Five actions to avoid another exchange crisis

LA NACIÓN –   The central problem of Argentina is fiscal. Public spending is exacerbated. The Ministry of Finance must create a fiscal program aimed at lowering the fiscal deficit and not just the primary one.

There was self-criticism. Mauricio Macri and the head of the Central Bank of the Argentine Republic, Federico Sturzenegger, acknowledged errors in their presentations after the exchange crisis in recent days. Macri said the inflation targets were too ambitious, while Sturzenegger acknowledged the market’s request to tighten monetary policy.

The truth is that two and a half years have passed with little progress in terms of inflation and little is expected in 2019, an election year.

When tracing recent history, one observes a 2016 of corrections with recession; a 2017 recovery; and it was expected towards the first quarter of this 2018 a first year of real growth. Analysts remained critical of the slow decline in inflation or fiscal inaction, but there was some consensus that inflation could fall from 24.8% that the Consumer Price Index (CPI) of the National Institute of Statistics and Census (Indec) measured for 2017, in addition to growth forecasts of between 2% and 3% of economic activity.

After the currency crisis, inflation estimates would exceed 25%, while the economic contraction, product of high-interest rates, would generate growth below 1.5%. The lower economic activity will reduce the collection, which also raises doubts about the new fiscal goals that the Minister of Finance proposed in the midst of the turbulence.

Below I detail the five key policies that I understand Argentina must take to avoid other currency crises before any “blow” that comes from abroad.

1 –   The Ministry of Finance must create a fiscal program or rule that aims to lower the fiscal deficit and not just the primary deficit. As long as the primary deficit goes down at a lower rate than debt interest, the fiscal deficit increases, as has happened in all this time.

2 –   The central problem of Argentina is fiscal. Public spending is exacerbated. The ruling party must retreat in the creation of the five Ministries created in these two and a half years of management. Even better would be to return Argentina to a structure of ten Ministries that existed when Cristina Fernández de Kirchner took office in 2007. Recall that under these agencies are created secretariats and undersecretaries that form a giant state structure that is expensive to finance and causes the rest of the imbalances.

3 –   Based on point 2, the primary fiscal balance can be reached in the next budget. It is necessary to work in these months in a Base Zero Budget like the one implemented by many companies and governments in situations of imbalances like the one that Argentina has today. There is a change of cycle in the global economy towards less liquidity that will make the financing of any fiscal imbalance costly.

4 –   As the government recovers the fiscal balance, it will be possible to advance in a reduction of the tax pressure. There are more than 100 taxes in Argentina, when only a dozen collects most of the revenue. Argentina can not pretend to attract local or foreign investment, with this level of taxes. A VAT or Income tax reduction is necessary, but gross income or check tax should be eliminated immediately.

5 –   The Central Bank of Argentina must recover its independence and stop financing the Treasury. A transition must begin so that the debt in Lebacs becomes government debt, which will strengthen the monetary authority in its fight against inflation.

I am not unaware that work should be done on a comprehensive reform of the State. But if Argentina is heading towards fiscal equilibrium, the monetary and exchange equilibrium arrives alone, and this gives space to continue with a reform towards the interior of the State structure so that it hinders less the entrepreneurial function and the market process.

Written by Adrián Ravier

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