The president of the Central Bank of Peru, Julio Velarde, in office for eighteen years and considered by the same markets to be more important than the President of the Republic, usually explains that when one exits from a scheme of multiple exchange rates and subsidies, Inflation is only going up.
This means that for prices to fall, they must first rise.
The sequence would be more or less the following:
First All the messes accumulated over the years are tidied up so that, once the dirty work is finished, businesses, the state and other actors know that with the prices and tariffs they charge, they will allow them to recover their investments and sustain their services into the future time without divesting and providing in a timely manner. This is what Velarde calls corrective inflation.
Secondonly when it is certain that corrective inflation is no longer underway does the task of supporting stabilization begin.
Argentina is in the first phase. The question many are asking is how the most affected sectors, which have seen their incomes collapse in recent years, will be able to tolerate such a start in 2024.
Then there’s the emissions inflation or fiscal deficit. Here Milei will have to overcome the pressure of many interest groups who will ask that their specific funds not be eliminated with the reforms via DNU, Congress or through the liquefaction launched by Caputo-Bausili.
Corrective inflation and liquefaction? What will come out of that mixture?
For former officials and experts, the sustainable fiscal balance over time will largely depend on how the amount of pensions and pensions paid by the state are permanently adjusted based on the destination of the majority of pesos coming from the public sector. And resorting to liquefaction to reduce that share of spending is not sustainable, as former Economy Minister Domingo Cavallo once said. More structural reform is needed and that is what the IMF is calling for to get the program back on track.
Economists at Econviews, Miguel Kiguel and Andrés Borenstein, warned of the same thing as Cavallo. “We have doubts about the excessive liquefaction to which the program leads.” In addition to government spending, both economists argue, the government is pulverizing the assets and liabilities of the financial system. “This could lead to another jump in the exchange rate.”
“The part we don’t know and therefore generates risk is how the government will stabilize after realigning relative prices,” adds Econviews. It’s okay that we don’t know why Governments must always save the surprise effect”. Will it be a stabilization plan?
Source: Clarin
