THE PROBLEM IS NOT THE DOLLAR, IT IS THE INFLATION

The dollar reached AR$21, raising concerns among political and economic analysts and the general population. For a large part of Argentines, the price of the dollar is the most sensitive indicator of the performance of the economy. Therefore, any sudden alteration is cause for anxiety. There is long experience that devaluations are associated with crises. Not only because of the instability in the financial system but because it ends up affecting the general level of prices.

In addition, at the present time the concern increased because both inflation and the rise of the dollar have accelerated. Until August of last year inflation was falling and was located in the order of 22% per year while the dollar grew at a rate of 10% per year. After the elections, there was a change of trend, reaching the inflation at April 25% per year and the devaluation rate exceeding 35% per year.

To put into context this dynamic of the Argentine economy it is useful to take a look at the situation at the neighboring countries of the region. Based on data from the Central Banks of each country it is observed that in the last 12 months:

• In Uruguay inflation rate was 7% and the price of the dollar raised barely 1%.
• In Chile inflation was 2% and the value of the dollar fall by 8%.
• In Peru both inflation and the dollar increase were at around 0%.

These data confirm the atypicality of Argentina both in its devaluation rhythm and in its very high inflation. But, in addition, it also means that if we want to maintain the value of dollar, lowering inflation is key. To achieve this objective, the tools available to the Central Bank are very limited. On the contrary, it is the rest of the public sector who must take more energetic measures to control the growth of public spending and reduce the imbalances in the public finances. Only thus it will be feasible to lower inflation and, with this, have a quieter exchange rate market.

Devaluations are the demonstration of the very precarious fiscal situation. It is true that in the first 3 months of 2018 an important fiscal saving of 20% was observed thanks to the reduction of energy subsidies. But this was more than compensated by an increase of 30% in the main expenditure of the national government, which are the pensions, and 100% in the payment of interest on public debt. This led to the total deficit going from $ 540 thousand to $ 665 billion that is growing by $ 125 billion in just the first 3 months of the year. As an aggravating factor, the tools to moderate the growth of public spending are being strongly questioned in Congress. There are plenty of initiatives aimed at reversing or delaying the actualization of utilities tariffs. Should any of these demands be successful, the main source of public expenditure saving would be reversed, namely, the cuts in economic subsidies.

By exaggerating the benefits of gradualism, awareness of the social costs of the high fiscal deficit are lost. The devaluation is a consequence of inflation and this of the high imbalance in public finances. To avoid devaluations, it is necessary to assume seriously the organization of the public sector. A central theme is the comprehensive reform of the pension system. Key points are to tend to eliminate special regimes that allow certain people to retire before, contribute less or collect higher benefits. The spouse’s pension rule should also be revised given that it doubles the benefits since the people who already have a retirement benefit earn a second benefit (derived pension) when their spouse dies.

The dollar and utilities prices accompanying the dynamics of the general price level are the least bad of the alternatives. To avoid the traumas and the worries generated by the devaluations and the “tarifazos” (high increases in utility tariffs), inflation must be lowered. This highlights the importance of structurally ordering public finances.