Report Nº: 94928/01/2022
The fiscal deficit of the national public sector is in the order of 5% of GDP. Most of it was financed with monetary printing which, since it is not entirely accepted by the public, had to be absorbed with Leliqs and repros. This generates an accelerated and unsustainable increase in the Central Bank’s debt.
The Ministry of Economy released the fiscal result of the national public sector in 2021. The total fiscal deficit, which is the sum of the primary fiscal deficit plus debt interest, decreased from 8.3% in 2020 to 4.9% of GDP in 2021. The slump responds to the fact that 2020 was an atypical year. In 2021, while not yet fully normal, public revenues tended to recover and Covid expenditures declined.
A better benchmark for comparison is 2019. In this perspective, the total deficit increased by more than one point of GDP, as it was 3.8% of GDP in 2019. The increase in the imbalance of public finances is explained by the fact that while public revenues increased by 1.5% of GDP, expenditures soared by 2.6% of GDP. The deterioration in the public finances clearly does not originate from the stagnation of revenues but from the strong acceleration of expenditures.
This deficit generates a “financing need”. In other words, it forces the taking of public debt or the printing of pesos. In this regard, according to data from the Ministry of Economy and the Central Bank, between 2019 and 2021, it is observed that:
These data show that national public sector indebtedness continues to grow. What has changed is its composition. Since Argentina rescheduled its debt, it has very limited access to credit through government bonds. With great effort, new debt is placed in the local financial market, which is barely enough to cover the maturities of the old debt. For this reason, practically the entire fiscal deficit is covered by money issuance. In order to prevent it from exacerbating inflation, the Central Bank absorbs the excess of money in the market by placing Leliqs and repros. In the last two years, this absorption doubled the Central Bank’s debt.
This dynamic invalidates the Vice-President’s argument questioning the IMF loan because it is a debt in dollars that cannot be paid in pesos. This view overlooks that issuing pesos to pay peso debt is equally harmful because it accelerates inflation. Paying peso debt with peso issuance is analogous to declaring default on dollarized debt, only that it is done gradually and not explicitly, eroding Argentines’ incomes with rising prices. When indebtedness is irresponsible, the currency of denomination does not matter.
The Central Bank’s accelerated indebtedness also invalidates the official argument that a faster reduction of the fiscal deficit, as the IMF would be requesting, would entail sacrificing economic growth. The main factor for the increase in the fiscal deficit is subsidies to energy, transport, and State-own companies, which increased from 1.6% in 2019 to 3.2% of GDP in 2021. According to the high-top officials, if utility tariffs were not subsidized there would be less consumption and thus less economic activity. It is overlooked that the Central Bank’s Leliqs and repros to absorb the monetary issuance caused by subsidies is recessive because it takes credit away from production and consumption. Subsidizing tariffs with money issuance to encourage consumption and, on the other hand, absorbing the money issued to contain consumption so that it does not generate more inflation is like the dog chasing its own tail.
The main conclusion is that the fiscal deficit must be reduced not because the IMF imposes it but because common sense demands it. Issuing money to pay tariff subsidies and then absorbing it with Leliqs and repros is regressive and recessive. Regressive because the subsidies favor middle and high-income families. Recessionary because it has reached the point where all bank deposits are going to Leliq and repros, instead of being used to provide credit to firms and families.
