Monday
October 23, 2017
Friday, July 28, 2017

Double deficit

Most analyses seeking to define theMauricio Macri administration’s economic policy tend to point to the contrast between fiscal gradualism and strict monetarism, a distinction which is not only basically valid but also gives undue prominence to the Central Bank within Macri’s economic team — Central Bank Governor Federico Sturzenegger’s stubborn approach of inflation-targetting via high interest rates might be widely questioned as being the best remedy for a stagnant economy but at least the outside world is far clearer as to where he is heading with his orthodox consistency than in the case of other decision-makers (thus after over half a year in office Treasury Minister Nicolás Dujovne’s official presentations still lack the cohesion and conviction of his previous journalistic analyses). Yet this contrast between a clear-cut orthodoxy and a confused gradualism can also be exaggerated — the media spotlight tends to fall on an unsustainably high fiscal deficit which the Macri administration has yet to show any sign of significantly taming but most observers fail to notice that Central Bank policies have resulted in the accumulation of a formidable quasi-fiscal deficit.

While a Central Bank in the red formed part of the Kirchnerite inheritance, the negative data for net assets have ballooned in the last 18 months. This does not immediately meet the eye because the Central Bank likes to boast that its reserves have almost doubled from just over 25 billion dollars at the time of Macri’s inauguration in late 2015 to around 48 billion now (after having topped 51 billion at times this year) — since the money supply is around 50 billion dollars, the balance thus looks healthy enough. But these dollar reserves have been purchased at the price of printing pesos way beyond local demand which then need to be “sterilised” by issuing Lebacs and other bonds at inordinately high interest rates, thus causing Central Bank debt to double from 28-plus to over 58 billion dollars. Such issues not only contribute numerically to the quasi-fiscal deficit but are qualitatively bad for the economy since they crowd the private sector out of credit markets. The previous Kirchnerite administration notoriously sustained its fiscal deficit by draining the Central Bank in order to avoid debt (not really an option while default persisted) but Sturzenegger’s policies do not seem to be doing anything to improve solvency.

Throughout this month the fluctuations of a suddenly volatile dollar (which started the last week of June at around 16.50 pesos) have been the centre of attention but perhaps more alarming in a longer term is the fact that deficit financing is coming from the orthodox as much as the gradualists.

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