Argentina will fix the peso's exchange rate for international trade at an average of the US dollar and the euro, devaluing the peso only for Argentine importers and exporters.
Economy Minister Domingo Cavallo said that the rate, which doesn't apply for the oil trade, would fluctuate daily according to movements of the euro and the dollar. Under current rates, exporters would receive about 1.08 pesos for each dollar earned from exports, compared with one dollar now. Importers will pay about 8 centavos more to acquire dollars.
The new exchange rate system for trade means that Argentina would lower the value of the peso for many international trade transactions without officially devaluing its currency. The peso has been fixed at par with the US dollar for the last 10 years.
"The original convertibility system, which assures that each peso is worth a dollar, is in effect," Cavallo said during a press conference at the presidential residence. He said the system would be managed through the banking system ``at the moment of the sale of the currency.'' He promised to provide more details at a yet to be scheduled press conference this weekend.
Cavallo said the trade exchange rate system will work because Argentina imports about US$300 million more than it exports each year, when oil exports are excluded.
The change is another step toward Cavallo's plan to officially tie the value of the peso at the average of the US dollar and the euro when the two currencies trade at parity.
Cavallo and President Fernando de la Rua called on the Senate to pass the proposed plan in sessions next week.
"Until the moment when the euro equals the dollar, we are going to give to the exporters all the benefits of this new convertibility," Cavallo said.
Argentina fixed its peso at par with the dollar in 1991 under a system called "convertibility," which requires the central bank to back each peso in circulation with a dollar. The currency law before the senate would require the central bank to back each peso in circulation with assets worth the average that day of the dollar and the euro.
Cavallo also unleashed a barrage of tax reductions and changes to stimulate consumer demand and ease financial pressure on the middle class. Argentina's US$280 billion economy is struggling to pull out of a three-year recession that has left 15 percent of the workforce unemployed and height-ened concern about the government's ability to pay its US$130 billion public debt.
"This package of measures will complete my competitiveness plan so that new investment arrives and drives a reactivation of demand," Cavallo said. "These are all part of perfecting the tax system and improving collection." Cavallo said that the payroll tax that companies pay into the social security system would be increased to 16 percent. Companies would be able to deduct that additional payroll tax from sales taxes.
He also said that he would lower the 21 percent sales tax to 16 percent "someday," even though it would remain unchanged for now, raise the minimum amount of taxable income and increase tax allowances for children and dependents. Cavallo added that interest payments on mortgages would be deductible from income tax.
Government officials said that highway tolls would by slashed to US$0.75 per 100km from US$2.40 and gasoline taxes would be cut. Those cuts will be offset by tax increases on diesel fuel, which will be credited against the sales tax.
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