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Economists have warned Argentina may enter a period of hyperinflation following its October election, after populist economy minister Sergio Massa launched a spending spree and frontrunner Javier Milei pledged to dollarise the economy.
Argentina’s senate on Thursday will vote on a proposal by Massa — who is also the presidential candidate for the ruling Peronist movement — to scrap income tax for all but a fraction of registered workers, the latest in a series of measures aiming to put money in voters’ pockets.
In a flurry of announcements before Wednesday, the date from which Argentina bans vote-seeking acts by government, Massa unveiled new cash handouts worth roughly $80 for registered workers, $125 for informal workers, and $49 for retirees, and announced a scheme to reimburse many consumers for value added tax on basic goods.
These and other handouts will cost 1.3 per cent of gross domestic product, according to Buenos Aires-based consultancy EcoGo. On top of that, the plan to raise the income tax threshold so that it captures less than 1 per cent of registered workers — down from 7 per cent — would cost up to 0.83 per cent of GDP in 2024, said Argentina’s congressional budget office.
In the short term, analysts expect the giveaways to be financed by money-printing, which may boost monthly inflation that stood at 12.4 per cent in August. That was its highest rate since Argentina was exiting a period of hyperinflation in 1991.
While the current rate remains well below hyperinflation — often defined as monthly inflation above 50 per cent sustained over several months — economists said the risk was growing.
“We can still avoid hyperinflation, but we are taking every step to get there,” said Sebastián Menescaldi, associate director of EcoGo. “We are putting new pesos into the economy when there is no reason to do so.”
The measures will make it more difficult for Argentina to stick to targets on trimming the fiscal deficit and curbing money printing that it agreed in July as part of a $44bn loan programme from the IMF. Buenos Aires missed all of the programme’s key targets ahead of a June review.
IMF spokesperson Julie Kozack said on Thursday that Argentina’s “inflation is very high and rising” and that the recent measures “exacerbate Argentina’s challenges”.
Ahead of the vote on October 22, Massa’s rivals for the presidency argued that the impact on price pressures would erase any benefits to voters.
“Pockets are empty because of the inflation that he has generated,” said Patricia Bullrich, candidate for the centre-right opposition.
Milei, the radical rightwing economist who is leading the polls, said: “It seems like Massa is trying to get to hyperinflation.”
Massa did not respond to a request for comment, but has repeatedly blamed rising inflation on an 18 per cent devaluation of the peso’s official exchange rate in August, which he said the IMF “imposed” on Argentina.
The payout to informal workers, he said on Tuesday, would be funded by a tax “advance” levied from banks and finance and insurance companies, which would “maintain balance in the public accounts”.
Economists said Milei’s strong performance in a primary vote in August worsened the inflation outlook. His flagship pledge is to replace the peso with the US dollar, but he has yet to commit to a plan or timeline for the policy.
The uncertainty may push voters to get rid of their pesos faster if Milei wins October’s election and a potential November run-off.
The IMF said on Thursday that Milei’s plan to dollarise the economy to stamp out inflation was “not a substitute for sound macroeconomic policies”.
Martín Rapetti, executive director of think-tank Equilibra, said monthly inflation for September and October would remain stable but in the double digits, as Massa does “whatever he can” to contain inflationary pressures and protect his electoral chances.
That includes a new preferential exchange rate scheme for oil and gas exporters, announced on Wednesday. Replacing a scheme for soy exporters that is due to expire, the policy aims to increase the flow of dollars into the central bank, allowing it to prop up the peso on parallel exchange markets.
The risk of an inflationary spiral would follow the elections, Rapetti said, as the winner must start to unpick an unsustainable patchwork of price and currency controls, and as the impact of recent stimulus measures is felt.
“December will definitely be high, likely the highest of the year,” he added. “Argentina’s inflation is going to go up before it comes down.”
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