From No Se Mancha Staff Member and IMF Research Analyst Cornelius Fleischhaker
On February 1th, the IMF decided to officially censure Argentina over flawed inflation statistics. This motion, which marks the latest escalatory step in a process that has been ongoing for years, sets off further procedures that could, in theory, lead to the country losing the right to borrow from the Fund and to vote on its executive board. They could even culminate with the expulsion of Argentina from the organization. However, most commentators agree that such harsh measures remain a long way off.
The primary reason why the Cristina Fernández de Kirchner government keeps underreporting inflation and has used criminal procedures against those publishing differing estimates of the price level might well be financial. According to Miguel Kiguel, a Buenes Aires based economist cited by The Economist, doctoring the number saved the government some $2.5 billion in payments on inflation-index debt since 2007.
Underreporting inflation lowers the real interest rate (the nominal interest rate less inflation). This means that even creditors that sought to protect themselves from inflation by having debt payments adjusted by (official) inflation can be paid of by the Argentinian government for less than what they originally borrowed, once payments are adjusted for the actual change in the Peso’s purchasing power.
Being at odds with the IMF might also be good politics in Argentina as the Washington based institution is widely blamed by the Argentine public for aggravating the economic crisis the country endured at the beginning of the 2000s. However, while the IMF is widely criticized by the Argentinian and other leftist governments in the region, nobody has taken what might seem to be the natural next step and left the organization. Cuba and North Korea are the only sovereign nations that have opted against membership.
As it turns out, even countries that don’t need the IMF or don’t particularly like it still see benefits in being a part of it. After all, the IMF remains the world’s foremost institution for economic governance and countries value having a seat at the table. Argentina, a G-20 economy, being sanctioned or even expulsed by the organization would diminish the countries global standing further.
Don’t cry your crocodile tears too early for Argentina
Mr. and Mrs. Kirchner’s critics have long gleefully pointed out signs of certain and eminent demise of Argentina’s populist model of government – only to be disappointed by an Argentinian economy that has proven more resilient and dynamic than they expected.
The record of economic growth over their ten-year reign is among the highest in the region. While current policies are clearly unsustainable in the long run there is always the possibility to change course just enough to keep the music playing and the divided opposition at bay.
Mark Weisbrot, a frequent critic of the IMF argues that most policies are unsustainable in the long run and this is why they are adapted when needed. So far, the Kirchners have been very successful at navigating the fine line between populism and economic viability. They have been fortunate in many ways: Economically, they were blessed by a surge in Chinese demand which led to high prices for Argentina’s commodity exports, which in turn shored up the country’s current account.
Politically, the memory of the disaster Nestor Kirchner inherited (and blamed on liberal economic doctrines and the institutions promoting them) still rallies popular support for the government’s anti-liberal policies. Finally, the Argentinian opposition has so far failed to present a coherent strategy and unite behind a leadership that could challenge the hold on power exercised by the Kirchnerist fraction of the Perronist movement.
Can the Tango continue?
Where Argentina is headed at this point in time is hard to predict. The government has responded to the censure imposing a two-month prices freeze for the largest supermarkets – another heterodox measure, which will not go down well with the Washington based institutions. Most likely it will lead to shortages of certain goods in these markets and a diversion of activity to smaller stores or the black market.
At the same time the government is planning to introduce a new consumer price index at the end of the year, which might be enough to keep the IMF taking further action for the foreseeable future. Ultimately the question will be if the Government can navigate itself out of the current perilous situation – through good fortune or skillful maneuver – or if it will finally be sunk by the economic storm it seeded.
Cornelius Fleischhaker is currently an Research Analyst at the International Monetary Fund. The opinions expressed in the post are those of the author only and should not be attributed to the International Monetary Fund
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