The content provides a comprehensive analysis of the economic challenges faced by Argentina and the impact of the government’s measures. It highlights the increase in fiscal deficit, inflation, and exchange rate gap.
The population approached the elections with their economy teetering on the brink. Rampant inflation, a delayed exchange rate, a steadily increasing deficit, a shortage of foreign currency, and a 190% exchange rate gap are just a few of the imbalances the country had grappled with before the primary elections and the Government’s electoral plan exacerbated them.
Determined to reverse the outcome of the primaries, the Minister of Economy and official candidate, Sergio Massa, reached into someone else’s wallet: the State’s. He opted for distributing funds to various sectors through measures with a fiscal cost of over 1.2% of the GDP. This success came at the expense of the poorest citizens, who bore the brunt of almost immediate inflation – an unforgivable misstep.
These measures included bonuses for the unemployed and informal workers, increased support for a group of retirees and pensioners, and additional payments for beneficiaries of social programs. These decisions, which signify an increase in spending, were combined with tax relief, especially in the form of a 21% reimbursement on debit card purchases and changes to income tax for salaried workers.
All of this has not only led to an increase in the fiscal deficit for this year, burying the agreed-upon target with the IMF but also foresees a fiscal gap for 2024. This is the challenge that the opposition candidate, Javier Milei, or Massa himself, will have to confront when one of them takes office at the Casa Rosada.
The changes in VAT and Income Tax have raised the projected deficit for 2024 by around 1% of the GDP, in addition to increasing the level of currency issuance and further damaging the balance of the Central Bank.
This has pushed the country into a precarious position, with a Central Bank depleted of reserves and a distorted foreign exchange market. The devaluation decided after the defeat in the primaries was insufficient to contain inflation, resulting in a widening exchange rate gap.
The delay in the official exchange rate has triggered a price spiral, with inflation accelerating alarmingly. The Consumer Price Index saw an increase of 26.7% in August and September, with expectations of ending the year above 180%. Furthermore, the Government has lost reserves in a desperate attempt to support financial dollars, incurring an intervention that cost around $2.3 billion in reserves.
The distortions caused by Massa’s policies encompass freezing utility tariffs, transportation, and fuel prices, which have deepened disparities in relative prices and impacted the sustainability of tariff structures. Cumulatively, subsidies have witnessed an actual decrease of 16.6% yearly in 2023. The absence of adjustments in energy tariffs and other freezes has led to shortages and pump closures, increasing the risk of an inflationary spiral.
Finally, the agreement with the IMF has been buried by Massa’s package of measures, which increased spending and currency issuance and froze tariffs. The country has failed to meet the agreed-upon targets, and it is now uncertain whether the next disbursement will occur. Argentina needs to rebuild its relationship with the IMF, but it’s more political than economic. Massa and the government have created a financial disaster that will burden the next president who takes office.