Despite criticism from business circles, Argentine authorities are pressing ahead with their policy of tightening currency controls to stem capital flight and protect foreign exchange reserves.

Argentina's reserves shrank nearly $6 billion to $46.6 billion in a matter of months, prompting President Cristina Kirchner's government to slap tight controls on the currency market by limiting dollar purchases.

The fight against the dollarization of the economy -- all major transactions as well as savings are in dollars -- led to the severe restrictions for banks, companies and small savers seeking to cope with inflation, which stands at 25 percent, according to independent analysts, but just 10 per cent according to the government.

These measures have put a damper on real estate transactions and construction, two key sectors of the economy, and this deepens the path to recession, said Mariano Lamothe, of the private consulting firm acebeb.com.

Authorities have just banned real estate transactions in dollars as well as acquisition of dollars for saving purposes. Earlier dollar purchases for foreign travel were also tightly controlled.

South America's second largest economy after Brazil must meet two key payments in the second half of 2012: a $2.4 billion Boden bond payment in August, and $3 billion in December to the holders of GDP warrants.

It has implemented drastic measures to control foreign exchange operations since the end of 2011, in a bid to preserve its monetary reserves slated to repay the country's debt.

The nation must still repay $6.5 billion to its public creditors from the Paris Club, an informal grouping of financial officials from international economic powers dealing specifically in debt relief and restructuring.

Argentina has already paid off 95 percent of its private debt -- around $100 billion with interest -- in 2001, when the country declared the biggest debt default in history. Much of the remaining seven percent is in the hands of hedge funds that have launched legal proceedings.

Kirchner in recent months forced through major protectionist measures, much to the displeasure of the United States, Europe and Argentina's Latin American neighbours.

This has revived the black market where the Argentine peso trades 45 percent higher than on the official market, where it changes hands at around 4.57 pesos to the dollars.

Central Bank President Mercedes Marco del Pont insisted that Argentina "is not facing a dollar shortage," but warned that the greenbacks are meant for "production".

"We cannot afford the luxury of having them outside the productive circuit," she said.

Concerned small savers have withdrawn $5.7 billion from the financial system over the past eight months.

"As long as we don't feel the government is tackling the issue of inflation, the foreign exchange drain will continue," said economist and conservative opposition lawmaker Rogelio Frigerio.

Jose Ignacio de Mendiguren, head of the Argentine Industrial Union and still a government ally, also described the restrictions as "exaggerated".

He also pointed out that the economy, which had soared in recent years, is experiencing a "strong slowdown, with a 4.5 percent fall of industrial production over a year period in May, the biggest since January 2009.

These restrictions are "a wrong decision based on a wrong diagnostic: It's like removing the kidneys when dealing with the flu," said Lamothe, who instead propose that the government "should allow a limited dollar exit, devalue a little and find credits" on the foreign market.

channelnewsasia.com