Argentina is facing a severe inflation crisis, with the annual rate soaring to 109% in April 2021, according to the country’s statistics agency. This means that the prices of many consumer goods have more than doubled since last year, making it harder for people to afford basic necessities and eroding their purchasing power.
What are the causes of Argentina’s inflation?
There is no single cause for Argentina’s inflation problem, but rather a combination of factors that have been accumulating over decades. Some of the main causes are:
-Fiscal deficit: Argentina has been spending more than it collects in taxes, resulting in a large public debt that has to be financed by borrowing or printing money. The latter option increases the money supply and fuels inflation.
-Monetary policy: The central bank has been unable to control inflation by raising interest rates, partly because of political pressure and partly because of the high cost of servicing the debt. The benchmark rate is currently at 78%, which is very high by international standards, but still insufficient to curb price increases.
-Exchange rate: Argentina has a floating exchange rate system, which means that the value of the peso is determined by market forces. However, the peso has been depreciating rapidly against the US dollar and other major currencies, due to low confidence in the economy and high demand for foreign currency. This makes imports more expensive and pushes up domestic prices.
-External shocks: Argentina is also affected by external factors that are beyond its control, such as the global rise in energy and food prices due to the war in Ukraine, adverse weather conditions that impact agricultural production, and the Covid-19 pandemic that has disrupted trade and tourism.
What are the consequences of Argentina’s inflation?
The consequences of Argentina’s inflation are severe and widespread, affecting both the economic and social spheres. Some of the main consequences are:
-Poverty and inequality: Inflation reduces the real income of people, especially those who depend on fixed salaries or pensions. According to official data, poverty increased from 35.5% in 2019 to 42% in 2020, affecting more than 19 million people. Inequality also worsened, as the richest 10% earned 31 times more than the poorest 10% in 2020.
-Unemployment and informality: Inflation discourages investment and production, leading to lower growth and higher unemployment. According to official data, unemployment rose from 8.9% in 2019 to 11% in 2020, affecting more than 2.3 million people. Many workers also resorted to informal activities, such as street vending or domestic work, which offer lower wages and no social protection.
-Social unrest and political instability: Inflation erodes public trust in institutions and generates discontent and frustration among citizens. In recent years, Argentina has witnessed frequent protests and strikes over various issues, such as wages, pensions, tariffs, education, health care, and human rights. The political scene is also polarized and divided between supporters and opponents of the current government led by President Alberto Fernández and his deputy Cristina Fernández de Kirchner.
What are the possible solutions for Argentina’s inflation?
There is no easy or quick solution for Argentina’s inflation problem, but rather a need for a comprehensive and coordinated strategy that addresses both the short-term and long-term challenges. Some of the possible solutions are:
-Fiscal consolidation: Argentina needs to reduce its fiscal deficit by increasing its tax revenue and rationalizing its public spending. This would help to lower its debt burden and restore its credibility with creditors and investors. In December 2020, the International Monetary Fund (IMF) approved another $6 billion of bailout money for Argentina as part of a 30-month program that aims to support its fiscal adjustment.
-Monetary reform: Argentina needs to reform its central bank by granting it more autonomy and independence from political interference. This would allow it to pursue a more credible and consistent monetary policy that targets inflation and stabilizes the exchange rate. The central bank should also improve its communication and transparency with the public and the markets.
-Structural transformation: Argentina needs to diversify its economy by promoting innovation, productivity, competitiveness, and integration into global value chains. This would help to increase its export potential and reduce its dependence on commodities. Argentina should also invest more in human capital development, social protection, infrastructure, and environmental sustainability.
