Argentina: The Plummeting Value of the Peso

From a tourist’s perspective, Argentina is a relatively relaxed country. From the wine bodegas in Mendoza to the languid city life in Buenos Aires, it is difficult to imagine the underlying resentment towards the government and the decline of their economy. However, once you have walked the sidewalks in the city or experienced enough rainy days to notice the crumbling infrastructure, the angry graffiti on the building walls, or the constantly changing prices on restaurant menus, today’s problems become apparent.

Inflation is not a new problem for Argentina. Historical inflation rates have hovered around the thousand percentages, but the government has always found a way to stabilize the economy. Argentina has encountered quite a few inflationary cycles in their economy, each which led to new policy controls that aided in the short run, but did not provide long-term anti-inflationary effects. Other changes took effect in the 1990s, from liberalization and deregulation of all of their markets to a new tax system. With less government regulation, prices began to stabilize according to the market, and the public had the option to use any type of currency they pleased. Inflation stabilized to an average of 0 percent by the 1990s, with the inflation rate fluctuating with the economy.

These new policies worked until the end of the 1990s. Poorly planned liberalization strategies, where the government sold sectors of their economy for less than half their value, led to worse working conditions and thousands of layoffs. 2001 saw one of the most turbulent times of Argentina as protests mounted to an all time high in the Argentizo which ousted President de la Rue and had the government fumbling through 3 other presidents before Kirchner stepped into power. The economy managed to pick up around 2003, but the economy has rapidly been declining since.

Argentina’s inflation today is at a ten-year high of 30% and the government’s expansionary monetary policy may be to blame. Government subsidies, such as holding household electricity costs constant (though they are still expensive), after the 2002 crisis have caused a need to print more pesos to finance these projects. By injecting so many extra pesos into the economy, the value of the peso decreased. Investors withdrew their money from Argentina due to uncertainty about Kirchner’s policies and fear of inflation. In order to prevent this capital flight, beyond the $21.5 billion capital flight happening in 2011, President Cristina Kirchner banned citizens from withdrawing US dollars from the bank. She has also tried to limit imports, vacations, and online purchases (Porsecanski 2014). Former finance Secretary Daniel Marx explained, “Those problems are related to the speed of inflation and the exchange rate in an international context that is more complicated” (2011). Argentina’s Mercado Abierto Electronico system estimated that these policies have diminished the amount of currency officially traded by 50%, as compared to 2010. These bans have only allowed the black market exchange for US dollars to flourish.

The government’s attempt to curb and hide inflation in the country has become apparent with the differing values of the official peso and the “dolár blue,” the black market exchange rate for the peso. The “dolár blue” rate reflects how much the citizens think the peso is worth, it is based on the economy and “Wall Street.” This also highlights the effects of the government’s attempt to decrease the supply of US dollars in the market (which increases the value of the dollar). In the span of one month (January to February 2014), the official rate had changed from around 6.5 pesos per US dollar to 8 pesos, a 23% decrease in the value of the peso. The “dolár blue” has jumped from 10 pesos per US dollar to 12 pesos, a reduction of 20%. Local newspapers have speculated on the apparently more stable value of the “dolár blue”, which demonstrates the ineffectiveness of government policies versus market forces in Argentina. 

The increase of government intervention in economic policies has led to their economic decline, with a bill approved that allowed the government unlimited access to the central bank’s reserves. This granted the government the ability to print money as needed for their endeavors, contributing to the country’s inflation. Kirchner has also seized private industries, such as the oil company YPF, in order to stabilize oil prices for citizens. This has only led to unnecessary increased government expenditures. The government has attempted to diminish their restrictions, by allowing individuals (but not businesses) to withdraw US dollars from the bank. Nicolás Titaro, a company treasurer in Buenos Aires explains, “Great, we can buy dollars now…We just need salaries that let us.” The government’s poor timing with their policies has only increased the ineffectiveness of their macroeconomic strategies.

Fears of inflation have reverberated throughout the economy, from the value of their pesos to some of their most important exports. For instance, in the agricultural sector, farmers have been refusing to sell their soybeans. They understand that their soybeans have a more stable value than the pesos they could receive for selling the soybeans. The US Department of Agriculture explains, “Unless a mechanism becomes available for producers to convert soybeans into assets that can retain their value in the current inflationary environment, limited selling is likely to continue.” This could become a problem, as Argentina is one of the world’s top soybean exporters and soybeans are one of Argentina’s main crops.

Stagflation could be the end result for Argentina unless the government can finally admit to the actual value of their dollar. There needs to be more responsible government actions, privatization–but in a socially conscious manner. Free market forces can do wonders for the economy, but also harm minimum-wage workers. The government needs to allow market forces to dictate the economy, while ensuring the protection of the lowest rung of workers.

The continuation of the decline of the peso can only mean an even smaller dollar reserve and decreased leeway for the government to pay back international debts and enact new policies. In the long-run, Argentinians can expect a lower standard of living as price increases diminish their purchasing power. The lack of transparency from the government will only lead to increased demand for US dollars and rapid devaluation of the peso, as no one, not investors nor porteños have faith in the Argentinian peso.