Argentina ends 2021 in an economic quagmire

ARGENTINA - In Brief 29 Dec 2021 by Domingo Cavallo

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The level of economic activity has recovered from Covid 19’s deep fall during 2020, and the rate of unemployment went down, restoring to the level of the third quarter of 2019. However, inflation is ending the year as high as in 2019. These macro indicators do not show the more worrisome aspect of the economic reality. The official exchange rate has been adjusted between 1% and 1.5% per month since April 2021. Increasingly binding price controls did not succeed in reducing the rate of monthly inflation below 3% per month, the rate at which most monetary aggregates increased during the year. To keep the monetary aggregates increasing at this pace, the Central Bank had to allow the stock of remunerated Central Bank debt (LELIQs and swaps) to jump from 80% to 100% of the monetary base. During the year, exchange controls were accentuated, and the spread between the official exchange rate and the various versions of the rather free exchange rates was permanently close to 100%. Similarly, the country risk premium remains around 1700 basis points, and the primary fiscal deficit, which in 2019 had been close to zero, ends in 2021 at 2.5% of GDP in spite of a significant fiscal adjustment owed to an accelerated inflation's eroding government spending in real terms. The 100% spread between the official and the free exchange rate, and the 100% ratio of remunerated debt of the Central Bank to the monetary base, very likely mark the limits of the two key instruments that were used to keep inflation under control. They have exhausted their usefulness. During 2022 the rate of adjustment of the exchange rate will need to be much higher, probably around 4% per month, and the expansion ...