The time has come to order the accounts to agree with the IMF / Argentina News

One of the reasons for speeding up fiscal consolidation is that the Central Bank must improve its international reserve position

Once the electoral contest is resolved, the national government must order the bills so that it is possible to successfully resolve the negotiation with the International Monetary Fund. A look at the evolution of fiscal numbers gives some useful references for making decisions for the future.

Upon taking office in December 2019, the Government inherited a situation of virtual primary balance. Taking six-month moving averages at constant values ​​to soften the impact of the Christmas bonus payments and excluding the SDRs and the Solidarity Contribution that may not be repeated in the future, the National Treasury’s income in September 2021 was around 3% lower than those of the same month of 2019, while primary spending was 14% higher.

“Tariff populism explains that subsidies practically doubled between September 2019 and September 2021”

This occurred despite increases in the Tax pressure disposed of prior to the pandemic (personal property, country tax and withholdings) and other minor ones that were applied during the health crisis, of the improvement in income from export duties that allowed the spectacular increase in the international price of soybeans, and of the normalization of economic activity, which is at levels similar to those registered at the end of 2019.

One of the reasons for speeding up fiscal consolidation is that the BCRA must improve its reserve position

In the medium term, it should be possible to recover that 3% of income and perhaps something more, which would reduce the primary imbalance by around 20%.

However the higher spending explains 80% of the increase at primary deficit that was observed in those two years. The key item to look at are the subsidies to the private sector that include a great variety of items, but where subsidies to the Energy and to transport.

Tariff populism that ignored even the tepid 2021 budget increases explains that subsidies will practically double between September 2019 and September 2021. That increase in spending explains almost half of the primary deficit. There is no alternative to raising rates immediately, at least to reach the 30-35% increase included in the budget this year, and then continue with additional improvements in real terms.

The rest of the expense should also roll back to pre-pandemic levels. That requires a reduction of around 7% real which does not seem difficult to achieve in a couple of years if there is political will to do so. In sum, primary equilibrium could be reached in two years.

“If the pressure of the treasury on the monetary authority remains high and you want to buy reserves, increases risk of a incident from proportions “

Of course, this requires reformulating the budget for the year 2022, which foresees a primary deficit of more than 3% of GDP, practically repeating the numbers of this year. The official discourse that a further reduction would abort the recovery is inconsistent with what is expected to be done in the rest of the world.

The latest IMF Fiscal Monitor projects a reduction by half in the primary deficit in advanced economies between 2021 and 2022 (from 7.8% of GDP to 4%) and to less than half in Latin America (from 2.4% of GDP to 1%). A country like Argentina that has practically no access to voluntary credit and that abuses the inflation tax should try to be more prudent than its neighbors who do not have these problems; on the other hand, the budget foresees a primary imbalance that is more than three times higher than the projected average for the region in 2022.

It is key to reformulate the budget for the year 2022, which foresees a primary deficit of more than 3% of GDP

There is another reason to rush the fiscal consolidation. The BCRA must improve its international reserve position. In the current context you can only buy reserves with issuance.

With the assets of the banks saturated with Leliqs, passes and Treasury bonds, if the pressure of the treasury on the monetary authority remains high and at the same time you want to buy reserves increases risk of a incident from proportions.

The government can raise expectations by tackling problems decisively. This requires understanding that the main problems are not the debt or the IMF, but the inconsistencies of a program that privileged the immediate electoral result rather than normalization. The “ballot box” plan that began several months before the PASO ended in an electoral defeat of vast proportions. It is vital that the government learn from its own mistakes.

Daniel Artana is Chief Economist at FIEL

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