Last week was likely one of the most difficult ones for the government. The exchange rate took the spotlight again with a sharp jump, showing that the idea of the dollar slowly moving to the lower end of the band was just an illusion. The new level isn’t alarming, but the sudden move created concern, especially because it came after a month of more gradual increases — nearly 9% in total. In any case, the situation is not out of control and should stabilize soon around the new level.

In recent days, short-term interest rate volatility has surged. Market rates swung between 18% and 70% in a short period, surprising markets and generating noise in the financial system. This was largely due to changes in monetary policy by the Central Bank, which removed key mechanisms for managing liquidity—tools that most central banks routinely use.

Monetary policy has been the weakest link in an otherwise orthodox and solid economic program. Over the past twenty months, there have been many back-and-forths. One clear example was when authorities claimed that there was no more money printing because the broad monetary base wasn’t growing. In reality, the traditional monetary base—the one that actually matters—was increasing steadily, and money was being printed. In fact, this was driving credit growth and the remonetization of the economy.

The second half of the year kicked off with tension for the government. On the economic front, it’s a time filled with challenges. First, the exchange rate is back in the spotlight, adjusting to higher levels as the soy harvest winds down and the incentive to export driven by lower export taxes fades, and the electoral uncertainty rises. Second, the recovery in economic activity is showing signs of fatigue. And third, disinflation is facing growing resistance.

The IMF program has placed the need to accumulate reserves at the center of the economic agenda. Alarm bells rang when INDEC reported that Argentina posted a current account deficit of more than USD 5 billion in the first quarter. This means that imports of goods and services, tourism expenses, interest payments, profit remittances, and other transfers abroad significantly exceeded exports of goods and services. This deficit is concerning because, unless it is reversed, it will likely be difficult to accumulate reserves or maintain exchange rate stability.

During the early months of the economic program, the decline in inflation had an expansionary effect on economic activity. The drop in the inflation tax eased the burden on real incomes, negative interest rates encouraged households to spend, credit grew strongly, and a part of consumption, which was repressed, rebounded in a meaningful way. In that context, the economy outperformed expectations and even allowed for talk of a V-shaped recovery.

Seeking the waiver. The government has been “passing the hat” in recent days with new debt issuances. Bonte (hard peso) bonds have already contributed around USD 1.5 billion, to which USD 2 billion from the repo were added, bringing gross reserves above USD 40 billion and liquid reserves above USD 20 billion. To meet the IMF target, about USD 2.5 billion is still missing, but at least the government is showing a willingness to move closer, hoping to secure the waiver that would unlock the next USD 2 billion disbursement.

Monetary and exchange rate policy has been evolving since Milei took office. Initially, the program included several unconventional elements aimed at rapidly reducing inflation and providing an anchor for inflation. During that phase, interest rates were negative in real terms, the official exchange rate was quasi-fixed, capital controls remained in place, and there were multiple exchange rates. Over time, we transitioned to the current regime, where the anchor is money supply growth, real interest rates are positive, and the exchange rate floats within a band.

The debate on the exchange rate has calmed down now that the dollar floats within the band and its value is determined by the market. It’s true that it’s still not a clean float because there are many exchange controls in place for companies, but the spread with parallel dollar rates has disappeared and the Central Bank is not intervening. Now, the discussion has shifted to the level of international reserves — in other words, it’s moved from prices to quantities, although ultimately both reflect concerns about the sustainability of the external accounts.

Finally, the Treasury raised dollars by issuing a peso bond to international investors, who purchased it in dollars. Thus, the Treasury received fresh dollars, although the principal and interest payments will be paid in pesos. The move was a good one: it allowed the government to approach its reserve target with the IMF (which we all know it will not meet) and, at the same time, kept its promise not to purchase reserves within the exchange rate band.

The government’s plan for getting Argentines to use their stashed dollars has finally been revealed, and everything indicates that the measures are less revolutionary than many expected. Even so, they represent an important step forward: by raising the minimum amounts for transactions that must be reported to the tax agency, people’s lives are simplified and the use of funds currently held in the informal economy is facilitated. This could translate into a slight increase in consumption and a greater circulation of dollars. However, if these bills do not enter into the financial system, they are unlikely to translate into more reserves.

The deregulation and trade opening agenda continues at full speed. This is probably one of the areas where the government has made the most progress. Untangling the knot of regulations and opening the economy often involves confronting deeply entrenched business interests. However, the executive branch decided to take a further step on the eve of the elections in the City of Buenos Aires, which Milei’s party ended up winning.

Following the new agreement with the IMF, the government announced the beginning of a new phase in its economic program — a turning point meant to mark the transition from stabilization to sustained growth. However, as the days went by, it became clear that this outlook was perhaps premature, and that we are actually heading toward a phase focused on consolidating stabilization. For now, the plan for sustained growth will have to wait. We’re still in the rebound stage after two consecutive years of GDP contraction.