IMF Doesn’t Have the Right Medicine for Argentina
Faced with a currency crisis, Argentine President Mauricio Macri’s first instinct was to call the International Monetary Fund. The conditions of the bailout deal, however, risk prolonging the IMF’s dubious track record when it comes to helping emerging economies.
The agreement reached last week between Argentina and the IMF brought the total bailout package to $57.1 billion through 2021. The cash injection is good news in the short term because Argentina’s government has a lot of U.S. dollar-denominated debt to service and the peso is down more than 50% against the greenback this year.
Argentina's President Mauricio Macri is dealing with one of the world's highest inflation rates and a sharp depreciation of the peso, which has lost more than halved its value against the dollar so far this year.
But it seems unlikely that the conditions imposed by the IMF will ensure the robust economic recovery many international investors are hoping for.
First, the IMF will only allow the Argentine central bank to shore up the peso if it falls beyond a certain level, and only by spending a maximum of $150 million dollars. If investors are intent on selling, that quantity may be little more than a water gun.
Second, to fix its inflation problem, the central bank will be forced to keep the amount of money it issues unchanged—it’s now growing at a 24% annual pace—and the government will need to massively slash its budget deficit.
This cocktail of policies echoes back to the 1970s, when limiting the amount of money central banks could print became all the rage. The approach proved unworkable and was soon abandoned. Many of the countries the IMF helped back then weren’t doing any better by the 1990s.
For countries like Argentina, the key determinant of inflation isn’t the amount of money in the economy, government spending or even central-bank policy. Instead, they are at the mercy of global capital flows. When the Federal Reserve raises rates and investors flock to the dollar, emerging-market currencies plummet and import prices surge. Workers and companies respond by trying to set wages and prices higher. Argentina is particularly prone to this problem because of its strong unions and dollarized utility prices.
Fixing Argentina’s economy may require painful measures, such as freezing public-sector wages, tempering union power and putting up with lower corporate profit margins. The government should also limit dollar debts. In the longer term, elements of China’s development success might offer a roadmap: Exchange rate stability, coordinated policy on incomes and a focus on producing exports in scale industries.
Targeting deficits and arcane monetary targets could indirectly achieve some of these goals, but it could also do a lot of damage. Rehashing the 1970s doesn’t look a useful path forward for Argentina. Investors should stay away.