Businessmen’s expectations from reduction in PAIS tax: How much dollar will be left for imports?

The Economy Minister announced, Louis CaputoRegarding a 10-point cut in the PAIS tax rate, if the fiscal package and the Aadhaar law are approved, from today’s 17.5%, an assumed expectation has arisen in the world of traders, especially in those most dependent on imports.

While economists have warned that this rate cut could leave room for a correction in the exchange rate, which some already see as signs of a delay, companies have started doing the math. Without devaluation for the time being, the cut estimated by the minister would lead to an 8.5% improvement from the current level of the “import dollar” for importers. This is the price at which they pay for goods or inputs after applying the current tax on the official wholesale dollar. According to calculations shared by the analyst, this price is $1,060 today Salvador Vitelli, would fall to $969, reducing the cost, an increase which was not in any businessman’s plans at that time.

“It will be a significant relief, undoubtedly a good measure that will contribute to reducing costs. It will be going back to the previous point, in December we were prepared for a devaluation but not for an increase in the PAIS tax, even less than the magnitude in which it was implemented,” he was honest with the automotive sector, one of the most affected given the volume of imports for production. The announcement also had a similar impact on sectors highly dependent on imported inputs, such as electronics and household appliances. “It will contribute to improving the equation, that’s clear,” he said, speaking in the context of a business meeting.

“With a possible reduction of 10 points of the PAIS tax, the import exchange rate, at today’s prices, will be at a level below the pre-STEP value at the end of July 2023 (before the imposition of tariffs on imports) and in 2023 (devaluation towards $350), contributed Vitelli.

However, it does not escape the analysis that, although none of the attendees – including CEOs of mass consumption companies, the financial sector and technology – placed a possible devaluation among their main concerns, they recognized that this possibility is only one of the possible short-term scenarios and that it is a challenge that, if it occurs, will be achieved in an orderly manner with inflationary expectations under control.

“There is no precedent where a rise in the dollar does not affect prices. Inflation will always react to devaluation,” said a representative of the food and beverage industry.

In the macroeconomic context, meanwhile, there is an understanding that this eventual transfer in prices could be mitigated to some extent by the reduced tax pressure that lower rates on imports would imply.

In any case, this possibility arises from the growing concern about the “equilibrium” exchange rate. While the government repeatedly emphasizes that what determines these variables is much more than the comparison of the growth of the dollar against inflation and that competitiveness will be given by structural reforms that increase the productivity of the economy, for example, they have mentioned a more solid fiscal and monetary situation, there are many opinions that identify the real exchange rate as a potential problem.

According to data published daily by the Central Bank, the real multilateral exchange rate – an indicator that links the evolution of the official dollar in relation to the main countries with which Argentina maintains a liquid commercial exchange – is located at the same level as in October of last year.