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Argentina just reinstated foreign currency restrictions. Here’s what you need to know.

Austerity is never popular with voters.

- September 5, 2019

On Sept. 1, Argentina’s central bank announced new restrictions on foreign currency transactions — reversing the decision taken four years earlier to eliminate currency controls. This was not welcome news for many Argentines, whose ability to buy their currency of choice — the U.S. dollar — faces renewed restrictions.

President Mauricio Macri focused his 2015 election campaign on freeing economic constraints that the left-wing government had put in place over the previous decade. One core part of this agenda was his promise to eliminate the capital controls. Within days of taking office, Macri rolled back those controls, which had made it difficult to buy dollars and other foreign currency.

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So why did Macri just walk back one of his most important campaign commitments? And how will this move affect his political standing in Argentina’s upcoming election? Here’s what you need to know.

The old capital controls hurt savers

Argentina has often used capital controls to combat economic instability. In 2001, a severe debt crisis led the government to make it drastically harder for people to withdraw money from their bank accounts.

Economic instability returned to Argentina several years later. With inflation above 20 percent, Argentines once again increasingly used U.S. dollars for their transactions rather than Argentine pesos. In 2011, the government, led by Cristina Fernández de Kirchner, restricted the purchase of dollars. The government tightened these restrictions between 2011 and 2015 — people could buy fewer dollars, could not use “saving” as a justification, and had to pay higher taxes when they used credit and debit cards abroad.

These restrictions had some success in reducing sales of the Argentine peso, but they were bad news for Argentina’s savers, who were stuck with savings in high-inflation pesos, rather than low-inflation U.S. dollars. This led many savers to buy dollars on the black market, despite the legal risks and black market premium. In fact, research suggests that 10 percent of all Argentine adults bought dollars on the black market from 2011 to 2015 and that almost half of educated, urban, middle-class people did so.

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Macri’s decision to remove controls was very popular

Macri had excellent political reasons to get rid of capital controls. In a recently published article, we showed that the capital controls were extremely unpopular with Argentine voters.

Results of a survey we conducted in 2016 showed that 61 percent of citizens agreed with Macri’s 2015 decision to eliminate capital controls, compared with just 20 percent who disagreed and 19 percent who neither agreed nor disagreed.

In two different nationwide surveys, we found that large numbers of voters viewed the elimination of capital controls as the single best thing that Macri had achieved to date in his term in office. This suggests Macri reaped real political benefits by allowing Argentines to freely exchange pesos for dollars.

Our study shows that Argentines who opposed the capital controls were considerably more likely to vote for Macri in the final stage of the 2015 election, even when we account for vote choice in the first stage of the election. Other research finds that people who were most affected by the capital controls — people who used the black market for dollars — were also more likely to vote for Macri.

But Argentina’s economy is back in crisis

So why did Macri just put unpopular capital controls back in place? The answer is that Argentina is undergoing a severe economic crisis, which has been years in the making. After the 2015 election, Macri sought to attract foreign investors who shunned Argentina during his predecessor’s tenure. By eliminating capital controls and settling a protracted legal dispute with bondholders, the government signaled a clean break with the previous administration’s agenda.

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This restored investors’ confidence — but only to a limited degree. Argentina’s government still had to borrow a lot of money to finance its budget deficit, which it did by issuing large amounts of bonds, most of which were denominated in dollars.

This wasn’t a problem for several years, when borrowing was cheap. But in early 2018, a combination of stubbornly high inflation, persistent budget shortfalls and a severe drought damaged investor and consumer confidence. By April 2018, the peso had lost half its value. The government burned through billions of dollars of reserves and raised interest rates to sky-high levels to prop up its currency.

In June, the government announced that it had signed a $56 billion bailout agreement with the International Monetary Fund. The IMF-backed austerity program was unpopular, and included a “zero budget deficit” pledge.

Public support for Macri quickly eroded. In a primary election held Aug. 11, the Peronist opposition defeated Macri by an unexpectedly wide margin, triggering another sell-off of pesos. The controls announced Sunday are a last-resort step by the government to prevent further depreciation of the peso.

This hurts Macri’s chances of reelection

What’s the fallout? Macri faces off against Alberto Fernández in Argentina’s Oct. 27 election. Macri seems unlikely to win this next round, even if the capital controls stabilize the value of the peso. The new currency rules are more limited than the old ones, and primarily target businesses that deal in dollars. The restrictions on savers — the segment of the public most burdened by the controls — are fairly soft, at least for the moment.

But the return of even limited capital controls will undoubtedly antagonize some voters. Fernández, the opposition candidate for the Peronist party, has so far been quiet about the return of capital controls. If, as expected, Fernández wins the presidential election, his administration will probably keep the controls in place.

If experience is any guide, the controls may become more draconian as savers and businesses try to avoid them — and this would no doubt drain the new government’s political capital.

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Stephen C. Nelson is an associate professor of political science at Northwestern University, and author of “The Currency of Confidence: How Economic Beliefs Shape the IMF’s Relationship with Its Borrowers” (Cornell University Press, 2017).

David A. Steinberg is an associate professor of international political economy at Johns Hopkins University’s School of Advanced International Studies, and author of “Demanding Devaluation: Exchange Rate Politics in the Developing World” (Cornell University Press, 2015).