For
Marina Dal Poggetto and Sebastian MenescaldYo
Economists. Eco Go directors
Since the rush to weight broke out in early 2018, we have insisted on the need for a stabilization program. With an inflation rate that then began to run at 50% per annum, with half of public spending indexed to the past and with income favored by the inflationary leap, Any attempt to lower inflation would go against the heart of the scheme, which is fiscal consistency..
With an inflation rate today close to 100% per year which has recreated in less than three years the same price distortion that existed in 2015 but with an exchange rate gap of 95%; with the same expenditure indexation components after discontinuing pension indexation by law and reintroducing it in 2021; and with a tax system largely favored by inflation, the need for a global stabilization program increases. Today the problem is no longer just a fiscal one, but basically a quasi-fiscal one.
But even if there is consensus that there is no room for gradualism, the truth is that there is not necessarily consensus that it implies a shock. Below we include a cursory review of what components a stabilization program should have at the start of a new administration. As a trigger, trying to get away from the restrictions of politics and trying to think how to mitigate the distributive conflict to prevent “taking the lid off a pressure cooker that has heated up” from becoming a Rodrigazo.
1) Correction of relative prices: dollars and rates
Both variables are correlated as the devaluation of the peso (increase of the official dollar) affects the costs of utilities, directly increasing the increase in tariffs necessary to reduce the budgetary burden of subsidies and balance the balances of regulated utility companies .
The devaluation has three direct hits:
a) Reduces domestic absorption. By raising the price of the dollar, it reduces the demand for imports which today is stimulated by the exchange rate gap. De Perogrullo, for the devaluation to be successful the gap needs to be compressed and the pass-through to prices moderated, which is not trivial.
b) It liquefies the excess (surplus) of pesos in the economy. As explained below, this will depend on the overhang composition at the time of program launch.
c) If the devaluation is partially offset by temporary increase in withholding taxes to all exports helps to close the fiscal deficit and cushion the pass-on to domestic prices. Obviously withholdings not they can be collected if the currency gap persists because they are confiscators, e neither they can be cashed in if the stabilization goes well and the initial dollar overshoot is eased. Today the exchange rate gap incorporates an exporter-to-importer cross-subsidy of 8% of GDPthe same that the nation spends on pensions.
2) Fiscal Closure
successful stabilization programmes they cut the monetary financing of the deficit. Hence the need for the stabilization regime to go hand in hand with a structural reform agenda that consolidates fiscal accounts without the need to incur withholdings over time and where the competitiveness of the economy does not rely solely on a high dollar regime /low wages.
3) Almost fiscal closure
Priority should be given to avoid breaking contracts, but liquefaction only works if the peso debt is not widely indexed. Today Remunerated pesos in the economy today reach 16% of GDP, of which 60% are BCRA liabilities and the rest Treasury debt. By December 2023, peso debt could account for 20.5% of GDP if the interest rate remains inflation-neutral, and over 26% if the interest rate is positive by 20 percentage points. Its composition will also depend on the decline in demand for “free pesos” and fundamentally on the search for coverage by holders of pesos in the election year.
4) Exceeding the interest rate
The interest rate must climb after weight devaluation, not before. In order for you to do well and avoid recreating the overhang (surplus) of pesos, it must go down ex post. It is difficult to remove all capital controls, but the national tax and perception system must necessarily be dismantled. For this, it is a necessary condition that country risk decreases, i.e the starting exchange rate is high and the exchange rate advantage does not dissolve quickly with inflation.
5) Some stabilization plans provide for mechanisms of ease (Plan Austral) and/or indexation (Plan Real)
Difficult to think of a relief mechanism like the Southern Plan since unlike then indexing is not generalized nor does it happen with the same terms. Yes, government spending will need to be de-indexed, even if continuing to combine retirements at current subsistence levels doesn’t seem politically feasible or humanly reasonable.
6) Normalization of the dollar debt market
The fiscal signal framed in a coherent program with political accompaniment to an agenda of structural reforms that support competitiveness and make the regime sustainable should help reduce country risk in a context where the maturity profiles of the 2021 restructured debt are comfortable. The opening of credit is a necessary condition, even if at the same time one should get used to living with the tax balance using credit only to refinance maturities, not to finance the fiscal deficit, much less to finance salaries and pensions. All roads lead to fiscal consolidation.
7) Definition of a monetary peg program?
The exchange rate anchor is the fastest to monetize the economy, and at the same time the hardest to sustain when the world plays against it. No lender of last resort Allowing the intermediation of dollars through the financial system carries some risks (we have already seen this with Convertibility). It seems more reasonable to start with a monetary aggregate program consistent with fiscal equilibrium and capital controls that need to be dismantled little by little.
8) Price and wage agreements
Relative price dispersion includes ridiculous prices for utilities, ridiculous prices for goods, and a wage that has lost more than 20% against inflation since 2015 in formal sheltered sectors and nearly 35% in informal unsheltered sectors.
For the program to be politically sustainable, commodity prices must fall in dollars, or what is the same, must increase less than devaluation. This requires agreements, probably some measures that force published prices to be fair at first, but fundamentally the normalization of the exchange rate gap and greater competition.
Wages cannot recover what was lost in the beginning. Necessary a political agreement so that parity does not collapse. At the same time, pressures to readjust wages will appear, we need an agenda for competitiveness at work. This implies a change in labor laws.
9) Frame it in the deal with the IMF
The hardest today seems the easiest. The IMF is mired in cross accusations from both sides of the rift. The government accuses him of having loaned Macri $50 billion to finance his re-election. The opposition of having granted the current government a light agreement that kicked off the bulk of the balance for the next administration. Meanwhile, the IMF has done and continues to do everything possible to achieve two goals: that the country does not go backwards and is not responsible for the fall of Argentina.
10) Competitiveness Agenda
The macro and micro agenda must go hand in hand, there is no micro agenda that works if the macro is not ordered (Macri). And vice versa, there is no long-lasting stabilization program if progress is not made with a series of structural reforms that support the competitiveness of the economy and make the fiscal balance sustainable over time.
Obviously there are efficiency issues in a consolidated expenditure of about 37% of GDP in a country that has a “trout” welfare economy and where the population that can, runs away from public goods and pretends not to have to finance them with taxes.
Two thirds of the the expenditure for salaries is in the provinces which have concentrated spending on health and education since the 1990s. Correct spending efficiency here is a necessary condition for reducing the fragmentation of society, but fundamentally for doing so increase the job offer in an increasingly connected world.
almost half of Consolidated spending is for transfers. Of these, one-sixth are business subsidies and five-sixths are household subsidies. Of the latter, the pension scheme accounts for almost 80% and the rest are national social plans which need to be rearranged, but cannot be eliminated. Most subsidies to businesses go to energy and, to a lesser extent, transportation, but public companies take more than 1% of GDP. Low rates explain part of the imbalance, but there are also big efficiency problems.
Reform of work, pensions and taxation they have to think together. You cannot have the current tax structure (with its gross distortions and inefficiencies) with a tax efficiency estimated at 60% and a scheme that exploits inflation to collect rates not regulated by Congress. It is not possible to have a contributory and solidarity pension system at the same time, let alone with national and provincial privileged schemes; the single tax regime and domestic dependent work is fiscally more perverse in the future than the pension moratorium. it can not be continue to finance 3.4% of GDP of tax expenditures in the national budget, including the Tierra del Fuego regime and judicial workers who do not pay profits.
Regulation and opening: A closed economy cannot be maintained ad eternum, with current prices of goods. Are needed remove regulatory barriers and promote competition (logistics, connectivity, other infrastructure, reduce testing industry, etc.).
For this we need a legal framework and political agreements to be able to advance and basically agreements with the Court and the governors.
The score tries to summarize in a few characters and without putting numbers a longer document that we have included in our last monthly report written when there is still a year to go before the change of government and where cooperation to maintain the status quo and avoid an escalation of nominality – if one visualizes political change – does not seem the most intuitive scenario. Unfortunately in Argentina the consensus appears only when “everyone leaves”, transformed today into “the caste is afraid”, begins to be part of the agenda.
Source: Clarin
