Globe Theory #1 : Argentina
Country Profile
Argentina is the third largest economy in Latin America with a population of about 45.7 million. Its major industries include automobiles, textiles, mining, technology, agriculture, and tourism. It is an important trading partner for the United States, China, and the European Union (EU). Argentina has one of the most stable democracies in the region and used to be one of the ten wealthiest countries per capita in the early twentieth century. It currently continues to struggle with economic mismanagement and political dysfunction. Argentina’s climate for business and investment has worsened in recent years, weakening due to political dysfunction, price and capital controls, high inflation, debt concerns, and the COVID-19 pandemic. This severely affected the country’s soy, wheat, and corn export.
Argentina's struggling economy has failed to significantly stabilize over the years. Argentina has defaulted on its debt nine times since its 1816 independence from Spain, and three times this century, with the largest default taking place in late 2001 The overall economy has shrunk each year since 2018. The Argentine peso loses value almost daily, despite the government instituting an exchange rate that makes the currency seem more valuable than it really is.
Current Situation
Gross domestic product is a monetary measure of the market value of all the final goods and services produced in a specific time period by a country or countries. Currently, the annual percentage change states that the GDP (at constant price) stands at 2.5 to 3.5, and Foreign Direct Investment (FDI) stands at 1.6 Argentina is facing inflation of more than 50 per cent a year, pressure on its exchange rate, dwindling reserves and billions of dollars of IMF repayments.
Argentina is struggling to meet the dreaded IMF conditions; the strings its bailout packages come with include a hike in lending rates at a whopping 78 per cent which is a damper on growth. Argentina has almost no access to international capital and is struggling to comply with the conditions attached to a $44 billion aid program agreed to with the International Monetary Fund.
Inflation is an increase in the general price level of goods and services in an economy. Argentina is on the brink of another recession this year as a historic drought comes on top of inflation. Private economists see the gross domestic product, or GDP, dropping 3% in 2023. Inflation in the triple-digit territory is wiping out Argentines’ pay checks, shrinking their buying power and consumer spending. The drought is destroying Argentina’s key commodity exports soy, corn and wheat which are essential to growth, jobs, and tax revenue. The central bank is running low on net cash reserves, down to an estimated $1.3 billion, according to consulting firm FMyA. Total reserves are less than half the level they were in 2019. That’s raising the risk of a potential currency devaluation, which has provoked social tension in the past.
Problems
Serious financial problems arose for the country in the 1980s when markets collapsed, prices rose, the currency depreciated, and wealthier citizens fled to more stable countries. During this debt crisis, the government turned to the central bank for financial assistance, leading to rapid inflation because of the increasing money in circulation and decreasing interest rates for borrowing. Since this initial problem, the country has been unable to recover but the deal failed to stabilize the economy.
The saga of the Argentinian economic crisis has been mindless printing of pesos, IMF bailouts and the sale of government bonds (only to default in servicing them) to pay off government employees. Nearly 40 per cent of Argentines live in poverty today, compared to about 25 per cent at the start of the current round of crisis in 2018. Argentina nosedived into an economic crisis in 2018 and it’s never fully recovered. The crisis also led to the peso losing half of its value against the dollar. The IMF responded by loaning a record $ 57 billion loan. Annual inflation has been above 50% most of the time since then; it reached 103% in February. Inflation’s impact has been exacerbated by three years of recession — since the 1950s, Argentina has spent more time in recession than almost any other nation, according to the World Bank.
The very expectation of a devaluation is causing more people to buy dollars, hold exports or speed up imports, exacerbating the government’s greenback drain. A gap between the official exchange rate and various parallel rates has held around 100% for several months, a level and stretch of time not seen since Argentina’s hyperinflation days. On top of the external international pressures that have resulted in record-breaking inflation, the government has been implementing programs that it is unable to financially sustain; Argentina has deeply subsidized healthcare, energy, universities, and public transportation for its citizens, all of which the government can only afford to fund through the printing of more pesos. Accounting for all these unprecedented global problems and poorly planned government programs, prices have increased massively since 2021 with the country hitting a 90% inflation rate (meaning a 90% year-to-year increase in prices) at the end of 2022. The spending in Argentina isn’t really controlled by the government. Argentina's provinces are very autonomous, meaning they can make decisions over fiscal spending that don’t necessarily have to be consistent with the Government. The government is planning to make some commitments in terms of refining spending growth. Politics in Argentina has become increasingly polarized.
Mindless printing of currency: Without access to credit following the default, Fernandez printed money during the pandemic to finance cash handouts and salary programs, which set the stage for inflation to surge higher. Fernandez also implemented a labyrinth of currency controls and price freezes, creating an alphabet soup of different exchange rates. The measures proved ineffective at cooling inflation and currency losses but made the business environment more complex for companies across the country.
1. High Fiscal Deficits: The government consistently spending more than it generates in revenue can lead to fiscal imbalances, which strained the Argentinian Economy.
2. Foreign Debt Burden: Accumulating a large amount of foreign debt became unsustainable, and the government struggled to pay and refinance it.
3. Currency Depreciation: Frequent devaluation or depreciation of the national currency caused uncertainty and negatively impacted businesses and investors.
4. Inflation: Persistently high inflation eroded purchasing power and created uncertainty, which made it challenging for businesses to plan.
5. Political Instability: Frequent changes in government and unstable political conditions led to the creation of uncertainty for investors and businesses, which affected economic confidence.
6. Inadequate Structural Reforms: Failure to implement necessary economic and structural reforms to address underlying issues led to perpetuating economic problems in Argentina.
7. External Factors: Global economic downturns, changes in commodity prices (Argentina relies heavily on commodity exports), or international financial crises had significant effects on the Argentine economy.
8. Inefficient Government Policies: Inconsistent or poorly designed economic policies exacerbated the existing problems and hindered their growth.
9. Banking System Issues: Problems in the banking sector, such as liquidity crises or high levels of non-performing loans, amplified the economic instability.
10. Income Inequality: High levels of income inequality led to social unrest and political pressures, which further impacted the Argentinian economy.
IMF and Argentina
The International Monetary Fund has been the country’s financial lifeline for decades now through periods of economic growth and turmoil, but the relationship is complicated. Despite doling out billions of dollars, the international financier has never quite succeeded in turning the ship around. This has been largely due to political pushback in Argentina against reforms and other conditions imposed as part of leading agreements. But inflation like this hasn’t been seen since the ‘90s : Interest Rate at 97%, which is said to be revised to 118% very soon and Inflation over 100%.
The IMF has a very unsuccessful history with Argentina because at no point has the IMF ever been able to help policymakers solve the problems for good. Argentina’s IMF-supported program sets pragmatic and realistic objectives, along with credible policies to strengthen macroeconomic stability and begin to tackle Argentina’s deep-seated challenges.The program seeks to improve public finances and start to reduce persistent high inflation through a multi-pronged strategy, involving a gradual elimination of monetary financing of the fiscal deficit and enhancements in the monetary policy framework.
- Krushna Punjabi