The Argentine government announced yesterday that CEDIN (Certificados de Depósito para Inversión), the most prominent of the government’s attempts to stall the rapid capital flight affecting the country, had only repatriated US$11 million in its first month compared to the US$400 million the government hoped it would bring in over its three months. This is obviously a huge failure on the part of Cristina Fernández de Kirchner’s economic team, which had designed the program as a means of bringing “blue” dollars—undeclared dollars possessed by Argentines—back into the formal system and burnishing the country’s dollar reserves. However, looking at the basic design of the program, it’s hardly surprising that few Argentines have been willing to hand over their dollars to the same government responsible for the economic conditions that have driven them to convert their savings away from pesos in the first place.
My understanding is that the CEDIN function this way: a person in possession of undeclared dollars can declare them without facing any tax or fine in exchange for a CEDIN certificate, which Axel Kicilof, the Secretary of Economic Policy and Development Planning, compared to a traveler’s check. The CEDIN certificate can then be used in any commercial transaction, but can only be exchanged back for dollars if it is used to buy property or for materials for construction. The government hoped that this would allow it to simultaneously shore up its faltering dollar reserves while channeling investment into the construction sector, which has been in decline for more than a year as a result of strict capital controls (called the cepo cambiario in Argentina).
In practice, however, this has not proved a sufficient carrot to draw people back into the peso economy. This is hardly surprising. For one, the exchange rate for the CEDIN while higher than the official rate, is still well below the black market rate. Intially, the CEDIN used for construction and property purchases (CEDIN aplicados) was $7.45 pesos, and those for other purposes (nuevos) at $7.15 pesos. With a 57 percent difference between the official exchange rate and the black market (dólar blue) it’s understandable that a person might not want to trade in dollars worth more than 8 pesos when they can only get back dollars worth a bit more than 7 pesos and potentially worth less than 6 pesos. Moreover, nearly nothing has been done to address the reasons why the peso is depreciating so rapidly, so any program would have to make holding pesos extremely lucrative, something the CEDIN do not do. Finally, while there is no punishment for declaring dollars during this blanqueo, the mere act of doing so is an admission of having broken the law previously. With several parts of the Argentine still tightly restricted—such as access to dollars and import licenses—and control over those mechanisms highly arbitrary, there is a major risk to admitting possession of undeclared dollars that is not counterbalanced by the benefits of the CEDIN.
In short, it was not difficult to imagine how the CEDIN program was likely to fail; it provided far too little incentive relative to the risks it incurred. As I’ve argued before, with an economic as distorted as the Argentine, no single measure is likely to dramatically improve the situation. Yet, at the same time, the big, dramatic measures that are becoming increasingly necessary will also be more disruptive in the short run and therefore less politically feasible all the time.