By Campaign Agent Sophia Esquenazi
Following years of economic struggle, Argentina currently faces one of its greatest challenges yet: a plummeting economy and dwindling confidence within it. As the Argentine peso remains weak, having lost more than 40% of its value against the US dollar in late August, the country must quickly find a solution to prevent further harm to its economy.
In a rapid response to the peso’s plunge, Argentina’s central bank increased interest rates to a staggering 60%, up from 45%. Raising interest rates when there is a drop in currency value typically increases the value of a country’s currency, as it tends to attract foreign investment. Additionally, the higher interest rate helps control inflation because consumers choose to save as returns from savings are higher. Argentina’s inflation currently stands at 34%, and while action was taken to control this, economic growth, the peso’s performance, and inflation are expected to worsen this year.
Despite rising interest rates, the value of the peso continued to drop amid trading on foreign exchanges, leading to a greater loss of confidence in the economy and government of President Mauricio Macri. Investors have pulled money out of the country, severely harming the government and companies that hold debt in dollars. Furthermore, a damaging drought in the country has hurt key agricultural exports, including soybeans and corn, which has contributed to the economy’s contraction.
As the economy continues to deteriorate, Argentina has turned to the IMF for help, attaining a $50 billion loan to aid in alleviating economic turmoil. Shortly after the announcement, President Macri unexpectedly asked for the loan to be released early. The request created more concern, unexpectedly causing the peso to drop more than 7%. With its economy still weakening, the International Monetary Fund has agreed to provide a bigger and faster bailout to Argentina. It will increase its 36-month financing package from $50 billion to $57 billion, the IMF’s biggest loan in history. As part of its agreement, the government will cut back spending in order to balance the budget by 2019. In a press release by Christine Lagarde, the managing director of the IMF, she states that reducing the Federal government’s deficit will “lessen the government financing needs, put public debt on a downward trajectory, and as President Macri has stated, relieve a burden from Argentina’s back.”
Many are expressing concern over the aid being received by the IMF because of the country’s past experiences with the organization. The IMF has been blamed for worsening Argentina’s 2001 economic crisis when the government defaulted on its debt and the banking system was at a standstill.
Argentina has struggled economically for many years now. Between 2007 and 2015, under the presidency of Cristina Fernández de Kirchner, problems began when public spending was raised, companies were nationalized, and many goods were being subsidized. The government also controlled the exchange rate, leading to several dilemmas, including the creation of a black market. In 2015, When President Macri was elected, he promised to return Argentina to a market-oriented economy where supply and demand determine prices, rather than the state. Although this was promised, the country continues to experience economic hardship.
Argentina is in a precarious situation. Despite the increased efforts by the government to reduce spending and a large loan from the IMF, many analysts express that economic pressure will continue. The South American country must take action expeditiously in an attempt to restore market confidence and halt economic turmoil.
Sources and Further Reading
Patrick Gillespie, Jonathan Gilbert, ‘How Poor Communication Fed Argentine Peso's Collapse’, Bloomberg (31 August 2018)
Patrick Gillespie, ‘Argentina's Inflation Rate Hits Highest Level of Macri Era’, Bloomberg (13 September 2018)
Luc Cohen ‘Argentina’s economic crisis explained in five charts’, Reuters (28 August 2018)
Daniel Gallas, ‘Why confidence in Argentina's economy is dwindling’, BBC (30 August 2018)
Christine Legarde, ‘IMF Reaches Staff-Level Agreement with Argentina on a Three-Year, US$50 Billion Stand-By Arrangement’, International Monetary Fund (7 June 2018)
Nick K. Lioudis, ‘How do national interest rates affect a currency's value and exchange rate?’ Investopedia (8 March 2018)
‘IMF boosts bailout for crisis-hit Argentina’, BBC (26 September 2018)
Image: Jorge Láscar @flickr