La Nación – The ideal system for a country, that lived for a long time with strong price rises and doesn’t have a reliable indicator of its variation, is that of inflation goals since it allows people to negotiate agreements and contracts based on a common course of action. Parity negotiations for 2017 were quite difficult. This year are also going to be very difficult, as no one believes in the new target of 15%. How different it would have been if the price rise set at a ceiling of 17% in 2017 had been met!
So that said, inflation goals and its fulfillment must be the priority for the Central Bank (BCRA). But, until today, its main concern was to liquefy the problems generated by exorbitant public spending and then trying to lower inflation as much as possible. Therefore, it can not be said that there are inflation target in Argentina.
The main instrument used by the BCRA to control the rise in prices is the issuing of Pesos (local currency). If more is emitted, the Peso will lose more value and, therefore, all goods and services will increase their cost. If less currency is produced, its depreciation will be lower and, therefore, everything will rise less against it. However, as in 2017 the State needed financing, $150,000 million was issued to cover it. In addition, given that the huge fiscal deficit of the three levels of public administration (Nation, provinces and municipalities) absorbed much of the local credit drying the place for the private sector and raising the interest rate, the BCRA issued to increase financing and decrease its cost, particularly before the elections.
With all this production of pesos -which, for example, rose by more than 30% year-on-year in the first semester- it was impossible for inflation to fall below 17% and reach 24.8%. In addition, when the BCRA decided not to defend the value of the peso in May-August 2017, we noticed that the shrinkage of the value of our Peso ($) was first reflected in the exchange rate (because of the liquidity of that market), but then we would see it in the goods and, with a little more patience, in the services, because their prices are fixed in that same unit of measure that was reduced. This is what happened: if we compare the annualized price rise of the second half of 2016 (18.5%) with that of the same period in 2017 (more than 24%), inflation went up, which should not be surprising. It is important to emphasize this, because today we are seeing the same situation of the peso losing its value and a BCRA, that not only does not defend it, but also encourages the depreciation of the currency. Surely, it will then be “surprised” when the annualized inflation of the first semester of 2018 exceeds 20%.
To top it all, even though the three levels of the State did not have enough money to pay their excess in expenses, they placed a large amount of debt abroad, flooding the local foreign exchange market and making their quotation go down. The BCRA went out to mitigate the impact that this had on the producers of goods, whose prices depend on the exchange rate, supporting it with purchases of reserves. If it had issued pesos also to acquire all those currencies, inflation would have exceeded that of 2016, so they mostly did it with very high debt. This not only slows the recovery of the BCRA’s solvency; It also meant taking out financing from the local market and, therefore, a smaller increase in domestic demand, which probably generated a worse evolution of the economy. Something remarkable for a BCRA that justifies not meeting the goals so as not to affect the activity.
Thus we enter another myth: that the BCRA can stimulate growth with greater monetary expansion. It is true: in these years it issued providing more purchasing power to those who obtained cheaper credits; to the public sector, to which he transferred resources, and to the producers of goods, which had better prices because it prevented the exchange rate from falling even further. However, this purchasing power was removed with the inflationary tax on the Peso holders, particularly the poorest ones, which are the ones that proportionally store a greater proportion of their savings. So it also encouraged a very unfair redistribution. If we add that more inflation generates greater risk perception and therefore less consumption and investment, the reality is that there is no way that the actions of the BCRA have stimulated growth; On the contrary, it reduced it.
Conclusion: it is necessary for the BCRA to change the strategy that it has carried out until now and prioritize the defense of the value of the peso, complying with the inflation goals so that they really exist. Thus, the lower uncertainty will allow us greater economic growth and recover the solvency of the BCRA.
Written by: Aldo Abram, Executive Director, Liberty and Progress.