Why does the Miley government say this is the problem?

Why does the Miley government say this is the problem?

(CNN in Spanish) — “The root of our problem has always been financial,” said Argentina’s Economy Minister, Luis Caputo, when announcing the first economic measures of Javier Miley’s government. “What appear as problems are actually consequences of how this deficit is financed,” he said, noting that rising debt, high inflation and the depreciation of the peso against the dollar are consequences of the fiscal deficit and therefore – according to the government – is the problem that must be solved.

“What is a deficit? Well, simply put. A deficit occurs when more is spent than is raised at the state level,” Caputo said.

In its financial monitor, the IMF expects the country to A Fiscal deficit 3.99% of GDP in 2023 and is expected to reach 3.73% in 2024.

In 2023, Argentina ranks 117th out of 150 countries in the IMF Comptroller’s Country Ranking.

Argentina’s National Institute of Statistics and Census (Indec) reported that as of November, cumulative inflation for 2023 was 148.2%. In the annual comparison, the increase reached 160.9%.

In October, the previous administration of the Ministry of Economy indicated that this was the main reason behind the increase in the fiscal deficit during the year It was drought Which hit agricultural production and thus one of the main sources of income for the state, which is the tax paid by exporters. The impact on export duties received by the country, according to the Economic Portfolio’s estimates at the time, was equivalent to an income loss of approximately US$3.3 billion, or 0.7% of GDP at the official exchange rate at that time, with respect to the projections contained in the Budget Law. 2023.

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The drought has exacerbated the negative situation due to the shortage of the dollar in a country whose main exports are agricultural products and raw materials. In the agricultural campaign of 2022 and the beginning of 2023, approximately 55% of the country’s territory was affected by lack of rain, according to a report issued by the Drought Information System for Southern South America (CISA). The economic impact, according to a report from the Buenos Aires Grains Exchange in January, would reach 1.8% of GDP and exports would fall by 1. US$14,115 million for the 2022/23 commercial campaign.

In addition to a fiscal deficit, when spending is more than collections, Argentina has a current account deficit in the balance of payments, when there is Imports are more than exports. In the latest balance of payments record, Indic said that during the second quarter of 2023 The current account showed a deficit of 6,351 million US dollars.

To solve the financial problem, Caputo announced that some government employment contracts would not be renewed, the suspension of official government guidelines for one year, the reduction of ministries, a “minimum” reduction of discretionary transfers to provinces, and a temporary pause. In the new tenders offered by the state for public works, the reduction of subsidies for energy and transportation and the devaluation of the peso against the official dollar.

“Addiction to helplessness”

Claudio the loser The economist, head of Centennial Group in Latin America and former director of the Western Hemisphere Department at the International Monetary Fund, told CNN that Argentina is not the only country with a “deficit addiction,” as Minister Caputo calls it. “But he had been suffering from it for many years. People had lost confidence in him.”

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“Politicians are used to spending more than they can afford,” Loesser says.

This economist explains that cuts in public works, government contracting and subsidies are important.

The International Monetary Fund welcomes these measures

Following Caputo’s comments, the International Monetary Fund said on Tuesday that it supports the new initiatives.

“IMF staff support the measures announced today by Argentina’s new Economy Minister, Luis Caputo. These strong initial measures aim to significantly improve public finances in a way that protects the most vulnerable groups in society and strengthens the exchange rate system,” Julie Kozak said. Director of Communications at the International Monetary Fund, In a press release.

“After serious setbacks in economic policy in recent months, this new package of measures forms a good basis for continuing discussions aimed at redirecting the current Fund-supported programme,” it reads.

Next step, dollarization?

One of the proposals made by the new president during his election campaign was to dollarize its economy, for which Argentina would need to exchange all the pesos held by its people and companies for US dollars, and assign a dollar value to all its assets and assets. shrinkage.

Such a move would effectively dissolve the Argentine central bank, handing the reins of monetary policy (i.e. the power to set interest rates and print more money) to the US Federal Reserve. The Fed will continue to set the cost of borrowing based on the needs of the US economy, not Argentina’s needs.

Miley has argued that handing over autonomy to Washington is a necessary step to instill discipline in Argentine policymakers. This means that Argentina can no longer print money.

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“This was Argentina’s problem with covering the fiscal deficit: it started up the central bank’s photocopier and started printing money,” he told CNN in October. Christopher SabatiniA senior fellow for Latin America at Chatham House, he added that dollarization would “enforce fiscal discipline” by helping to cool inflation.

With reports from CNN’s Anna Cuban, Crystal Hoare and German Badinger

Aygen Marsh

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