Budget confirms fiscal inconsistency - IDESA

Report Nº: 98311/10/2022

Budget confirms fiscal inconsistency

The government presented the draft Budget 2023. In addition to a complex and disorderly presentation, the projections have little relevance because they have been elaborated under an unrealistic inflation assumption. In any case, it confirms that the fiscal disaster continues to deepen.

The Ministry of Economy presented the 2023 Budget Bill. It contains more than 4,800 pages presented in such a complex and disorderly manner that it is difficult to interpret this transcendental instrument of public policy. Added to this are the inconsistencies and unsupported assumptions. The most transcendental is that the projections are made with the assumption that inflation -Consumer Price Index- will be 60% per year next year. By not explaining how inflation will be lowered from the 95% projected by the Budget itself for the current year to the 60% used in the projections of revenues and expenditures for 2023, the content of the Budget is reduced to insignificance. 

The draft Budget also sets forth the projection made by the Ministry of Economy for 2022. According to its estimates, the GDP in 2022 will be $82 trillion and the primary deficit will be $2.3 trillion. This implies that the primary deficit (i.e., excluding interest payments) would reach 2.8% of GDP, showing a small reduction with respect to 2021, which was 3% of GDP.

These projections made by the Ministry of Economy for 2022 are used to evaluate whether or not it plans to meet the fiscal target with the IMF. In this sense, the agreement with the IMF contemplated nominal targets. Specifically, it was established that:

  • GDP for 2022 would be $70 trillion.
  • The target for the primary fiscal deficit was agreed at 2.5% of GDP. 
  • This implies that the fiscal deficit does not have to exceed $1.8 trillion.

These data show that, assuming the government’s projections come true, Argentina will miss the fiscal deficit target in 2022. While the agreement contemplates a cap of $1.8 trillion for the primary fiscal deficit, the Ministry of Economy projects an imbalance of $2.3 trillion. The difference is explained by the vertiginous inflationary process. Therefore, measured in terms of GDP, the deviations are less profound. Surely this will be used as an argument by the Argentine government to get the IMF’s forgiveness, arguing that a deficit of 2.8% of GDP implies an improvement over last year and is not so far from the agreed target of 2.5%.

Another controversial issue in relation to public accounts is the “soy dollar”. The natural way to implement it would have been to eliminate withholding taxes on soybean exports. This would have been recorded in the public accounts as a loss of income and, therefore, as an increase in the fiscal deficit. Given that the deviation from the IMF targets would have been greater, this mechanism was used to establish that the Central Bank would pay a special dollar of $200 and that the loss it assumes by selling dollars at the official value of $140 would be compensated by a security issued by the national Treasury. Thus, instead of registering a higher deficit, what the Treasury records in accounting terms is an increase in debt.

There is no doubt that Argentina will default again on an agreement with the IMF. However, there are reasons to consider that it is feasible that forgiveness will be obtained and disbursements will not be suspended. The main reason is not so much the technical arguments of the national officials, but the resignation and fatigue of the IMF technicians and authorities. In this sense, the political negotiations for the Board of Directors to accept the default have a good chance of reaching a successful conclusion.

Achieving the continuity of the agreement with the IMF and achieving a good response to the “soy dollar” are the central axes of a strategy that focuses on the Central Bank’s reserves. The strategy overlooks the fact that the main problem is the excessive issuance of pesos to cover for the fiscal deficit, which forces the Central Bank to issue more and more Leliqs. The “snowball” caused by the absorption of monetary issuance with Leliqs keeps getting bigger and more expensive -every time the Central Bank is forced to increase the interest rate- which accelerates prices and makes it increasingly difficult to imagine a non-traumatic way out of the inflationary dynamics we are experiencing. 


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