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February 22, 2021

The Week at a Glance

Argentina: The Wrong Medicine Against Inflation

BY Miguel A. Kiguel, Alejandro Giacoia, Andrés Borenstein, Lorena Giorgio, Rafael Aguilar, Isaías Marini

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( 3 mins)

Controlling inflation has become a priority for the government on the road to elections. The high records of December and January, which are unlikely to recede much in February, have accelerated the search for recipes that help lower inflation.

Unfortunately, the bulk of the ammunition that is being used goes through increasing price controls, putting a ceiling on rate increases, delaying the depreciation of the exchange rate and pressures on companies, recipes that have failed in the past and that will hardly work this time. They are like a treatment that can alleviate the symptoms for a little while, but do not provide a real cure; at the same time that relative price imbalances increase, which means that the problems will surely be more acute in the future.

History records a few moments when the agreements worked, but only because there was a consistent plan behind it. There are examples such as the Krieger Vassena plan of 1967 or the Israel stabilization plan of 1985 in which price agreements contributed to lowering inflation. But in those cases, they were successful precisely because it was carried out within a program that contemplated monetary and fiscal policies that were consistent with the objectives and in which controls were a complementary element that helped to “coordinate” the drop in inflation.

In those plans, the agreements were a sort of dam until the economic program matured. Without a macro program that contemplates the consistency of the monetary and fiscal variables, the forced price agreements end in tears (Rodrigazo or spring plan) or at least they do not meet their objective.

Recently, Minister Guzmán and Cabinet Deputy Chief Cecilia Todesca correctly pointed out that the inflation problem is macro and not microeconomic, statements that are shared by the vast majority of economists and businessmen. However, these opinions that drew applause for the minister are not consistent with the economic policy measures. Little is said about how the government can finance a fiscal deficit of 6% of GDP, as is in the Budget, without resorting to a strong monetary issue that breaks the objective of lowering inflation, or how it will manage to increase reserves with a high FX spread and slowing down depreciation.

Also, there does not seem to be an awareness of the impact that pressure on companies can have on other central objectives such as growth, employment and poverty. Argentina desperately needs investments and businessmen who bet on the country. To the extent that they are persecuted and regarded as those responsible for an inflation that by its nature is macroeconomic, they will be hardly willing to invest; and without investment there will be no growth.

How could these measures impact the agreement with the IMF? The more technical sector understands that the agreement, although it generates political costs, will provide a plan on which the macro can be improved and even make price and wage agreements more viable. The sectors that are more political do not want to know anything about tying their hands during the electoral campaign. An extended facilities agreement looks not only at stability, but also at growth and Argentina’s ability to increase reserves to repay debt. Price controls and the new exchange rate policy go in the opposite direction. The market has already voted, the country risk remains at 1,500 points and does not show signs that it may go down. This scenario does not seem conducive to reaching an agreement before the elections.

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