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Time for an Argentine economic policy rethink

March 20, 2019 6:02 pm A+ / A-

To say that all is not going well with the Argentine economy would be a gross understatement.

Argentine inflation keeps rising, the economy continues to sink, and the currency is again swooning. And it does so despite Argentina having received the largest IMF financial support program on record for any country in an amount close to US$60 billion. This has to raise serious questions as to whether Argentina’s IMF program might not need some serious rethinking.

Under the IMF’s program of fiscal adjustment and a very restrictive monetary policy stance aimed at stabilizing the currency, the Argentine economy was projected to decline by around 2 percent in both 2018 and 2019.

Meanwhile inflation was supposed to decelerate sharply to some 20 percent by end-2019 as the currency was supposed to stabilize. Sadly, the latest economic indicators paint a very much bleaker picture for the Argentine economy.

According to the most recent indicators, the Argentine economy would seem to be contracting at a much faster rate than the 2 percent projected pace. Among these indicators is the fact that for the 12 months ended January 2019, both Argentine industrial production and construction activity continued to contract by more than 10 percent.

 

Similarly, despite maintaining interest rates at among the world’s highest levels, the Argentine peso has lost around half of its value since the start of 2018 making it the world’s worst performing currency. This has been the principal factor in causing Argentina’s headline inflation rate to rise to almost 50 percent. It has also kept inflation expectations for end-2019 at more than 30 percent or some 10 percent above the IMF program’s inflation target.

It is troubling that after some period of relative exchange rate stability towards end-2018, since the start of this year the Argentina peso has again slumped by close to 10 percent taking the currency to a record low. This has prompted the Argentine central bank to hike interest rates back to 60 percent in an effort to stabilize the currency.

Argentina’s present economic policy stance of tight fiscal policy and sky-high interest rates to stabilize the currency begs a basic question. If last year that policy mix did not succeed in preventing a fall in output, a rise in inflation, and a very weak currency, why would one expect it to be more successful this time around? This question would seem to be particularly pertinent at a time that increased political volatility ahead of the country’s schedule October-presidential elections must be expected to further undermine investor confidence.

It might be worth asking whether the root of Argentina’s present economic difficulties might not be President Macri having got the country’s economic policy sequencing wrong from the very start of his Administration. He did so by totally liberalizing the country’s capital account before he had stabilized the highly distorted economy he inherited from Mrs. Kirchner. If that is indeed the case, then maybe what Argentina needs to do now is to resort to capital controls on a temporary basis to put a floor under the currency while measures are being taken to stabilize the economy.

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Time for an Argentine economic policy rethink Reviewed by on . To say that all is not going well with the Argentine economy would be a gross understatement. Argentine inflation keeps rising, the economy continues to sink, a To say that all is not going well with the Argentine economy would be a gross understatement. Argentine inflation keeps rising, the economy continues to sink, a Rating: 0

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