The recovery will slow, but at least an inflationary explosion can be avoided
After long negotiations, the staff of the IMF and Minister Martín Guzman reached an understanding on the path for the primary fiscal deficit and the monetary assistance of the Central Bank to the Treasury that will be the core of a program. The government hopes the program will be supported by the Argentine Congress, allowing the IMF Board to approve an Extended Fund Facility loan to Argentina.
In our November 2021 Forecast for 2022 we estimated a primary fiscal deficit of 2.5% of GDP, exactly as has now been targeted in the understanding, but we considered that the Central Bank would continue with the sort of passive monetary policy that had been applied during 2020 and 2021. That meant that that monetary emission would continue at 3.9% of GDP, as it was in 2021. Based on those assumptions, we had forecast a 60% inflation rate for the year 2022. We mentioned the risk of an inflationary explosion if monetary emission were to spin out of control.
Now, assuming that monetary policy actively pursues containing inflation as agreed in the understanding of the IMF and the Economic Ministry, that is, the 1% monetary emission target is effectively implemented, we forecast a 3.7% monthly inflation rate, which implies a 55% annual inflation for the year 2022. And the risk of an inflationary explosion diminishes.
We continue to forecast GDP growth at 3% for 2022, which in practice means that GDP will stabilize at the level that had already been achieved by December 2021. Therefore, the population will probably perceive that the rapid recovery of 2021 has ended. This is what worries the members of the government who have been advertising a “strong recovery” as a signal of success of the expansionary fiscal and monetary policies that pursue a rapid expansion of domestic demand and believe that inflation can be contained with price controls and wage agreements.
We assume that the views shared by the IMF, most of the economists advising the main opposition coalition “Juntos por el Cambio”, and at least some of the economists in the government with executive responsibilities will prevail over those of the critics, and therefore Congress will probably accept the terms of the understanding and support the implementation of its fiscal and monetary targets.
Under these assumptions, the projections for the main economic variables for 2022 are summarized in the forecast tables in this report.
The conflicts between the members of the economic team and the legislators and policymakers who follow the leadership of the Vice President may create difficulties both in the process of approval of the program, and even more so in the process of implementation. Even though, so far, the statements by the President have not been encouraging, we predict that in the course of the discussion in Congress and the ongoing negotiations with the staff of the IMF, he will finally be convinced that the government has no better alternative to the agreement in order to avoid a foreign exchange crisis and an acceleration of inflation that would end his government.
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