Throughout his electoral campaign, Javier Milei promised to dismantle the Central Bank’s "maquinita," or money-printing machine, in order cut off an inflationary spiral. But while pesos have continued to be printed in these first months of the La Libertad Avanza government, the reasons for doing so have taken a 180-degree turn.
Firstly, the Central Bank has stopped printing to replenish Treasury coffers and finance a fiscal hole that reached 6.1 percent of Gross Domestic Product (GDP) last year. In subscribing to monetarist theory, Milei and his economic team conceive of inflation as a phenomenon of an excessive demand for money and, following that logic, are cutting it at its root of financing the deficit via printing money.
Within that framework the Central Bank reoriented the printing of money towards a key objective of the programme of Economy Minister Luis Caputo – the accumulation of international reserves, which in the medium term would facilitate the elimination of capital controls.
The government inherited gross reserves of US$21.208 billion while net reserves were negative to the tune of some minus US$11.5 billion. The abrupt devaluation applied in mid-December accelerated the cashing-in of exports, permitting the monetary authorities to lay their hands on greenbacks.
In order to acquire those export dollars, the Central Bank under its governor Santiago Bausili reverted to printing pesos, thus accumulating over US$7.654 billion since the change of helm, according to analysis by currency trader Gustavo Quintana.
Another factor requiring the production of pesos was interest payments on liabilities. Official statistics show that the debt assumed by private and public banks with one-day passes topped 30 trillion pesos in recent days. Despite having grown from the 24 trillion inherited from the previous government, this sum has shrunk in real terms due to the effects of inflation and devaluation.
How much has been printed since December?
Consulted by Perfil, economist Manuel Cerdan, of Invecq consultants, estimated that in the two months between Milei’s arrival in the Casa Rosada on December 10 and February 9, "5.6 trillion pesos were printed to buy [hard] currency from the private sector, five trillion [pesos] to pay interest on liabilities and two trillion [pesos] for other operations such as redeeming put options."
Nevertheless, Cerdan explained that all that mass of pesos printed "is absorbed by placing Leliq/Pases to the tune of minus 6.9 trillion pesos and operations with the Treasury for minus 4.7 trillion [pesos]." In this latter case, the repurchase of sovereign bonds by the Central Bank stands out.
"In summary, the money supply has stayed practically constant so that in real terms, it has fallen quite a bit," indicated the economic analyst.
The money supply consists of the legal currency in circulation plus the bank deposits in the system.
The ‘benign’ printing of money
In the eyes of Salvador Vitelli, chief researcher at the Romano Group, printing money to buy reserves is a more "benign" form of omission when compared with other objectives because "when all is said and done, those cashing in their dollars are going to demand pesos."
"The most harmful channel for printing money for the government is to pay interest on debt, not to buy [hard] currency. Logically, it would be better to buy via other instruments such as debt bonds or [fiscal] surplus but this does not screw up the public accounts," judged the financial expert.
When analysing that mechanism, Vitelli underlined that "it is generating a greater supply of pesos than the market demand." In other words, the dollars are cashed in because exporters require national currency in exchange.
However, the economic consultant placed an asterisk against the dynamics of the sale of hard currency in the official exchange (Mercado Único y Libre de Cambios) market when observing that it is compulsory: "[What I said before] would be completely true were cashing in not obligatory, as it currently is. If it were not obligatory, there would be a genuine demand. We cannot speak of that today."
Reduced money supply
A recent report by the Fundación Mediterránea-IERAL think tank highlighted: "Monetary and fiscal policy is doing its job, unlike in the previous presidency. Since Milei took office, the variation in the money supply has been minimal, 0.31 trillion pesos."
In the same tone, LCG consultants concluded: "Whether due to less direct assistance to the Treasury [and the repurchase of Central Bank debt] or the lower interest paid for sterilisation instruments [pases], there has been less expansion of the money supply."
"Both factors more than compensate the greater purchases of the Central Bank on exchange markets. Concretely, the money supply shrank by 6.6 percent in December in real terms and something similar in January. By comparison with this time last year it has plunged by around 40 percent, measured in real terms," described the economists Javier Okseniuk and Melisa Sala in their report.
The weekly tenders of the BOPREAL (Bonos para la Reconstrucción de una Argentina Libre) also assisted the government aim of taking pesos out of circulation. These are dollar bonds subscribed by importers to cancel their commercial debts with foreign suppliers or their head offices abroad.
In exchange for the bonds issued by the Central Bank, the import agents hand over pesos which the monetary authority headed by Vausili proceeds to absorb. Until now it has managed to adjudicate US$6.44 billion, which translates into an absorption of 5.4 trillion pesos at the official buying exchange rate.
Along with his iron-fisted fiscal and monetary policies, healing the Central Bank’s imbalance is one of Caputo’s main objectives. Via bond tenders, the minister aims to redirect the debt from the bank of banks to the National Treasury while simultaneously liquidating the Central Bank’s interest-bearing debt.
Indeed, LCG has calculated that, measured in GDP terms, the stock of interest-bearing liabilities has shrunk by slightly over a quarter in these two months.
"At the end of January it was equivalent to 6.9 percent of GDP, 2.5 percentage points less than in November," they concluded.
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