It has been 100 days since Mr. Xavier Milai has taken power in Argentina. He started to cut the rates and balance public finance. The first signs that the success is germinating in the February inflation report. In february inflation diminished more than expected to 13 percent. Of course that is monthly inflation, not yearly. Annual inflation is around 276 percent, that is just how bizarre the country’s economic affairs are! In the developed countries an annual inflation of 8 percent is horrific, for Argentina 13 percent of monthly inflation is a success. Responding to recent inflation reading, Mr. Milei has said “We are genuinely satisfied”.
His main economic plan regarding public spending is to turn the government annual deficit from 3 percent of gross domestic product to a budget surplus of around 2 percent of gross domestic product. In January and February the Melei government ran a surplus, it was the first month in more than a decade that an Argentinian government took more than its spending.
However, that does not mean success is now guaranteed. In fact there are numerous obstacles in the way. Mr. Milei has no majority in congress, in fact his party only controls only 15 percent of the seats. And in order to keep the costs down, he needs much cooperation from the congress. On the other hand, spending cuts (mostly for pensions) so far has not been a true slash in spending but more like a postponing scheme, which the government has to pay for in the coming months. Many unions and other organizations that have witnessed wage declines due to policies initiated by the government are at the courts to take their “rights” back. If the judges vote in their favor, it would be much harder for the government to resist.
The Mr. Milei seems to be aware of the situation. Recently, his interior minister met with powerful provincial governors who have some degree of control over the congress. Many of them emerged as somewhat modified after the meeting. A deal might emerge, in which the government may transfer payments to provinces in exchange for delegating some emergency power to the presidency, pension reform and mining and energy deregulation which are a relief on the government’s wallet.
Mr. Milei’s popularity is still holding high, despite the fact that the recent downtrend in inflation has affected the economic affairs of the country, as a sign prescription sales has been cut by 7 percent and pharmacy sales has been cut 46 percent in the February compared to the last september. This means the economy has already entered a recession. It is not clear how much the country can suffer before it turns against him.
He hopes that his party will win in the next year’s congressional elections, this would empower him to push his economic reform to a further level. ForNow, however, it remains to be seen if he will be able to turn the economy into one that is thriving with low inflation and conducive to investment and growth.
Source: Economist
