party president, Nestor Kirchner, follow his desire to discipline those who he believes are his biggest enemies: who supposedly speculate against the peso, the farm sector that held a strike, and the industries that didn't back him as he wanted them to in this context. To act with this intention is really ridiculous, like a banana republic. The president of the Central Bank should not be allowed in any way to exert this absurd pressure .

Aldo Abram: To have faced a mini-run on the exchange rate with reserves as was done was an adequate decision. The Central Bank president always repeats that the reserves are for the defense of the peso's value. I agree with this vision. What doesn't seem certain is to have allowed the dollar's value to fall so low. This strategy implies an unnecessary loss of reserves, inconvenient and contradictory to the political strategy of this government to retain a high dollar. It's evident that the people don't believe that the value of the dollar will be sustained and for this they are seeing it as an opportunity to buy, which raises the demand for the currency.