Argentina: Dealing with Another Economic Crisis

Argentina being the second-largest economy in South America is having trouble as the country's inflation rate has surpassed 100 percent for the first time since 1991. With the ongoing crisis, it has essentially no access to global financing. Argentina went from being one of the richest nations in the world to experiencing inflation rates of one hundred percent, with mountains of money worth nothing. Argentina had a specific mix of political, economic, and historical problems that tended to render the country's economy into unpredictable shambles. Argentina's economic situation is in a turmoil due to ongoing economic crisis. Also, throughout the last century, Argentine market has been infamously volatile with chronic inflationary trends.

The economy of Argentina has been plagued by problems for decades, and its history has been marked by a number of crises, periods of hyperinflation, and cycles of boom and bust. The decade of the 1990s began relatively quiet, but it concluded with a severe economic downturn and a sharp rise in the rate of poverty. But following the end of 2022 and in the beginning of 2023, the economy of Argentina is on the verge of collapsing following multiple shocks. A terrible drought is preventing Argentine grain exports; and the black-market rate for the dollar being twice as high as the official rate because of the government's strict exchange control. The National Institute of Statistics and Census has stated that the annual inflation rate in Argentina is currently at 102.5%. These data were revealed earlier this year as meat, dairy, and egg products have been negatively impacted the most. In February, there was a 20% increase in the price of meat.

The annual percentage increase in consumer prices when the economy was beginning to recover from hyperinflation of 3,000%. According to data released by the government, prices increased by 6.6% month over month, which was higher than all of the projections, which had a 6% median forecast. Prices of food, which make up the largest component of Argentina's inflation index, rose by about 10% over the previous month, contributing significantly to the overall rise in prices. In example, the price of beef had increased by as much as 35 percent in Buenos Aires. The amount of net cash reserves held by the central bank had dropped to an estimated $1.3 billion, putting it in a precarious position. This increased the risk of a potential depreciation of the currency, which in the past had been a catalyst for increased social friction. The currency devaluation was driving an increase in the number of people purchasing dollars, delaying exports, or accelerating imports, which had been increasing the greenback drain on the government.

Despite persistent deficit spending, ongoing devaluation, and global price shocks brought on by Russia's military attack of Ukraine, Argentina's central bank continued to print more pesos. An exchange rate that had been illegally fixed is that caused Argentina's financial problems. This indicated that rather than consumer demand, it was regulated by the government. It had also created an alternative exchange market where pesos and US dollars could be converted for cash without a bank's permission at “cuevas” or through “arbolitos” (informal monetary exchange places) for around twice the official exchange rate. Due to this, picket lines and demonstrations have been more common as a result of persistent efforts by laborers and unions to secure greater salaries in response to the rapid rise of overall costs. For Argentina, these sporadic economic crises, inflation, and widespread mistrust in governmental and financial institutions were the root causes of numerous types of distortions that manifested in both large and subtle ways. There were many different exchange rates for the peso, including one for purchasing tickets to see Coldplay or the World Cup in Qatar.

The most recent spike in inflation fueled as Argentina has suffered greatly due to severe drought as well as wildfires. The country's mechanism for exporting grain has been disrupted as a result of climate change, placing farmers in the Pampas in a difficult position. Even though Argentina is the leading exporter of processed soy and one of the leading exporters of corn, the country's crops have been damaged by the worst drought in over 60 years, which has led to a decrease in imports. This resulted in a loss of $14 billion and a reduction of grain production of 50 million metric tons across soy, corn, and wheat. It is anticipated that there would be a 28% decrease in exports in 2023 when compared to the previous year.

To mitigate the crisis, the administration of centrist-leftist President Alberto Fernández has been attempting to rein in the steadily increasing prices, but it has not resulted in much success. Critics and members of the opposition believe that Argentina is in need of a more comprehensive stabilization plan that includes a significant cutback in spending. Fernandez also enacted a complex system of price freezes and monetary control systems, resulting in various foreign exchange rates. The policies did not succeed in reducing inflation or financial damages, but that complicated the business environment for firms across the nation. Even the 2023 Presidential elections could be dominated by inflation, which makes it difficult for the two major political parties to win over voters after failing to stabilize the fragile economy.

Argentina, has been struggling with its rising international debt. But since 2018, inflation has steadily increased, making it difficult for the nation to keep up with its repayment schedule to IMF. The IMF 2018 plan was replaced in 2022 with a new $44 billion loan agreement. With the ongoing crisis, the IMF stated it had reached a staff-level agreement to lower the nation's economic goals under the latest debt repayment plan. IMF officials further argued that it would be difficult to fight the inflation as severe drought has ignited more challenges. The IMF staff has further asserted that they had requested the Argentine administration to modify important financial plans for increasing foreign exchange reserves. It stated that early 2023 would be the focus of changes that would help the program be adjusted for the nation's ambitions to save money by reducing its expenditure on energy imports. However, the IMF's assistance is fueling worries about a potential devaluation of pesos that could plunge the second-largest economy in Latin America into an even worse crisis. Before coming to an agreement, IMF has put conditions which the country must apply to reduce the inflation and Argentina must pass quarterly assessments in which the government must demonstrate progress in reducing its fiscal deficit.

Beyond politics, Argentina's economy is suffering greatly from inflation that has wiped out wage increases in a country where nearly 40% of the population lives in poverty. With growing inflation as well as high interest rates, it is anticipated that money available for spending will limit private consumption. In addition, the country's economic activity may be constrained as a result of high levels of debt, stringent controls regarding imports, and low levels of foreign reserve holdings due to the anticipated severe depreciation of the Argentine peso.

As a direct consequence of this, the expansion of Argentina's real GDP in 2023 will remain flat, in contrast to the substantial increase of 5.1% that was accomplished in 2022. The most recent research from Global Data, titled "Macroeconomic Outlook Report: Argentina," indicates that the rate of economic growth in the country has slowed. The Argentine peso had a depreciation of 37.6% in 2022, and it is anticipated that the rate of depreciation will accelerate to 76.4% in 2023.Argentina is anticipated to enter a deeper recession as a result of increasing inflation and a crop drought that is swiftly getting worse. This year, Argentina's economy is predicted to drop 2.3% that could be the worst result among the Group of 20 nations. In 2023, economic growth in Argentina is predicted to be stagnant, down from the 0.5% increase forecast in the previous survey. By the end of this year, the average nominal exchange rate of the nation will probably decline to 330.47 pesos to the US dollar. Argentina's economy will be on the verge of a worsening crisis if things continue this way.

For Argentina, stopping a fixed exchange-rate system that results in overpriced exchange rates and contributes to inflation should be a priority in the fight against the current financial crisis. This includes, stopping a system that is based on a currency board to help minimize currency crises. The liberalization of transactions, the promotion of direct investment from other countries, and the privatization of companies that are now controlled by the government are all possible beneficial policies for Argentina. Other types of capital inflow, such as portfolio stock investments and direct investments in plant and equipment that would not result in debt, should be taken into consideration in order to ensure the stagnant financial growth in the years to come.

Aishwarya Sanjukta Roy Proma is a research intern at the KRF Center for Bangladesh and Global Affairs. Previously, she worked at the East Asia Study Center. She is a research analyst in security studies. She obtained her Master's and Bachelor's degrees in International Relations from the University of Dhaka, Bangladesh. She can be reached at [email protected].