Argentina will announce a new round of emergency government measures on Monday, including raising interest rates by 600 basis points to 97 percent, to try 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 devaluing peso and embrace the US dollar.
Fueled by money printing to finance a huge government deficit, Argentine inflation hit 109 percent a year in April, the highest level since 1991. The economy ministry said the new measures, to be announced on Monday, would involve the central bank intervention intensified in the currency market to try to slow down the peso’s fall.
Economy Minister Sergio Massa is also trying to persuade the IMF to advance the disbursement of agreed loans 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 that allowed it to pay just over $1 billion of its imports this month in renminbi.
The IMF has already shown leniency toward Argentina over the past year, giving it more leeway on targets to increase reserves and ease monetary pressure in an effort to keep a $44 billion loan program on track. It is unlikely to want to advance payouts in the months before a potentially crucial election, which the government is likely to lose.
Massa also plans to allow food imports at a zero tariff to try to reduce inflation, a first in a country that is one of the world’s biggest grain exporters. The government will also cut interest rates on a state-run scheme for Argentines to buy locally made products on credit, part of an effort to boost national industry.
The latest package of measures does not represent a change of course, more an attempt to repeat policies of heavy government intervention that have failed to bring down inflation or boost the economy. It also carries risks: continuous increases in interest rates make servicing a large pile of domestic debt increasingly expensive.
“It just kicks the can down the road a few inches,” said Hector Torres, a former IMF executive director and Argentine diplomat who is now with the Canadian think tank CIGI.
“I have nothing against central banks using reserves to smooth volatility and fight speculators. But we are already out of reserves, deeply indebted to the IMF, with no access to capital markets. In that situation, it is reckless to sell what we owe to the IMF to support an exchange rate that is clearly unsustainable. It can only invite speculators to bet on a new standard.”
Economists have criticized the government’s foreign exchange and price controls for creating major distortions, discouraging investment and suppressing production. Many forecasters expect Argentina to enter recession this year, with Oxford Economics predicting a 1.6 percent drop in GDP, the worst outlook for any major Latin American economy.
Amid a bitter row over policy 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 October’s elections.
However, his plan to try to patch up the economy with temporary interventions to avoid painful austerity measures ahead of the election has run into mounting problems, exacerbated by a severe drought that has hurt agricultural exports. Massa’s chances as a candidate now depend on the success of his economic plan over the next few months.
The center-right opposition has yet to agree on a presidential candidate this year, with support split between Horacio Rodríguez Larreta, the centrist mayor of Buenos Aires, and conservative law-and-order candidate Patricia Bullrich.
A far-right contender, Javier Milei, has risen rapidly in the polls and could reach another runoff if he can expand his support beyond greater Buenos Aires. Milei campaigned on a radical anti-establishment platform that included the abolition of the central bank and the dollarization of the economy.
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