CLARIN: Given the new price agreement announced by the government, economists warn that the chances of it working are slim amid a sustained rise in the exchange rate and tariff increases in a context that lacks a clear economic path to deepen the adjustment of prices and become fiscally responsible.
According to Eugenio Marí, chief economist of Fundación Libertad y Progreso, “This type of agreement is something we have tried repeatedly. The Precios Cuidados program has been in force without interruptions since 2013. That year annual inflation was 25% and poverty was 26%. In 2022 inflation will close above 100% and poverty at 40%,”.
The Government confirmed this Friday that 1,788 products will be frozen as part of the official plan negotiated by the Ministry of Economy.
Marí pointed out that the products whose price is frozen for four months “will accumulate a relative delay of 27% with respect to the consumer price index (CPI)”, since a monthly inflation of 6% or more is expected between December and March of 2023.
According to Marí, “The lack of a major fiscal or monetary program is worrying. We need to improve the sustainability of public accounts and generates expectations that the Argentine State will be able to deal with its debt and dispense with the monetary issue as a financing instrument”.
For Fabián Amico, coordinator of the Institute for Workers’ Statistics (IET) of the Metropolitan University for Education and Work (UMET), “this freeze can last in the very short term. Three months seems to be too long.”
“It is very difficult to freeze prices when the nominal exchange rate grows at 6.5% per month, we have increases in the rates of public services ahead of us and, in addition, salary negotiations are open,” said Amico.
“There is no experience anywhere in the world of a stabilization plan when the exchange rate grows to 6.5%, which is equivalent to an adjustment in the price of the dollar that is equivalent to 100%,” Amico stated.
According to Camilo Tiscornia, director of the C&T consultancy, “if prices move to 4% this would help to lower inflation a bit since prices are currently above 6%, but history plays against him. It can work at the beginning, but if macroeconomic conditions do not change, the prices end up being regularized and the agreement does not end up working”.
Referring to the history of price agreements, Tiscornia recalled that “a year ago Feletti supported these agreements and thus we went from an inflation of around 3% monthly to one that surpassed 6%. It may have some effect in the short term, but I don’t see it lasting.”
The only chance for it to work would be that “the government is thinking of advancing even further in fiscal consolidation. But if there is no deficit adjustment, Massa’s promise of not issuing will not be sustainable. And if they cannot kick debt maturities, the problem is amplified. These agreements could be a complement to more substantive measures, but they are not the solution,” Tiscornia summarized.
The weakness of the exchange situation also sets off alarm bells, with the Central Bank selling US$ 763 million so far this month to meet market demand in the midst of a shortage of supply and with no signs that it is recovering income in foreign currency.
“The lack of a fiscally relevant program makes the price agreement less credible and, consequently, its impact is reduced. In addition, in this case it is linked to the fact that companies will be able to import at the official exchange rate, an exchange rate that it is not clear that the Central Bank can defend for four more months,” Marí said.