In Argentina, inflation touched more than 100 percent mark in February this year after nearly three decades, driving down the exchange rate of its currency Peso to 2 per 1000 US dollars, the currency, most Argentines prefer to stock up including for payment for properties. Economic crisis is not new to Argentina, with their people inured to 30 percent inflation at best of times. The 2001 blunder consisting in confiscation of bank deposits to tie over the economic crisis disenchanted its people from bank deposits. When an economy is cash-driven and the central bank merrily goes on printing currency notes not represented by real economic growth, the bottom line is stagflation. When prices surge relentlessly, economists call the phenomenon, the unanchored expectations when people shop for goods to buy the cheapest in the circumstances and stock up in the knowledge tomorrow could be another day in the inflation-ravaged market where currency value depreciates by the hour.
In Zimbabwe this happened in 2008 when a sausage sandwich sold for 30 million Zimbabwe dollars, or about $1.25. The problem was that Zimbabwe’s skyrocketing inflation, running at more than 100,000 percent a year. A 30-pound bag of potatoes cost 90 million in the first week of March 2008 in Zimbabwe. A few months down when things worsened that same bag costs 160 million. Small wonder, driven to the wall, the government abandoned its own currency and embraced the greenback or the US dollar.
While Argentina hasn’t yet officially switched to the greenback, people have been keeping their wealth in US dollars (often under mattresses and pillows) reflecting their own lack of faith in the domestic currency and greater faith in the greenback perceived to be the only international currency so much so that Argentina is believed to be hoarding and accumulating the largest amount of greenback! But even this hoard has lost its sheen with the unofficial market for currency (officially the Peso is pegged to the US dollar) steadily hammering the Peso vis-à-vis the greenback.
The 2019 Covid pandemic, followed by the Ukraine war has been impacting the entire world negatively but for Argentina the unprecedented drought has spelled disaster, hitting its exports of soy, wheat and corn. Argentina is the world's topexporter of processed soy and one of the leading exporters of corn but the worst drought in over 60 years has damaged the crops, thereby hitting the imports. The worst drought is attributed to climate change on which of course Argentine rulers have no hold.
People are making a beeline for citizenship of Spain, Italy and Australia like never before highlighting the fact that patience has run its course. Successive IMF bailouts have done little to shore up the sagging fortunes of the South American nation whose only claim to fame is the last world cup football victory in 2022. Remember post great depression of 1930, Argentina was among the first ten economies of the world.
In fact, Argentina is struggling to meet the dreaded IMF conditions -- the strings its bailout packages come with including hike in lending rates now standing at a whopping 78 percent that is a sure- shot dampener for growth, axing jobs in the government sector, devaluation and reining in fiscal deficit that is easier said than done in an election year --attached to the last tranche of a staggering US$44 billion loan in 2022.
Incidentally this loan was to repay the last loan given by IMF in 2018 of the order of $57 billion, in a manner of "evergreening" that many Indian banks are accused of to cosset and camouflage their NPA.
The stiff conditions of IMF loans has prompted the nation to toy with the idea of seeking the membership of BRICS, the new kids on the developmental bloc, and seek bailout from its fledgling New Development Bank (NDB) rather than from the IMF.
But BRICS obviously won’t like to be singed by association with a nation that lurches from one crisis to another. In any case NDB has but a small war chest of just $12 billion barely enough to scratch the surface of its own existing members’ problems! It has another unsavoury reputation to live down---fickle mindedness. In 1973 Argentina joined the non-aligned movement only to desert it in 1991. Likewise, it deserted the South American Nations in 2019.
Argentina has been in the dubious company of Pakistan, Zimbabwe and Sri Lanka where protests spilled into streets a few months ago. In contrast, Argentines inured as they are to inflation and recession have been grinning and bearing stoically. Nearly 40 percent of Argentines live in poverty today, compared to about 25 percent at the start of the current round of crisis in 2018.
It is a matter of cold comfort that the current inflation is nowhere near the 1989-91 when it breached the 3000 percent mark annually! Another cold comfort is that it has fared much better than Zimbabwe, Lebanon, Venezuela and Syria in the dubious race for inflation.
The saga of Argentinian economic crisis has been mindless printing of Peso, IMF bailouts and sale of government bonds (only to default in servicing them) to pay off government employees.
— The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.
Read his previous articles here (Edited by : C H Unnikrishnan)
First Published: Jun 13, 2023 1:12 PM IST
