MercoPress. South Atlantic News Agency

Argentine minister admits real value of US dollar is 2.30 pesos

Argentina confirmed Saturday its current policy of supporting a strong US dollar to ensure competitiveness to local manufacturers and for the export industry.

"The main pillar of this government's economic policy is for the Central Bank to buy US dollars to increase international reserves and ensure a high exchange rate", said Finance Minister Felisa Miceli addressing a manufacturers association celebrating Industry Day.

The current value of the greenback in Argentina's money markets is 3.11 pesos, "but without the intervention of the Central Bank purchasing dollars, the US currency would be costing 2.30 pesos", added Ms Miceli.

"Some economists and special interest groups argue that the Central Bank should not buy dollars and let it drop to 2.30 pesos, but if this was to happen, provincial economies could not maintain stability and growth", underlined the minister who was present at the celebration with all her cabinet top aides.

However the other side of a strong US dollar is inflation and rising costs in pesos, but Ms Miceli told her audience that "industrialization is the official policy of President Nestor Kirchner's administration; with prices compatible with international markets and it is essential manufacturers increase the supply of goods".

The exchange rate policy is an ongoing debate not only in Argentina but in the region. Mercosur country members Brazil, Chile and Uruguay have a different focus by letting the market find its own equilibrium which is reflected in an appreciation of the local currencies vis-à-vis the US dollar.

In Argentina heterodox economists who support the Kirchner administration argue that a high valued US dollar promotes exports and import-substituting industries; it lowers costs in US dollars and strengthens the fiscal surplus by taxing mainly farm exports.

Orthodox economists on the other hand would like to see the Argentine peso appreciate thus improving the purchasing power of local salaries in US dollars plus avoiding the risk of inflation speared by an overflow of pesos from the Central Bank buying the US currency.

But since the system has been working for several years most economists now agree that it's very difficult to undo the current situation.

With a lower (cheaper) US dollar it would be very difficult to retain the current level of taxes on exports and thus fiscal revenue, which would then have a negative impact on the budget surplus and expectations, warn several orthodox economists.

"The peso is undervalued by 15 to 20% and should be revalued gradually", said economist Javier Arvaredo who points out that since August 2005 the "three pesos to one US dollar has been moving at the same rate as inflation which is a warning light".

Daniel Artana from analysts FIEL admits that the Central Bank still has resources and instruments to keep inflationary pressures under control, "but it would be most imprudent if the peso depreciates further to the range of 3.30 to 3.40 to the US dollar".

Another backlash is that the higher the US dollar, the lower salaries' purchasing power plus making capital goods imports to supply local industry and improve production capacity, dearer.