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Argentina Considers Re-Adopting Fixed Currency Exchange Rate - 2002-04-26

The sudden resignation this week of Argentina's Economy Minister underscored continuing concern the government might be unable to stop the country's economic free-fall. The government of President Eduardo Duhalde is now considering different policies for dealing with the crisis, including re-adopting a fixed exchange rate for its currency.

President Duhalde is assembling a new economic team in the wake of Tuesday's abrupt resignation of Economy Minister Jorge Remes Lenicov. Mr. Remes resigned after the Congress refused to consider a controversial government proposal to convert billions of dollars in bank deposits into long-term government bonds. The plan's aim was to prevent a collapse of the banking system which is on the verge of running out of money.

The banking system's problems are part of an overall economic crisis inherited by President Duhalde when he took office in January following the resignation of two Presidents in December. The economy, which has been in recession for four years, shrank last year by four-and-one half percent. Unemployment at over 22 percent continues to rise, while the Argentine peso, which was devalued in January, has lost almost 70 percent of its value.

Until the devaluation, the peso had been pegged one-to-one to the U.S. dollar for ten years. The peso-dollar parity brought economic stability when it was adopted in 1991, but became unsustainable when Argentina sank into debt and recession in the late 1990's.

Argentine economist Aldo Abram sees no sign of improvement, and predicts the Argentine economy will shrink by at least 13 percent this year. Mr. Abram says the devaluation and continuing government restrictions on bank withdrawals have shaken the confidence of Argentines. "In Argentina 90 percent of the goods and services that we produce are used by consumers and investors. So, if you have less and less consumption and less and less investment, what you have is a greater and greater recession. It's very difficult to recover the confidence of the people if you defraud them," he says. "People feel that they have been robbed. They feel the government has made them lose money, their earnings. They measure their earnings in dollars, they feel poorer. So why would they invest more in Argentina?"

So far, there appears to be no quick solution. With the resignation of his economy Minister, President Duhalde is considering different policy options including abandoning the floating exchange rate. Maintaining a free-floating peso has been a pre-condition by the International Monetary Fund for granting a new emergency loan to Argentina. Despite this, government officials are now saying the peso needs to be "anchored" again to the dollar.

One reason for this is to prevent the kind of hyperinflation that occurred in Argentina in the late 1980's and early 90's. Argentina's inflation rate for the first quarter was ten percent, and it continues to rise despite the recession.

Economist Abram believes the peso devaluation has increased the risk of hyperinflation. He says only by dollarizing the economy can Argentina recover. "The only way you can escape hyperinflation is if you have the government willing to take the risk of an ordered dollarization…The way to make an orderly dollarization is to call the people and say 'we will give you dollars in return for pesos at, say, an exchange rate of two pesos for a dollar or whatever', and then you change all the pesos for dollars and then you have an orderly dollarization," he says. "(But) I don't believe this government has the disposition to do that."

Instead the Duhalde government is pinning its hopes on persuading the IMF to grant Argentina up to $9 billion in emergency loans. On Wednesday, President Duhalde signed an agreement with the country's provincial governors aimed at meeting IMF demands for implementing a sustainable economic program.

The 14-point agreement, which calls for fiscal and monetary discipline, was welcomed Thursday by U.S. Treasury Secretary Paul O'Neill. For his part, Mr. Duhalde expressed hope for the future. He said "there is only one economic plan, a plan which certainly has had its difficulties, but we will be redoubling our efforts to make it work." Mr. Duhalde went on to predict Argentina will recover soon from what he described as a "difficult" situation.