On Monday, Argentina will announce a new round of emergency government measures, including raising interest rates by 600 basis points to 97 percent, in an effort to stave off the country’s worst economic crisis in two decades.
The Peronist government is desperate to avoid a major devaluation before elections in October. But the South American country is also running out of foreign exchange reserves as Argentines abandon the rapidly deteriorating peso and embrace the US dollar.
Spurred on by printing money to finance large government deficits, Argentina’s inflation hit an annual 109 percent in April, the highest level since 1991. The economy ministry said the new measures, to be announced on Monday, would involve the central bank to step up intervention. In the foreign exchange market to try to slow down the peso’s decline.
Economy Minister Sergio Massa is also trying to persuade the International Monetary Fund to make the agreed loan payments and will travel to China on May 29 to seek greater use of the renminbi in foreign trade. Last month, Argentina activated a currency swap with China, allowing it to pay just over $1 billion of its imports this month in renminbi.
The International Monetary Fund has already shown leniency towards Argentina over the past year, giving it more leeway to meet goals of increasing reserves and reducing money printing in an effort to keep a $44 billion loan program on track. It is less likely to want to make payments in the months leading up to potentially pivotal elections, which the government is likely to lose.
Massa also plans to allow tariff-free food imports in an effort to bring down inflation, a first in a country that is one of the world’s largest exporters of grain. The government will also cut interest rates on a state-run scheme for Argentines to buy homemade products on credit, as part of an effort to boost the national industry.
The latest package of measures does not represent a change of course, but rather an attempt to replicate the state’s heavily interventionist policies that have failed to reduce inflation or boost the economy. It also carries risks: persistent hikes in interest rates increase the cost of servicing a huge domestic debt pile.
“This is just kicking the can a few inches down the road,” said Hector Torres, a former IMF executive director and Argentine diplomat now with Canadian think tank CIGI.
I have nothing against central banks using reserves to smooth out volatility and fight speculators. But our reserves are already depleted, we are deeply in debt to the International Monetary Fund, and we don’t have access to the capital markets. In this case, selling what we owe to the IMF to support an obviously unsustainable exchange rate is unconcerned. He can only invite speculators to bet on a new default.”
Economists have criticized the government’s foreign exchange policy and price controls for causing huge distortions, deterring investment and reducing production. Many forecasters expect Argentina to enter a recession this year, with Oxford Economics forecasting a 1.6 percent drop in gross domestic product, the worst forecast for any major Latin American economy.
Amid a bitter dispute over politics between President Alberto Fernández and his powerful vice president, Cristina Fernández de Kirchner, Massa is seen as one of the Peronist movement’s few remaining options as a presidential candidate for the October elections.
However, his plan to try to fix the economy with temporary interventions to avoid painful austerity measures before the election ran into increasing difficulties, as well as a severe drought that hurt agricultural exports. Massa’s chances as a candidate now depend on the success of his economic plan over the next few months.
The centre-right opposition has yet to agree on a presidential candidate this year, with support divided between Horacio Rodriguez Larreta, the centrist mayor of Buenos Aires, and conservative law and order candidate Patricia Bullrich.
The far-right challenger, Javier Melei, has been rising rapidly in the polls and could reach the second round if he can increase his support beyond Greater Buenos Aires. Milley campaigned on a radical anti-establishment platform that included abolishing the central bank and dollarizing the economy.