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Inflation continues on downward trend amid stronger exchange rate and
delays in utility price hikes
In July, consumer prices rose 0.45%, which was up from a 0.09% drop in
June. Nevertheless, the annual inflation rate returned to single-digit
levels for the first time since March 2002, as it declined from 10.2% in
June to 7.3% in July. The current downward trajectory in inflation is
the result of the strengthening exchange rate and the postponement of
public service tariffs increases. Despite Central Bank intervention to
counteract the persistent currency appreciation this year, the peso
depreciated just 1.9% in July. However, given the robust strengthening
throughout most of this year, the currency still remains 18.0% stronger
than at the end of 2002. The currency appreciation has served as an
important safeguard against a more pronounced inflationary bout this
year.
Additionally, the current economic emergency decree (Ley 25.561)
approved by Congress in January, enables the government to continue to
postpone public service tariff increases for the time being. Officials
have submitted a bill to Congress to extend the authority through the
end of 2004, since the current authorization expires at the end of this
year and the government wishes to completely review and revise existing
contracts, which would need legislative approval before entering into
force. The delay in public service tariff increases will help keep
inflation at bay. In fact, participants expect the combination of a
stronger exchange rate and public service tariff hike delays to lower
inflation at a more notable pace than previously expected. Consensus
panellists anticipate annual inflation to rise again, reaching 7.6% by
the end of the year, which is down 3.1 percentage points from last
month’s forecast. Inflation is expected to pick up only moderately next
year, despite the spurt in economic activity, with the rate rising to
8.9% by the end of 2004. Next year’s figure is 1.0 percentage points
below last month’s forecast and confirms the decline in inflationary
expectations.
Government 2004 budget foresees continued improvement in economy
The government is currently drafting its budget for next year. According
to the Economic Ministry, the economy will continue to perform
favourably. GDP is seen to expand 4.5%, while average inflation will
rise only moderately to 10% (22% in 2003 budget) and the currency will
remain stable, at an average rate of 2.72 pesos to the US$ (3.63 in 2003
budget). As a result of robust growth, authorities anticipate that the
primary surplus will reach 2.5% of GDP, unchanged from this year’s
target agreed to with the International Monetary Fund (IMF) under the
terms of the US$ 3.0 billion stand-by credit agreement approved in
January. The economy minister hopes to finalize the budget for
submission to Congress by the beginning of September, at which point the
government also intends to sign a new agreement with the IMF. So far
this year, fiscal accounts have been bolstered by the robust economy,
which helped the government to post a primary surplus of 4.9 billion
pesos (US$ 1.8 billion) in the first half of the year, exceeding the IMF
target by 400 million pesos (US$ 143 million). As a result, Argentina
received its third disbursement under the current loan agreement on 28
July. The US$ 1.1 billion disbursement followed upon two prior fund
deliveries of US$ 320 million in June and US$ 307 million in March this
year. Participants expect the current favourable fiscal trends to
persist throughout this year with the non-financial public sector
deficit anticipated to reach just 0.6% of GDP, down 0.2 percentage
points from last month’s projection. The fiscal deficit is seen to
remain unchanged at 0.6% of GDP in 2004.
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