Inflation is approaching 300%! Can "shock therapy" cure Argentina's chronic disease?

On May 14, local time, the Central Bank of Argentina announced that it would cut the benchmark interest rate from 50% to 40%. This is the sixth rate cut since Javier Milley took office as president of Argentina last December.

At the same time, Milley also insisted on reducing the size of the central bank's balance sheet because "inflation is declining."

Earlier in the day, Argentina's National Statistics Institute released data showing that the country's consumer price index (CPI) rose 8.8% month-on-month in April, the lowest level in the past six months and the first time it reached single digits since October last year; In the first four months of this year, the CPI rose by 65% and 289.4% in the past 12 months.

The International Monetary Fund (IMF) believes that Argentina has "made faster progress than expected" in restoring macroeconomic stability, and expects to disburse nearly $800 million in loans to Argentina.

However, shopkeepers and consumers alike said that the changes brought about by the slowdown in the monthly inflation data have not yet been fully felt, and prices are still high.

Inflation is slowing, but prices are still high

When Milley took office in December, Argentina's inflation rate hovered at 143 percent; Since taking office, Milley has pursued a series of reforms centered on "shock therapy," hoping to repair the economy and curb inflation through dollarization, market deregulation, and austerity measures.

Argentina's CPI rose 8.8% month-on-month in April, according to data released by Argentina's National Statistics Institute. While the figure is still high, it is lower than economists' previous forecast of 9%. After reaching a high of 25.5% in December, Argentina's inflation rate has fallen for four consecutive months.

Argentina's central bank also announced that it would cut its benchmark interest rate from 50% to 40%. Borrowing costs in Argentina's benchmark have fallen significantly from a record high of 133% in December.

While inflation has slowed, consumer demand has fallen by about 20% due to reductions in wages, pensions and social benefits. The Argentine Times pointed out that the decline in demand has led to a smaller increase in prices in areas with greater demand elasticity such as catering, hotel accommodation, culture and entertainment, but the price increase of rigid demand items such as housing, water, electricity and gas is still larger.

In fact, housing, water, electricity, gas and fuel were the categories with the highest increases, with a monthly increase of 35.6%. In addition, Argentina's inflation rate rose by 65% in the first four months of this year and 289.4% in the past 12 months.

A staff member at a supermarket in Buenos Aires said that since Milley introduced "shock therapy", supermarket rents have soared by 90 percent and electricity bills have almost tripled.

"Everyone is saying that inflation has fallen, but no matter how much the data has fallen, it is not reflected in prices", another fruit and vegetable seller also said, adding that the prices of workers' wages, shop rents, transportation costs, plastic bags and other materials are all rising, which will eventually be passed on to the price of fruits and vegetables, "no matter how hard you try to lower prices, the result is futile".

"The decline in inflation is due to a drop in consumption due to a sharp drop in private spending," said Monica de Bolle, senior research fellow for emerging markets at the Peterson Institute for International Economics. ”

According to the data, Argentina's retail sales in the first quarter of 2024 fell by almost 20% compared to the same period last year, which is comparable to the level of the new crown pandemic in 2020; Consumption of beef, a staple food in Argentina, has also fallen to its lowest level in 30 years.

Some experts have also warned that falling inflation does not necessarily mean an economic victory, but rather a sign of a deep recession. The IMF expects Argentina's gross domestic product to shrink by 2.8 percent this year.

How effective is "shock therapy"?

Milley's path to reform has not been smooth. Critics argue that Milley's "shock therapy" is pushing more people into poverty.

About 60 percent of Argentina's population lives in poverty, the highest level in 20 years, according to a study by Argentina's Catholic University.

The "shock therapy" measures such as not renewing national government contracts, shutting down government departments, and reducing energy and transportation subsidies have also sparked controversy in China. In recent months, Argentina's economic crisis has deepened, and popular protests have continued.

On May 9, local time, Argentina ushered in the second national general strike under Milley. The strike involved all industries across the country, affecting finance and trade, air cargo, education and medical care, municipal health and other fields.

The Argentine Confederation of Labor issued a statement denouncing the government's "brutal adjustment of low-income sectors, wage earners and working class".

Eugenio Mari, chief economist at the Libertad and Progreso Foundation, a consultancy, believes that Milley's move has hit economic activity hard. "A sharp drop in real wages means a drop in aggregate demand, a drop in consumption, and a drop in economic activity".

And on January 24 of this year, 46 days after Milley came to power, Argentina has already gone on a 12-hour nationwide strike. It was the fastest strike in Argentina's presidential presidency since democracy was consolidated in 1983, and the country's first nationwide strike since 2019.

But Milley's "shock therapy" has been effective in cutting government spending, with Argentina running a fiscal surplus in the first quarter of this year.

The IMF is also confident that Argentina's economic situation is improving. On Monday (13th), IMF staff signed the eighth review and evaluation of Argentina's aid package of up to $44 billion. If approved by the IMF's Executive Board, Argentina would have about $800 million in breathing space.

Luis Cubeddu, deputy director of the IMF's Western Hemisphere Department, said in a statement on the same day that Argentina has implemented "strong" plans and has made "faster progress than expected" in restoring macroeconomic stability.

Since 2000, Argentina has been mired in a deep debt crisis. In 2022, the IMF's Executive Board approved a $44 billion, 30-month medium-term loan to Argentina to provide the country's balance of payments and budget support to mitigate persistently high inflation. Argentina is already the IMF's largest debtor, with 22 IMF loans since 1958.

Reporter: Wang Zhexi