Argentina: the Making of an Economic Miracle?

By the close of 2023 Argentina was teetering on the edge of a precipice, beset by a confluence of economic ills reminiscent of its most harrowing crises. The monetary overhang had ballooned to twice the level of 1975, which triggered the infamous Rodrigazo, an inflationary spiral that ushered in five decades of stagnation. The central bank’s interest-bearing liabilities had swelled to four times the monetary base, surpassing even the ratio of 1989 that precipitated hyperinflation. By the year’s end GDP was in free fall after 15 years of stagnation. Prices increased during 2023 by 211 percent.

Faced with impending disaster, swift and decisive action was our only recourse. We began by slashing public spending by 30 percent in real terms, achieving fiscal balance in our first month in office. We also devalued the currency and raised import taxes, narrowing the black-market premium from over 100 percent to a more manageable 25 percent. Country risk, a measure of the risk of default, plunged by 40 percent and monthly wholesale-price inflation (which spiked to 54 percent in December 2023) fell to 2 percent.

In a bold departure from Argentina’s long history of fiscal excesses, our primary policy is the pursuit of a balanced budget. Our financing needs, aside from rollover, will be nil. With total nominal debt stock remaining flat, our debt-to-GDP ratio will steadily decline, effectively restoring fiscal solvency. In a country where promises are often made lightly, we focused on making our commitment to fiscal balance into a tangible reality. As we prove in the coming months that we can sustain our commitment to fiscal solvency and repay our outstanding foreign debts, the country’s risk premiums should gradually disappear, paving the way for increased savings, higher productivity and real-wage growth.

Our monetary policy has undergone several distinct phases. The initial phase involved eradicating money-printing to fund government spending. The second phase saw the elimination of the central bank’s remunerated liabilities, phasing out the interest-rate-driven automatic growth of money supply. With those liabilities gone by our seventh month in office, further money growth was solely the result of the central bank buying dollars, potentially risking a higher-than-acceptable monetary expansion. To avoid this, we have transitioned to our third (and current) phase, where we have diminished these purchases of reserves, thus stopping this remaining source of further money-printing.

Now it is only a question of time until inflation drops to international levels (if not lower). Once that is achieved we will lift capital controls and cease all remaining foreign-exchange interventions.

Economic growth is on track to recover, driven by both cyclical and structural factors. After a sharp fall, wages and pensions in the private sector are now rising, fuelling aggregate demand and higher capacity utilisation. Inventories stockpiled in 2023 in anticipation of hyperinflation have been gradually winding down, further normalising aggregate demand. On the structural side, we will reap the benefits of a 15 percent-of-GDP boost in aggregate savings, courtesy of fiscal adjustment.

This is being combined with an ambitious programme of structural reforms – largely encapsulated in the Bases Law passed by Congress in July. Scrapping rent-control laws, for example, has led to a 170 percent increase in supply and a 40 percent drop in real rental costs. Additionally, the reduction in country risk premiums, stemming from the restoration of fiscal sustainability, serves as a powerful catalyst for savings and investment.

What lies ahead in 2025 is more of what we’ve already done: strict fiscal balance, no money growth and deregulation. Argentina has suffered from an overdose of deficits, money-printing and useless regulations. All that needs to go. As we pursue a smaller government, fiscal consolidation will need to deepen. And, mindful of the fiscal balance as we always are, we know that it is lower expenditures that open the way for lower taxation. We are also aware that undoing Argentina’s regulatory mess will take time. There the challenge is to keep the reforms on the move.

We have made significant strides, yet much remains to be done. If we succeed, many might label our achievements a “miracle”. But it is no miracle – it is the result of governing with macroeconomic prudence and adhering to the principles of economic freedom that have enriched nations. We work to show the world that embracing the ideas of freedom brings prosperity.

From The World Ahead, 2025 © 2024 The Economist Newspaper Limited. All rights reserved