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Consumer prices shoot up as inflationary
expectations deteriorate
Consumer prices spiked 4.0% in March, which was up from the 3.1% monthly
increase registered in February and on par with the Consensus figure last
month. The March figure represented the highest monthly increase observed
since April 1991 and raised the annual inflation rate to 7.9%. The
strongest price increases were experienced in clothing, household
equipment as well as food and beverages were costs increased by 8.5%, 6.9%
and 5.2% respectively. Education and housing prices showed the lowest
increases, rising 0.5% and 0.8% respectively. Wholesale price developments
indicate that inflation is likely to accelerate at a more rapid pace in
the coming months as the variation in the wholesale price index (which
includes import prices) rose a staggering 11.2% over February, which
brought the annual rate to 25.7%. The strong depreciation of the currency
last month has prompted participants to make notable upward adjustments to
their inflation forecasts for this year. Panellists expect the rise in
consumer prices to accelerate further this year with annual inflation up
another
9.0 percentage points from last month. As a result of the less favourable
inflation prospects, the government decided to revise the official
inflation forecast for this year upward from 22% to 45% for this year.
Moderation in the pace of currency depreciation and monetary discipline
are expected to help lower inflation significantly in 2003.
Exchange rate plummets as concerns over
international aid delays and inflation spikes
The peso depreciated a staggering 28.3% in March nominally, following a
more moderate 6.9% drop in value in February. During several days in March
the currency was trading at 3.75 pesos to the US$. The currency freefall
continues to reflect a lack of confidence in the government’s ability to
manage the current crisis and an increase in inflationary expectations, as
Argentines scamper to protect their savings in US$. In order to halt the
plunge of the currency, the Central Bank announced exchange rate controls
on 25 March. The new restrictions force exporters to buy pesos with US$
revenues within five days of the closing of a sale (down from 180 day
previously), require banks to lower US$ holdings to 5% of net value and
oblige foreign exchange houses to limit their US$ holdings to US$ 500,000
at any time. In addition, the Central Bank announced its intention to sell
US$ at below market value to banks that guarantee to pass through the
discount to customers. The new measures quickly led to a recovery of the
peso, which closed at 2.93 to the US$ at the end of March and recovered
additional ground by 12 April, closing at 2.90 pesos to the US$.
Nevertheless, the March deterioration has prompted participants to revise
their forecasts, expecting the currency to close this year 17.2% weaker
than in last month’s forecast.
Government still negotiating IMF funds
Argentina is currently seeking an international aid package from the IMF
that may go as high as US$ 25 billion. Funds are urgently needed to prop
up the fledgling financial system, safeguard social stability and restart
domestic lending to get the economy going again. The main sticking point
for IMF officials is the inability to receive a firm commitment from the
government to undertake further economic reforms particularly on the
fiscal front. Key to any agreement is a reining in of provincial deficits.
The IMF has offered to provide financing of up to US$ 700 million to cover
expected provincial deficits in return for a commitment from the provinces
to implement a 60% budget cut and cease issuing scrip – the provincial
paper currency currently used to pay public sector salaries and basic
services that is estimated at US$ 1.8 billion.
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