By Maximilian Heath and Anthony Esposito
BUENOS AIRES (Reuters) -Argentina is dismantling key parts of its years-long currency controls and loosening its grip on the peso, the central bank said on Friday, a major policy move for the South American nation ahead of a $20 billion IMF deal being finalized.
The central bank announced that it will undo a fixed currency peg from Monday, letting the peso freely fluctuate within a moving band between 1,000 and 1,400 pesos per dollar, versus 1,074 at the close on Friday.
Argentina will eliminate major parts of the so-called “cepo” capital controls that have restricted access to foreign currency, the central bank said in a statement. Companies from this year will also be able to repatriate profits out of the country, a key demand from businesses that could unlock more investment.
“As of Monday, we will be able to put an end to the foreign exchange restrictions which were imposed in 2019 and which limit the normal functioning of the economy,” Economy Ministry Luis Caputo said at a press conference on Friday evening.
The new exchange rate system could allow the peso to weaken almost a third if the currency were to hit the weaker edge of the band, although the central bank is likely to have some tools to intervene. The band will expand 1% each month, the bank said.
The policy move comes as the country waits for the final green light by the International Monetary Fund board for the 23rd program in a long and mottled history between the grains-producing nation and the Washington-based lender. That vote is expected later on Friday.
Argentina needs the financial firepower to bolster depleted foreign currency reserves that are in the red on a net basis and have been falling in recent weeks, sticky inflation and a country risk index that has started to rise again.
The funds are also key to unlocking the currency controls, which will likely prompt a period of local market volatility already stirred up by the international tariff war between the United States and its trade partners.
“This is a devaluation, which rather goes against what the government would have intended to calmly get to elections,” said economist Ricardo Delgado, referring to midterm legislative elections later in the year.
“It’s a bit surprising that at this time of global volatility, the controls are being lifted,” he added.
IMF AGREEMENT DETAILS
Minister Caputo said that the $20 billion extended fund facility agreement with the IMF would see an initial disbursement of $12 billion which would arrive by next Tuesday, and another $2 billion that would be available by June.
Caputo also announced other multi-year disbursements from other multilateral organizations, including $12 billion from the World Bank and $10 billion from the Inter-American Development Bank.
The IMF funds will be used to recapitalize Argentina’s central bank and the government expects it will bring a healthier currency, continue the inflation reduction process and allow tax reductions, Caputo added.
(Reporting by Maximilian Heath in Buenos Aires, Adam Jourdan in London and Anthony Esposito in Mexico City; Additional reporting by David Lawder and Andrea Shalal in Washington; Editing by Aida Pelaez-Fernandez and Rosalba O’Brien)
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