It’s a painful dilemma: to prioritise the fiscal deficit, or inflation?
The government of Mauricio Macri sent a strong signal that it is serious about controlling Argentina’s fiscal deficit when it announced hikes in electricity tariffs from 61 to 148 per cent for consumers in Buenos Aires on Tuesday.
The move represents another step in reining in Argentina’s bulging fiscal deficit, the Achilles heel of its crisis-prone economy, and the phasing out of distorting and populist subsidies implemented by the previous Kirchner administration.
Nevertheless, it will also complicate the year-old government’s battle against inflation, which it has succeeded in reducing from a monthly rate of almost 4.5 per cent a year ago to around 1.5 per cent this month.
Until inflation is properly under control, the government will struggle to reactivate economic growth, which it depends on to keep voters onside ahead of crucial mid-term legislative elections in October. Those elections could determine the future of Mr Macri’s market-friendly economic reform programme.
Indeed, the first round of unpopular tariff hikes last year met with serious pushback, although the increases this year are less severe.
Ecolatina, an economic consultancy in Buenos Aires, estimates that the electricity tariff hikes will push inflation in February up to around 2.2 per cent, from around 1.7 per cent in January.
The consultancy expects tariff rises across all sectors to contribute around 7 percentage points to inflation in 2017, which they estimate at 24 per cent.
That is well above the central bank’s target of below 17 per cent, but a significant reduction from about 40 per cent inflation in 2016.