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ECONOMY | 24-04-2021 01:41

Argentina can’t overcome its chronic inflation issue

In the first three months of 2021, price rises showed no sign of slowing down. As well as being cause for concern for the government, businesses and citizens are feeling the pinch.

In the pasta factory founded by his parents in 1970, Arturo Cabarcos faces yet another economic crisis. Just in the first quarter of this year, cumulative inflation in Argentina reached 13 percent, spearheaded by food prices.

"We’ve been through many crises, with inflation and hyperinflation, but we’ll only be able to assess the dimensions of the ongoing crisis when it’s over," says Cabarcos, aware that "inflation dissolves wages and subsidies [social plans], thus increasing poverty," which affects 42 percent of the population.

In the half-century since the La Imperial pasta factory was inaugurated in La Lucila, on the outskirts of Buenos Aires, inflation has been the most recurrent demon of the Argentine economy.

"It’s difficult to explain why Argentina has not managed to overcome inflation, above all because it’s tried policies of every kind from the most orthodox to the most heterodox, plans with their main focus on interest rates and plans with their main focus on price controls. And nothing worked," says economist Matías Rajnerman of the Ecolatina consultancy firm.

With a cumulative 42.6 percent over the last 12 months, Argentina has one of the highest inflation rates in the world, surpassed in Latin America only by the hyperinflation of Venezuela.

 

Accounting problems

Apart from making artisanal pasta, La Imperial has incorporated a meal delivery service, a type of offering that has grown amid the quarantines of the coronavirus pandemic. Nevertheless, the accountancy is complex.

"It’s very difficult to transfer the costs to the public. Some products have increased 100 percent since November, like chicken breasts, while packaging has also risen greatly in price. We have to forgo profits and even then we have to touch up the price lists every 20 or 30 days," remarks Cabarcos.

With 18 formally employed workers, La Imperial has in its favour owning its own premises and thus not paying rent. Furthermore, it is located in an upper-middle-class zone where the clientele goes for cheaper products before stopping buying altogether.

 

International prices

Food inflation in Argentina was 13.8 percent in the first quarter, on a par with the international price increases for that sector, the country’s main exporter.

According to an index prepared by the International Monetary Fund (IMF), food prices shot up 20 percent between August and February, driven by increases of 45 percent in the cost of vegetable oils and 41 percent for cereals while soy and maize prices rose 50 percent in the same period.

"If food prices go up, more dollars enter Argentina from exports, which should help contain inflation but at the same time domestic food prices go up – that’s the paradox," comments Rajnerman.

Economist Héctor Rubini stresses that other costs also influence the rise in domestic food prices, such as fuel hikes and a heavy tax burden. 

"Although taxes are nominally only applied to the richest, they are transferred to prices," he explains.

 

Problems of poverty

To contain inflation, President Alberto Fernández’s government has reached agreement over a series of maximum prices while also directly subsidising the food purchases of the most underprivileged sectors.

"The feeling is that inflation will continue high. The controls may serve as palliatives for a few months but the inflationary tensions will continue," points out market analyst Dante Romano.

"There’s an imbalance between state revenues and public spending and again we have to deal with the pandemic," which has implied more money being printed, says Romano.

"That’s why a debt agreement is so important, to gain financing from credit markets and present a viable economic programme," he adds

In recession for the past three years and after renegotiating US$66 billion worth of debt with bondholders last year, Argentina still has pending agreeing a new credit programme with the IMF to replace the one signed in 2018 for US$57 billion, of which US$44 billion has been received. 

"How to end inflation is easy to explain from an economic standpoint but when you add the social dimension, it’s not so simple. Six out of every 10 Argentine children are below the poverty line. The challenge consists of maintaining a social safety net while resolving economic issues at the same time," concludes Romano.

 

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by Nina Negrón, AFP

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