Argentina's peso, Pakistan's rupee, depreciation and IMF

Argentina's peso, Pakistan's rupee, depreciation and IMF


Black market offering 780 pesos for a dollar against official exchange rate of 350 pesos

BUENOS AIRES/LAHORE (Reuters/Web Desk) – Confidence in Argentina's peso plumbed new depths on Wednesday as the currency slid to 780 pesos per dollar in the popular black market, where savers are willing to pay more than twice the official rate now pegged at 350 pesos per greenback, Reuters said.

It reminds us of what has been happening here in Pakistan as the rupee slid against the US dollar thanks to a similar rush to buy the greenback amid political and economic uncertainty, which triggered a shortage of the world’s dominant currency and also boosted the black market.

Hence, it resulted in a wide gap between the official exchange rate and that of the open market as more and more people opted for taking advantage of a “business opportunity” while others joined the bandwagon to protect their life savings.

That gap was temporarily reduced after Islamabad inked the $3 billion deal with the IMF. But the things have started worsening in the recent days and the rupee is depreciating sharply against the US dollar as the gap between the official exchange rate and the open market is widening yet again.

At the same time, smuggling of dollar to Afghanistan also complicated the affairs as Pakistan saw its currency nosediving against the US dollar.

Coming back to Argentina and its peso, the long-struggling currency, held in check by capital controls for years, plunged this week after a shock primary election result raised the possibility of a radical libertarian economist winning the presidential election in October. Households have rushed to convert their pesos to dollars as a more stable way to protect their savings, Reuters said.

It is another similarity between Argentina and Pakistan as the South Asian nation is also now dependent upon the market for the rupee exchange rate after the IMF made it clear that the central bank could not intervene to check the trend.

On Monday, according to Reuters, Argentina’s central bank devalued the official exchange rate some 18 per cent and hiked the benchmark interest rate to 118pc to protect the peso and tamp down inflation, already running at more than 113pc and squeezing people's savings and wages.

"Demand for dollars continues to be sustained as people look to hedge and are increasingly concerned about an acceleration of inflation after the devaluation," said economist Gustavo Ber, citing "a climate of political and economic uncertainty."

The Sunday primary vote saw outsider candidate Javier Milei, who has pledged to dollarize the economy and eventually scrap the central bank, win the largest share of the vote. He will face a three-way battle in an Oct 22 general election.

As the peso has slid, the government has tried to stabilize the local currency, reducing access to some parallel foreign exchange markets, cracking down on informal street-corner currency traders and starting talks to cap meat prices to tame inflation.

Analyst Salvador Vitelli, however, said that despite the new measures a further devaluation was expected, even after the central bank pegged the official exchange rate at 350 pesos per dollar until the election.

"The market does not seem to believe that they will be able to maintain the exchange rate until October," he said.

Future wholesale peso prices, a reflection of market expectations about its likely price trajectory, show 460 pesos per dollar for October, 629 by year-end and 890 by July 2024.

Milei, who secured 30pc of the vote in open primary elections on Sunday, will face the conservative opposition bloc of Patricia Bullrich, which won 28pc and the Peronist coalition led by Economy Minister Sergio Massa, which received 27pc.

Analysts see a tilt towards tighter economic policy regardless of who wins, though any new president will face major challenges to stabilize the economy amid triple-digit inflation, scant reserves and a fragile $44bn IMF loan deal.

Milei's dollarization pledge, some added, was also pushing more people to dump their pesos even though it would likely be very difficult to pull off in the near-term.

"The inevitable response of investors would be to shift out of pesos into dollars sooner rather than later," said Peter West, an economic adviser at consultancy EM Funding.

Argentina's S&P Merval stock index, seen as a hedge against local inflation, jumped 6.8pc on Wednesday, extending its rise after a similar advance on Tuesday.

Sovereign bonds in the local over-the-counter market dropped by an average of 0.3pc, slowing their decline after a sharper fall earlier in the week.