Report Nº: 14/10/2018
Faced with the anxiety generated by a high and unstable value of the dollar, the Central Bank raised the reference interest rate to 73%. This leads the financing cost for most companies and consumers to above 80%. Under these conditions it is inevitable that the recession will deepen and, associated with it, the destruction of jobs could accelerate.
Meanwhile, from different sectors, including from abroad, criticism of the adjustment is intensifying. Some emphasize the difficulties of increasing taxes and reducing expenditures in order to reach a zero primary deficit. Others argue that interest rates at exorbitant levels are severely damaging the productive apparatus. Faced with these questions, it is worth Fiscal adjustment is not a whim of public officials but an imposition of reality. The systematic lack of austerity in the public sector generates an imbalance that no one is willing to finance. With more agility and strategic sense in the ordering of the public sector, equilibrium can be reached with reduced social costs.
Asking whether fiscal adjustment and high interest rates: Are they a whim of officials or a factual fact imposed by reality? In other words, are there alternatives to continue financing the fiscal deficit without exacerbating the dollar or interest rates?
In order to find an answer, it is useful to compare the fiscal deficit with the amount of money held by the public. According to information from the Ministry of Finance and the Central Bank, it is observed that:
These data show that if the government decides to renounce fiscal adjustment and finances it only with money printing, the amount of money in people’s hands would increase by more than 40%. If Argentines were to allocate those pesos as savings without dumping them on more consumption or buying more dollars, the strategy would be viable. But since it is foreseeable that, in the face of such a monetary shock, people would quickly get rid of the pesos by consuming and buying dollars, monetary financing of the fiscal deficit would lead to hyperinflation. In other words, if the fiscal deficit is not lowered, it is impossible to abandon the Central Bank’s strategy of raising interest rates in order to absorb the issued pesos with more debt.
Nor is it feasible to mitigate the recessive effects of fiscal adjustment with a substantial reduction in the interest rate. At present, the Central Bank has accumulated very short-term debts with the people (LEBAC) and with the banks (LELIQ) for USD 40 billion, equivalent to 5.8% of GDP. This means that, if the Central Bank reduces the interest rate and all this debt is monetized, the amount of money in the hands of the public would also increase by more than 40%, causing an impact similar to that of financing the fiscal deficit with monetary printing.
That is why, instead of distracting energies into unleashing alternatives, it is essential to give clear and convincing signals that the fiscal deficit will be eliminated. The budget as sent to Congress is going in the right direction, but it is insufficient. On the one hand, because in order to make revenues sustainable, the tax administration must be improved by aiming to collect more, not with new taxes, but by expanding the tax base and reducing loopholes and evasion. On the other hand, because the reduction of expenses should not be based on cuts in investment but on reforms of the social security system and the elimination of federal programs that overlap with functions in charge of the provinces and municipalities.
In the transition, it is advisable to resort to innovative measures. For example, in Chile, the SME sector proposes that large companies do not to be able to take VAT credits from unpaid invoices. It is a way of discouraging them from financing themselves at the expense of their suppliers (as well as improving tax collection). These kinds of alternatives should emerge if the prevailing conviction is that the faster the state moves forward equilibrium, the faster the crisis will be overcome.