Argentina takes emergency measures to prevent a big devaluation

Interest rates will be raised to nearly 100 percent by Economy Minister Sergio Massa and currency intervention will increase.

Argentina will announce a new set of emergency measures on Monday, including a 600-basis point increase in interest rates to 97 percent, to help stave off its worst economic crisis for two decades.

The Peronist Government is desperately trying to avoid a large devaluation in time for the October elections. The South American nation is also running low on foreign exchange reserves, as Argentineans abandon the rapidly devaluing peso in favor of the US dollar.

Inflation in Argentina hit 109 percent a year, its highest level since 1991, due to money printing by the government to finance a large deficit. The Economy Ministry said that the new measures would be announced on Monday and involve the central banks increasing intervention in the foreign exchange markets to try to slow down the peso’s decline.

Sergio Massa, the Economy Minister, is also trying persuade IMF to accelerate the disbursement agreed loans. He will be traveling to China on the 29th of May to encourage greater use of renminbi for foreign trade. Argentina initiated a currency exchange with China last month that allowed it to pay for just over $1bn in imports this month using renminbi.

IMF has been lenient with Argentina in the last year. It gave it more leeway to meet its targets of increasing reserves and reducing money printing to try to maintain a $44bn program on track. It’s unlikely that the IMF will want to advance disbursements months before an election which is likely to be pivotal and the government to lose.

Massa plans to import food with zero tariffs to reduce inflation. This is a first for a country that is the largest grain exporter in the world. As part of its efforts to boost the national industry, the government will lower interest rates for Argentines who buy local products on credit through a state-run program.

The latest measures do not mark a shift in direction, but rather a reiteration of policies that have been unable to reduce inflation or stimulate the economy. The risks are also high: the constant increases in interest rates make servicing a large amount of domestic debt more expensive.

Hector Torres is a former IMF Executive Director and Argentine Diplomat who now works at the Canadian think tank CIGI.

“I do not have anything against central banks using reserve funds to combat speculators and smooth out volatility. We are out of reserves and deeply indebted with the IMF. We have no access to capital market. It is reckless to sell what we owe the IMF in order to support an exchange rate which is unsustainable. It will only encourage speculators and investors to place bets on a new default.”

Economists criticised the government for its foreign exchange and price control policies, claiming that they created huge distortions and discouraged investment. They also claimed it lowered production. Many economists expect Argentina to be in recession this year. Oxford Economics predicts a 1.6% drop in GDP. This is the worst forecast for any major Latin American country.

In the midst of a bitter policy dispute between President Alberto Fernandez and his powerful Vice-President Cristina Fernandez de Kirchner Massa is considered one of Peronist Movement’s last remaining options for a presidential candidate in October’s election.

His plan to fix the economy temporarily to avoid painful austerity before the elections has been hampered by the severe drought that has affected agricultural exports. Massa’s chances of becoming a candidate depend now on the success his economic plan in the coming months.

The centre-right has not yet agreed on a candidate for the presidency this year. Support is divided between Horacio Rodrguez Larreta – the centrist Mayor of Buenos Aires – and conservative candidate Patricia Bullrich, who advocates law and order.

Javier Milei is a far-right candidate who has been steadily rising in the polls. He could still reach a run-off if he manages to increase his support outside of greater Buenos Aires. Milei’s radical anti-establishment campaign includes abolition of the central bank, and dollarisation of the economy.

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