Argentina’s Senate approved changes to the central bank charter that allows the government unlimited use of the bank’s reserves to pay debt, a move that economists say could stoke inflation already running above 20 percent.
The 71-member upper house passed the bill proposed March 1 by President Cristina Fernandez de Kirchner after a five-hour session. The lower house approved the proposal last week.
The charter changes eliminate the requirement that reserves must equal or exceed the monetary base, which had been part of the so-called Convertibility law that pegged the peso at a one- to-one rate to the dollar from 1991 to 2002. The bank will also be able to boost lending to the Treasury to help the government finance its budget gap, said opposition Senator Laura Montero in an interview before the vote.
“There will be a clear mandate from the Treasury on the central bank to finance the country’s deficit,” Montero, a member of the Senate’s Economy Committee, said in a telephone interview. “The bank will respond by printing more money amidst a strong inflationary process that the bank doesn’t even acknowledge.”
The change to the charter that allows increased lending means the government can take loans of about 55 billion pesos in 2012, Montero said, as the bank will be permitted to lend the federal government as much as 20 percent of the cash resources it had in the previous 12 months from 10 percent previously.
While consumer prices rose 23 percent in February from a year earlier, according to an average estimate of private economists released by opposition lawmakers, the country’s statistics agency reported that prices rose 9.7 percent.
South America’s second-biggest economy posted a 2.7 billion-peso budget deficit in January and February, a record in data going back to 2000, after spending jumped 34 percent last month from a year earlier while revenue increased 30 percent.
The budget gap will rise to about 3 percent of gross domestic product this year from an estimated 1.8 percent last year, according to Juan Pablo Fuentes, an economist at Moody’s Analytics in West Chester, Pennsylvania.
The government has used $16.2 billion of reserves since 2010 to pay the country’s debt as Argentina has been blocked from international credit markets since its 2001 default on $95 billion in bonds. Fernandez plans to use $5.7 billion this year to pay debt.
Central bank reserves stood at $47.3 billion yesterday, down from as high as $52.6 billion in January 2011. Bank President Mercedes Marco del Pont said that the use of reserves to pay debt is “convenient” for the country.
“We seek to break a logic that no longer exists in Argentina, which is the convertibility logic,” Marco del Pont said on March 7 in an almost five-hour presentation to committees of deputies in Buenos Aires. “There’s no reason that the proper reserves level should be related to the monetary base. The level of reserves should be related to what happens in the external sector that guarantees the administration of the exchange rate.”
The changes also include a requirement that policy makers take into consideration financial stability and economic development in addition to maintaining the value of the currency.
The peso weakened 0.1 percent to 4.3665 per dollar from 4.3638 yesterday and has depreciated 1.5 percent in 2012, the only decline among seven major Latin American currencies tracked by Bloomberg.
To contact the reporter on this story: Eliana Raszewski in Buenos Aires at firstname.lastname@example.org