WASHINGTON – Recession-hit Argentina’s inflation and inflation expectations have been on a downward trend since October, a situation that should enable policy makers to gradually reduce sky-high interest rates, the director of the Western Hemisphere Department at the International Monetary Fund (IMF) said on Friday.
Consumer prices in South America’s second-biggest economy “look set to continue a slow decline in 2019,” Alejandro Werner said in a blog post that presented the IMF’s latest forecast for the Latin American and Caribbean region.
“This should allow a gradual fall in interest rates, which together with higher real wages and stronger exports is expected to trigger a recovery of economic activity starting from the second quarter of 2019,” he added.
Consumer prices in Argentina rose by 47.6 percent last year relative to 2017 (the country’s highest annual inflation rate since 1991) due in large part to a sharp currency devaluation.
Although the IMF says inflation expectations have moderated, consumer prices are still projected to rise by 28.7 percent in 2019.
“In Argentina, the economy fell into recession in 2018,” Werner recalled. “While a severe drought significantly reduced agricultural output and exports, the strong peso depreciation around mid-2018 fueled inflation, reducing disposable income and investor confidence.”
The IMF is projecting that the Argentine economy, which contracted by 2.8 percent in 2018, will remain in recession and shrink 1.7 percent this year before growing 2.7 percent in 2020.
“The government’s stabilization plan, based on revised and strengthened monetary and fiscal policies, helped reduce the financial turmoil and stabilized the exchange rate,” the IMF official said, although he warned that the 2019 general election “could reduce reform appetite.”
Last year, the IMF approved a 36-month, $56.3 billion bailout package for Argentina, the Washington-based multi-lateral lender’s biggest-ever program.
Argentina obtained the credit line amid concerns about a selloff of the peso in May and the ability of the country to pay its dollar-denominated debt.
As part of the program, known as a standby arrangement, Argentina agreed to accelerate the pace at which it reduces the government deficit.
After the agreement was reached between the Argentine government and IMF staff in June, IMF Managing Director Christine Lagarde hailed that country’s commitment to deficit reduction and to achieving a flat primary balance by 2020.
“This measure will ultimately lessen the government financing needs, put public debt on a downward trajectory and as (Argentine) President (Mauricio) Macri has stated, relieve a burden from Argentina’s back,” she said then.