OECD Economic Outlook, Volume 2021 Issue 2

Argentina

The economy is projected to expand by 2.5% in 2022 and 2.3% in 2023 against the backdrop of a strong recovery in 2021, declining COVID infections and an acceleration in vaccination rates. Private consumption and investment have been vigorous while high commodity prices have bolstered exports, with the current account now in surplus. Inflation has picked up and will remain high, in part because a large share of the fiscal deficit is monetised. Foreign currency reserves have declined. Unemployment has come down and formal employment has risen, but high labour informality remains a concern, while poverty affects more than 40% of the population.

Given the firming recovery and significant risks of a disorderly unwinding of macroeconomic imbalances, a meaningful fiscal adjustment remains a key priority, while continuing to protect the most vulnerable. Outlining a medium-term path towards fiscal sustainability would help to shore up confidence. Public spending efficiency could be improved, including by scaling back public employment and subsidies, while preserving well-targeted social expenditures. Monetary policy should withdraw support and take more decisive action to bring down inflation, which disproportionally affects low‑income households.

The recovery has gathered momentum

COVID-19 infections have declined substantially recently, and most mobility restrictions, including for international travel, have been lifted. Vaccination progress has outpaced regional peers, with more than 60% of the population fully vaccinated. After a contraction of GDP in the second quarter of 2021, consumer confidence has rebounded strongly, with similar positive signals seen in other short-term economic indicators such as industrial capacity utilisation, retail sales and an economic activity indicator, which has surpassed pre-pandemic levels. Unemployment has declined slightly to 9.6%, similar to 2019 levels, but labour participation and employment are still below pre-pandemic levels. Exports have strongly benefited from improving terms of trade. Against the backdrop of high transfers from the central bank to the Treasury and other factors, inflation has recently edged up again to 52.1% year-on-year, after several months of deceleration.

Argentina: Vaccination, economic activity and confidence indicators

Source: Center for Systems Science and Engineering at Johns Hopkins University; CEIC; and INDEC.

Statlink

Argentina: Demand, output and prices

Statlink

Policy tightening will reduce macroeconomic imbalances

Fiscal policy has turned more expansionary since mid-2021 with the announcement of higher social benefits, including bonuses for pensioners and transfer recipients, but also subsidised lending programmes for consumer durable purchases, higher public sector wages and benefits through an increase in the minimum wage and additional capital spending. An increase in the basic deduction for personal income taxes implies that this tax now affects only 10% of salaried workers. As the recovery is firming, fiscal adjustment should be accelerated beyond the 0.7 percentage points consolidation planned for 2022. This would also reduce the need for monetary financing, which remains a significant source of financing for the public deficit. Price controls and slower increases in administered prices such as fuel, transport and public utility tariffs have done little to contain price pressures sustainably. By contrast, the managed nominal exchange rate is helping to anchor inflation expectations, but at the cost of significant currency reserve losses and an increasing gap between the official and parallel exchange rates, which has now reached 90%. Monetary policy is projected to become less expansionary as tightening will be inevitable to bring inflation on a declining path and reduce other macroeconomic imbalances, which is a precondition for relaxing tight capital controls and import restrictions.

Growth will remain solid but there are significant risks

In the short run, consumption is buoyed by policy support that lifts household disposable incomes. External demand will remain supportive. As fiscal and monetary policy support is gradually withdrawn in 2022, growth is projected to moderate to 2.5% in 2022 and 2.3% in 2023. The risks of a disorderly adjustment remain significant, given high inflation and significant macroeconomic imbalances. Low and declining net foreign currency reserves provide little room for support in the case of renewed pressures on the currency, which could occur as financial conditions tighten in advanced economies. Short-term central bank liabilities in domestic currency of almost 10% of GDP imply additional risks and will likely limit the pace of policy rate increases. Restoring access to financing from multilateral institutions or international capital markets could mitigate some of these risks. Lower rainfall in the context of the regular meteorological phenomenon “La Niña” could reduce agricultural exports. On the upside, higher commodity prices would provide some relief for the external and fiscal accounts.

Strengthening confidence and protecting the vulnerable will be key challenges

Macroeconomic imbalances continue to weigh on domestic demand and confidence, and resolving this will require prudent and predictable fiscal policies and less monetary financing while strengthening the credibility and independence of the central bank, and eventually removing foreign exchange controls. Reducing the fiscal deficit can be achieved through improvements in public spending efficiency, including in public employment and subsidies, and by broadening tax bases, including personal income taxes. In contrast, well-targeted social expenditures, in particular cash transfers to poor and vulnerable households, should be safeguarded or even expanded as poverty is above pre-pandemic levels. Formal job creation could be accelerated by reducing high non-wage labour costs and labour market rigidities. Strengthening domestic and external competition and entrepreneurship through lower regulatory and trade barriers holds the key for raising productivity and innovation.