By Petyo Rakov
While Europe is overcoming an annual inflation rate of less than ten per cent, across the Atlantic in Argentina, annual inflation hit 104.3 per cent in March 2023. This devaluation of the currency effectively doubled the price of many consumer goods. Moreover, the inadequate efforts of the government to manage the crisis have led to the formation of an unregulated ‘blue’ market for currency exchange. Thus, it is worth asking what are the main recent developments regarding the Argentine peso.
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Quantitative Overview of the Inflation
According to the National Institute of Statistics and Censuses (INDEC), just in February 2023, consumer prices increased by almost seven per cent. This prompted the annual inflation to hit 104.3 per cent compared to last year, a record-high digit for the last 30 years.
In addition, since 2018, the annual inflation rate has not fallen below 30 per cent. In April 2018, one dollar (0.81 euros) was worth 20.08 pesos. Meanwhile, in April 2023, one dollar (0.91 euros) is worth 217.44 pesos, an increase of 960.78 per cent.
In response to this jump in inflation rates, a 2,000-peso banknote is to be unfolded in 2023, even though, in 2016, a 100-peso banknote was the highest denomination in circulation.
These figures foreshadow a shortage of affordable foods and beverages, whose prices rose by almost ten per cent during February 2023 alone.
Additionally, the agriculture and livestock sector fell eighteen per cent, partly due to the worst drought in recorded Argentine history. This was characterised by a heat wave of 40 degrees Celsius and wildfires that devastated 800,000 hectares of arable land.
Altogether, a recession is expected since Argentina did not capitalize on its FIFA World Cup victory. Scientific studies suggest that winning the Mundial increases GDP growth by at least a quarter of one per cent in the two subsequent quarters, usually due to increased exports.
Instead, analysts forecast that the economy contracted for two consecutive quarters at the end of 2022, constituting a recession.
The Grey Area of the ‘Blue’ Exchange Market
Black markets arise when currency exchanges take place at an unofficial exchange rate, usually in macro environments with high inflation rates. In Argentina, tourists are able to double their purchasing power by exchanging cash with arbolitos.
These illegal, unregulated exchangers, ranging from Airbnb hosts to street vendors, are ‘incentivized’ to partake in this activity by the government-imposed monthly limits on the number of pesos that can be exchanged at the official rate. As of April 2023, this restriction stands at 200 dollars per month.
Apart from exchanging with tourists, to circumnavigate the present limitations, citizens engage in trueque (bartering) or exchange their savings in dollars through cuevas financiarias.
These institutions usually exchange pesos at the unofficial ‘blue’ rate, which devalues the peso nearly by half. Despite that, the cuevas are widely used by Argentinians, who tend to treat them as the lesser of two evils, the other one being the previously mentioned limitations.
According to the Central Bank of the Argentine Republic (BCRA), Argentine households and non-financial companies hold more than 230.00 billion dollars (209.66 billion euros) in foreign financial assets such as foreign currencies.
To put this astounding figure into perspective, the GDP of Argentina for 2021 was 487.23 billion dollars (444.14 billion euros). It should be noted that this estimate includes only the declared assets from foreign and domestic bank accounts and vaults.
Considering that the trust in the Argentine government is lower than both the Latin American and global average, this figure is probably greatly underestimated.
The parallel value of the dollar on the black market, the so-called dólar blue, is tolerated. Western Union, an American multinational financial services company, is operating at this rate, which in April 2023 is worth 418.00 pesos.
Since Western Union is the preferred option by foreigners for exchanging their money, the ‘blue’ rate is de facto being ‘officialized’. The interesting effect of these developments, coupled with the unfavourable official rate for foreign cards, is the over-prevalence of cash transactions. In Argentina, discounts are sometimes applied when paying cash.
The Politicisation of Inflation and Potential Solutions
Inflation is voters’ top concern, and thus a central opportunity to entice voters for the 2023 Argentine general (congressional, gubernatorial, and presidential) elections scheduled for 22 October 2023.
Curbing inflation is a relentless challenge that has been politicised in the past. Economists argue that the inflation is partly self-inflicted due to the excessive printing of pesos to compensate for a deficit, caused by inefficient subsidising of health, education, and transport services.
The failure of previous presidents to stabilise the peso has severely damaged their approval rates. In addition, in 2022, three economy ministers succeeded one another in the span of four weeks.
In 2018, after continuous struggles with international debt, Argentina arranged a deal with the International Monetary Fund (IMF) for more than 57 billion dollars (51.94 billion euros), the biggest loan package in the fund’s history.
However, the country was unable to follow its repayment plan. For that matter, in December 2022, the IMF approved a bailout of six billion dollars (five-and-a-half billion euros) as part of a 30-month program that is expected to reach a total of 44 billion dollars (40.4 billion euros).
It should be noted that opponents of the IMF argue that the loans enable member countries to pursue reckless domestic economic policies that delay needed reforms and create long-term dependency.
The abovementioned developments diminish Argentina’ and foreign investments. To combat this, Argentina is marketing itself as lucrative for digital nomads, citing among others its low living costs and ‘competitive’ exchange rates.
This move demonstrates the complexity of the situation since the country is willing to tolerate and even pitch the numerous exchange rates of the ‘blue’ market or adopt a parallel common currency with Brazil in its efforts to attract capital.
Furthermore, since December 2022 the country has been attempting to increase the influx of dollars by allowing MasterCard and Visa to start offering Uruguayans and other travellers an exchange rate that mimics the ‘blue’ rate.
By eliminating the inconvenience of wads of cash, Argentina is hoping to promote spending since studies suggest that when consumers use credit cards, they often spend more.
Concluding Remarks
The devaluation of the Argentine peso has been a serious problem for at least the past 30 years and has already led to the decimation of economic sectors on numerous occasions. Moreover, this crisis has led to the formation of a widespread black market for currency exchanges, that attracts tourists and citizens alike.
As a consequence, inflation has become voters’ top priority, meaning that the next government will have to reform the economy in order to prevent an upcoming recession.
Sources: BBC, Buenos Aires Times, CNN, DW, MJPE, New York Times
Written by Petyo Rakov
April 2023