Argentina cannot spend its way out of this crisis

The world is facing an unprecedented challenge fighting against Covid-19 and safeguarding the economy. Governments have been playing a central role in strengthening their health systems response and injecting liquidity into their financial systems. Alberto Fernandez, President of Argentina, was quick to respond to the crisis with a national lockdown on March 20th even though there were only 32 confirmed cases of Covid-19. He said that the nation’s health was his main priority, and that he was less concerned about the economic consequences.

Argentina is facing a deep economic crisis from the virus, on top of the fact that the economy has not grown since 2011. President Fernandez has said that we are in a “virtual default”, which exacerbates the problem. In his strategy to protect people from Covid-19 and to safeguard the healthcare system, Fernandez has compromised SMEs and put thousands of workers at risk of sinking below the poverty line.

The decision to protect people’s health should immediately be followed with an economic response that will mitigate the effects of the deepening economic recession.

The government is spending its energies strengthened the capacity of the health system. It recently bought, from China, thirteen tonnes of medical supplies, such as testing kits, digital thermometers, biosafety suits, and face masks. Intensive care units are still being equipped with more beds, respirators, and safety equipment. The health system is supposedly getting ready for the peak of infection, projected to start in June. However, the country needs more health specialists, testing equipment, and better infrastructure to tackle the tough challenges ahead. Moreover, the current number of tests being carried out appears to be insufficient to get an accurate estimation of Covid-19 cases.

On the economic side, the government has halted production in most sectors of the economy and prepared a relief package. The Fernandez administration has introduced price controls, a rent freeze, forbidden companies from dismissing workers, as well as other measures to avoid an increase in the poverty rate. The government also intends to use public money to compensate businesses that cannot work during this crisis. Thus far the government has spent around 2 per cent of GDP on its efforts to stimulate the stagnant economy.

Martín Guzman, Argentina’s minister of economy, has said that the government is not considering a much-needed reduction of public spending, which hovers around 40 per cent of GDP. The current economic measures will lead to an increased fiscal deficit and subsequent deep recession. To finance the emergency economic response, the government resorted to expanding the monetary base by at least 34 per cent in the last month alone. This will inevitably lead to higher inflation, reduce the value of the peso, among other dire economic consequences.

However, the government insists that the relief package is aiming to provide economic aid to low- income families, protect SMEs, workers’ wages, which will enable sustained economic recovery.

But the effectiveness of these economic measures is questionable. Many businesses cannot access bank loans on time to pay salaries, some families do not have cash or access to the 10000 Pesos (152 USD) in government subsidies, and high tax rates are hampering private sector growth and survival. Workers in the gig economy, comprising at least 40 per cent of the workforce, and autonomous workers called “monotributistas” have lost their main source of income. And recently the Social Development Ministry bought overpriced food; at prices at least 150 per cent higher than market value, exposing the corrupt practices that started during the Kirchnerist era. The Fernandez administration needs to find more adequate economic measures, free from corruption, to delay further economic problems for these and all other sectors of the fragile economy.

These economic issues are aggravated by the “virtual default” due to a failed restructuring of billions of dollars of sovereign debt. Guzman, Argentina’s economy minister said that they “have not reached an agreement with bondholders” and that “Argentina cannot pay anything”. The outcome of restructuring negotiations will determine if the country stays on the path to a deeper economic recession and limit its much-needed participation in the global economy.

In times of deep economic crises, government spending does not correlate with economic growth, as shown by the aftermath of the 2008 recession. To stimulate economic growth, the Argentine government can still reduce its already high government spending, provide tax cuts for individuals and SMEs, as well as diverting public investment to the private sector.

There will be some slight relief from the partial reopening this week of certain municipalities and local communities with few to no cases of Covid-19, which may allow for a gradual return to normality. But the government is far from reigniting and reopening the economy.

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