Finally, the agreement with the IMF passed the test of Congress and the IMF Board approved it because the memorandum (“fine print”) did not undergo any modification in the legislative process. Said agreement is not an imposition by the IMF, but rather a document from the Argentine government in which it sets out the measures it intends to take to meet the two main goals that were agreed upon in that famous “understanding” in January. These two goals are the reduction of the primary fiscal deficit (deficit before the payment of interest on the debt) and the monetary issue that the Central Bank sends to the Treasury.
with magnifying glass. The memorandum abounds in generalities. This wouldn’t be a problem if the specifics came later. The problem is when generalities contradict each other. For example, it is stated that energy subsidies will be reduced by 0.6% of GDP. But then it is pointed out that this reduction will be achieved by eliminating the subsidies on electricity and gas rates for 10% of the residents with the highest income in the City of Buenos Aires and for the remaining 90%, the rates will be adjusted below inflation. .
In the memorandum itself it is stated that the adjustment to 10% of the residents will imply a saving of 0.06% of the GDP, that is, one tenth of the total reduction. In addition, it is not said, but it follows from the logic, if 90% of users have their electricity and gas rates adjusted below inflation, then energy subsidies should go up, not go down. These types of contradictions remained in the document without further clarification.
The numbers. Certainly, the generalities and contradictions are explained by the internal ideology within the ruling coalition, which ended up hatching with the treatment in Congress. What remains as a question, then, is how this story continues.
The IMF technicians are aware of the ideological barriers of the Argentine government. For this reason, they accepted the generalities and inconsistencies and began to concentrate on making the eventual non-compliance explicit. That is: for 2022, the agreed goals are 2.5% of GDP for primary deficit and 1% of GDP for Central Bank issuance to finance the Treasury.. The most important detail is that the goals are not set as a percentage of GDP but in nominal amounts. This was done in order to prevent the Government from considering the goal fulfilled thanks to higher inflation.
Specifically, the government projects a nominal GDP for this year of $70 billion. 2.5% is $1.8 trillion. This GDP projection assumes that inflation in 2022 will be 48%. If inflation ends up being 60%, nominal GDP will not be $70 but $88 trillion. Therefore, 2.5% of GDP would not be $1.8 but $2.2 trillion.
If the goal were a percentage of GDP, with a $2.2 trillion deficit, the goal would be met (2.5%). But if it’s in nominal amounts ($1.8 trillion) it won’t be enough. It was placed, then, in nominal amounts. In this way, the non-compliance is clearly explained. Then, the agency’s board of directors will be able to forgive –and it will do so–, but in this way, the IMF’s technicians fulfill their responsibility to explain said non-compliance.
Thus, the goals for 2022 are $1.8 trillion of primary deficit and $0.7 trillion of monetary issue to the Treasury. Regarding 2021, the deficit goal implies containing the growth of the deficit, but with the monetary issue to finance the Treasury it implies reducing it to a third in nominal terms. A very demanding goal.
War against inflation. With the IMF issue closed, the President of the Nation “declares war on inflation.” This motivated the use of such a quixotic metaphor, surely it is the acceleration of inflation. In the first two months of the year, inflation was 4% per month, which means 60% per year. A sensitive indicator, such as food, has been growing at 6% per month, which implies 100% per year, and in Greater Buenos Aires it is growing above this percentage.
The weapons deployed for the war against inflation are price controls, the supply law, an increase in export duties, and the calling of business, union, and piqueteros representatives. These are the same measures that have been announced and applied until today. The decision to go to war with the same weapons suggests that the official strategy is to use them more intensively.
Can it work? In the last decade (2011-21), the gross domestic product, that is, the total amount of goods and services in the economy, remained practically static (it fell 3%). But the monetary issue grew by 2,200%. So, on the same amount of goods and services, the number of bills was multiplied by 22. This simple fact explains why inflation in the last 10 years has accumulated 2,000%.
There is no doubt that inflation is multicausal. But when you have a monetary disorder of such magnitude, the most urgent thing to start dealing with that distortion is to issue less. For this reason, the Fund, accepting “multicausality”, also accepted all the generalities and inconsistencies of the memorandum. But in the end, he advises lowering Treasury issuance from $2.1 trillion in 2021 to $0.7 trillion in 2022. In other words, the Fund tells the Argentine government that, if it goes to war against inflation, it should turn off the issuing machine because if not, the battle will be lost.
the other front. Dark clouds are gathering over the global economy. Ukraine and Russia are major world suppliers of grains, oilseeds and fuels. This implies that due to the destruction of Ukraine and the sanctions against Russia, these goods will be scarce, which will translate into an international increase in their prices. Argentina is affected because it exports cereals and oilseeds and imports fuels. Win on one side and lose on the other. The balance is positive because it exports cereals and oilseeds for US$6.5 for every US$1 it imports in fuel. From this point of view, Argentina will have a net increase in foreign currency as a result of the rise in international prices that the war in Ukraine is causing. Argentina’s problem comes from the side of its internal policies and, in particular, its energy policy.
The national State subsidizes electricity and gas. These subsidies amounted to 2.3% of GDP in 2021 and are the ones that the Government promised to reduce by 0.6% of GDP in the memo with the IMF. If fuel prices are shot up by Ukraine, energy subsidies will grow, throwing away all the reduction of the fiscal deficit and committed monetary emission.
In any case, the growth of energy subsidies will not only be due to the military clash. The problem of Argentina is the internal one of the Government where the “hard wing” does not want to adjust the tariffs of electricity and gas. This situation led to the fact that only in the first two months of this year, before the war in Ukraine broke out, economic subsidies have doubled in real terms (above inflation), when public income grows at the same time of inflation.
In conclusion, the worsening of the Argentine crisis will not end up being due to the IMF or the armed conflict. In any case, it will be due to the stubbornness of maintaining energy policies that are inconsistent with sustaining commitments that, it is known, will be breached.
George Hill. Economist at IDESA
by Jorge Colina
