The vast majority of comprehensive economic programs include two clearly differentiated components: an anti-inflationary program, realignment of relative prices and improvement of external accounts, and a program of structural changes.
Without the first you never reach the second;
Without the second it is very difficult to sustain the first.
In my opinion, the first is working better than expected, while the structural reform proposals are facing serious difficulties in their approval process.
Some readers may wonder how I can affirm that the anti-inflationary program is working better than expected when in the first two months since its implementation the general price index increased by 51.4% and demand plummeted in many sectors?
The answer is that this initial behavior is exactly what would be expected after the realignment of some prices (exchange rate, public services, health, etc.) that had been artificially contained for a long time.
The important thing is to determine if this price increase was in line with what was expected and what its future evolution will be.
After the initial adjustments, it is expected that inflation will begin to decline.
The data for January and private measurements for February seem to indicate this.
In my opinion, the government was right to implement an anti-inflationary program supported by two anchors: fiscal and exchange.
Inflation is the mechanism for adjusting imbalances in the unit of account market.
Most countries use their own currency as a unit of account, hence it is stated that inflation is a monetary phenomenon;
But in a bi-monetary country there are two units of account and to stop inflation it is necessary to stabilize both units of account.
However, it is impossible to stabilize the exchange rate if at the same time monetary imbalances are not eliminated, and these cannot be eliminated if fiscal imbalances, the true cause of much of Argentina's problems, are not eliminated.
The government proposed eliminating the total fiscal deficit, that is, including interest payments, and claims to have achieved it in the month of January.
To do so, he proposed tax increases and spending cuts, which in total represent an adjustment equivalent to five points of GDP.
Part of this adjustment is not paid by Argentines (increase in withholdings due to the end of the drought, among others), but most of it will fall on the shoulders of some Argentine
The government's greatest initial success was recorded in the external accounts.
In just under two months, the Central Bank bought almost 7,000 million dollars in the exchange market.
Is this reversal the result of devaluation?
The answer is negative, at least directly.
The result of the exchange market always reflects (it is an accounting identity) the differences between the demand for the monetary base and the issuance of internal origin.
If economic agents demand 10 units of monetary base and the government shows zero issuance, the demand will be satisfied through the issuance for the purchase of foreign currency.
This emission is not inflationary because it is related to a growth in demand.
The base demand in the first two months of implementation of the program increased by 719 billion pesos (7.4%), while the supply of domestic origin contracted by 4.26 billion, so the difference was satisfied through the purchase of currencies.
How is the contraction of domestic issuance explained? By the rescue of public securities held by the Central Bank and by increases in the famous remunerated liabilities of that institution, which more than offset the payment of interest.
If this policy is maintained, reserves should continue to grow, which would facilitate the elimination of the stocks and the exchange gap.
This exchange rate variation must also reflect the result of international transactions of goods and services (current account) and the capital account.
The current account reflects another accounting identity (the difference between a country's income and expenses).
In 2023 it showed a deficit of more than 20 billion dollars (mostly explained by the drought), while this year it should show a surplus as the harvest recovers, due to the greater dynamism of the energy sector and the drop in spending. public.
Capital has no nationality, it moves based on the expected risk-adjusted rate of return.
Structural reforms should improve profitability and adjustment policies should lower risk, so - if governance problems are resolved - the capital account should also improve.
The main challenge is in the evolution of economic activity and employment.
The experiences of 2001-2002 (with a similar adjustment) and 2009-2010 (with the drought) would lead us to predict a recessive first quarter and a recovery starting in the second quarter.
The key is in governance.
Difficulties tend to be reflected in capital outflows and this can make recovery slower.
Ricardo H. Arriazu is an economist.