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June 10, 2005

Capital Controls In Argentina -- On Inflows!

Most of us probably associate restrictions on financial transactions with governments trying to keep funds from fleeing their countries (often because their currency is under attack).  The opposite is the case in Argentina these days.  From the Financial Times:

Argentina on Thursday announced stricter controls on capital inflows in an attempt to discourage “speculative” funds and protect the peso from strengthening further against the dollar.

The measure, which is expected to come into force on Friday, obliges investors bringing capital into the country to lock away 30 per cent of the total amount for 12 months. The decision, to be enforced by decree, adds to existing rules that force inflows to remain in the country for at least one year.

However, Roberto Lavagna, the economy minister, said on Thursday that there would be exemptions for trade finance and direct foreign investment in productive sectors as well as investment in primary issues of bonds and shares.

He said the main objective was to prevent the peso from strengthening further, and added that maintaining a competitive exchange rate had been one of the keys to Argentina's economic recovery since it devalued the peso in January 2002...

Argentina's economic recovery since its financial collapse in December 2001 has made the task of keeping a competitive peso much harder. For example, private-sector capital flows switched from net outflows to net inflows towards the end of last year, which has placed further upward pressure on the local currency...

Vladimir Werning, an economist at JP Morgan in New York, said: “This is not something that investors will look at from the perspective of state intervention versus free market economics. Instead, they will see it as a signal of the government's emphasis on keeping a competitive exchange rate policy.”

If you are interested in the path to reform in Argentina (and elsewhere) Nouriel Roubini and Brad Setser have a book just for you.

UPDATE: You can find Brad's latest on Argentina here.