Report Nº: 103227/09/2023
The enormous accumulation of liabilities in the Central Bank is a major constraint to lower inflation. But even more restrictive is the fact that, if inflation is lowered, pension expenditure automatically will rise. This cannot be solved by manipulating pension indexing but through a comprehensive reorganization of the system.
The Central Bank’s liabilities (leliqs and overnight deposits) already represent 10% of the GDP. This is a consequence of the strategy applied by the government to withdraw monetary issuance excesses derived from fiscal imbalances. As these liabilities are remunerated, the interest they accrue forces more money issuance. With rising interest rates (more than 200% per annum), the dynamics become explosive.
The counterpart of the Central Bank’s liabilities are the fixed-term deposits that people have in banks. This led the Minister of Economy to speculate on the possibility of the new government implementing a “Bonex plan”. It would imply, as happened in 1989, swapping fixed-term deposits with a long-term government bond. This is an extreme and traumatic way of dealing with the problem of monetary excesses. The Central Bank’s liabilities are a consequence of the irresponsible fiscal deficits accumulated by the current government generating a major constraint for the next one.
The Central Bank’s liabilities, are the main obstacle for the next government to stabilize the economy? To answer this question, it is relevant to analyze the dynamics of public spending. According to data from the Ministry of Economy, it is observed that:
These data indicate that, if the economy were to stabilize, pension spending would automatically increase. Since pensions are updated according to past inflation, the acceleration of the increase in prices will reduce social security pensions. Conversely, if inflation falls, pensions spontaneously tend to recover their lost real value. This implies that the fiscal challenge is not only to eliminate the current primary deficit (estimated at around 3% of GDP) but also to find a way to finance a recovery of pension expenditure of no less than 2% of GDP.
Faced with this challenge, the traditional approach will risk proposing, as part of a stabilization plan, a new modification in the pension index formula that would prevent the recovery of pensions. The goal would be to maintain the strong adjustment in pensions made by the current government’s inflation within a framework of price stability. Beyond ethical considerations, the scheme is short-sighted. History teaches that the manipulation of pension indexation brings lawsuits. That is to say, higher pension expenses in the medium term due to the adjustment of pensions with retroactive pensions, interest, and lawyers’ fees.
The effectiveness of a stabilization plan depends on a sustainable fiscal balance. This makes it necessary to discard tools that serve to lower current public spending at the cost of future spending increases. It is very important to assume that controlling pension spending by violating the retirees’ rights means increasing the State’s debt (even if it is not recorded as such in public accounting). This impact is analogous to other fiscal adjustment measures that generate a reduction in present spending with an increase in future spending, such as postponing investments in infrastructure, delaying payments to suppliers, or reducing public salaries’ real value with inflation.
The size and dynamics of the leliqs justify taking them as an important obstacle to stabilizing the economy. But even more challenging is to achieve stability with the recovery of the real value of pensions. The first step is not to fall again into the temptation of trying to perpetuate the pension adjustment by manipulating its indexation. The second step is a thorough review of the complex network of pension regulations for a comprehensive pension reform that will simultaneously allow financial sustainability and equity in the pension system.
