Salvador Argentina will not come out of the crisis. On the contrary: In the past twelve months, inflation in the South American country has exceeded 100 percent for the first time in decades. For every purchase in February 2023, Argentines had to pay an average of 102.5 percent more than in the same month last year.
Even the country’s economists now seem at a loss. Most economists had expected the monthly inflation rate to stop rising in February. But according to figures from the national statistics office, it rose for the fourth straight month and was 6.6 percent.
For comparison: In Germany, the inflation rate for the whole of 2022 was 6.9 percent. Argentina is currently experiencing the German price increase of a year every month.
To a certain extent, people in Argentina may have gotten used to inflation, which has been in double digits on an annual basis since 2012. However, the last time the population saw their purchasing power halve within twelve months, as is the case now, was in 1991. At that time, however, inflation fell, in previous years Argentina experienced hyperinflation with inflation rates of more than 3000 percent. To stem the price explosion, the government pegged the peso to the dollar, and Argentina subsequently experienced one of the few decades in its history with monetary stability.
Argentina: Inflation is likely to rise further
The situation is different today, because inflation is likely to increase even further: JP Morgan, for example, expects 115 percent inflation by the end of the year. Analyst Diego Pereira is certain: “Inflationary pressure will continue to increase.”
Argentina’s president is up for re-election in October.
(Photo: via REUTERS)
Argentina’s President Alberto Fernández has not taken any structural measures against inflation since he took office more than three years ago. Instead, his government is resorting to price controls in an attempt to prevent inflation. Many prices for services and consumer goods, as well as wages and salaries, are set by the government, as is the dollar-peso exchange rate.
This makes it difficult for statisticians to determine true inflation. Nevertheless, investment banks estimate core inflation – i.e. minus the fluctuating food prices – at almost six percent a month.
The government seems to be hoping that a miracle will reduce price increases. Only then could it succeed in surviving the elections in October.
But a miracle is not in sight, on the contrary. Argentina’s economic growth is likely to stagnate this year as agriculture suffers from a severe drought. Exports of corn, wheat and soy could be up to $20 billion lower this year, a severe shock for the entire economy: last year Argentina exported goods worth around $90 billion. Since the state finances itself largely through export taxes on agricultural exports, revenues continue to fall.
Argentina doesn’t get any loans
This could have devastating effects, as Argentina is virtually isolated in the international credit market. Although the budget deficit is only four percent of gross domestic product, the country can hardly finance new debts – because the risk of bank default is simply too high. Only multilateral lenders like the ÌWF still give credit to Buenos Aires, the fund is the country’s largest single lender. However, hardly any money comes into the country in net terms, because in 2023 repayments of interest and principal amounting to five billion dollars are due.
A severe drought is threatening the cultivation of Argentina’s main export crops.
(Photo: AP)
Argentina would have been insolvent for a long time if it hadn’t signed an agreement with the IMF a year ago to secure the repayment of a 44 billion loan. It is the 22nd agreement between Argentina and the IMF.
The fund transfers exactly the amount of interest and repayments due, which Buenos Aires then sends back directly to the fund. For example, the IMF has just extended another $5.2 billion tranche of credit to Argentina to help Argentina meet its $5.35 billion debt in March and April.
Companies can no longer get loans on the world market either, international corporations have invested just under 600 million dollars in the country in 2022. And this despite the fact that Argentina has one of the world’s largest shale gas reserves and large quantities of raw materials such as lithium.
State budget grows faster than economic output
A look at which sectors in Argentina have grown in the last ten years shows the structural cause of the chronic inflation: Argentina’s economy has grown by just twelve percent in the 15 years since the global financial crisis from 2007. However, government spending has increased by 40 percent over the same period. Exports stagnated, while imports grew by 37 percent. In short: although Argentina is only growing slowly, the state is spending more and more. Argentina’s central bank fills the gap by constantly printing new money.
Argentines are likely to bet on a new government that could come into office after October’s elections. In any case, new ideas for combating inflation are needed. It is quite possible that plans to tie the peso to the dollar will then arise again.
President Fernández is currently in the United States, where he will also meet US President Joe Biden on Wednesday. His trip is likely to be about Argentina’s difficult situation – after all, the IMF is also based in Washington.
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