When Laura, a 28-year-old Argentine specializing in marketing, was given the opportunity to charge in dollars in Buenos Aires, she did not hesitate. After the last salary update due to inflation, the company where she works confirmed that the salaries were still too low compared to the rest of the Latin American countries where the company operates. For this reason, the directors offered their employees two options: dollarize the salary and keep it fixed or collect in pesos and update every six months for inflation. “I don’t know anyone who has chosen to continue charging in pesos,” she tells elDiario.es.
Inflation worries the different governments of the world, but Argentina suffers a pressure far removed from what any country in Europe is experiencing. From Spain with the last year-on-year price increase of 9.8% to Germany and its historical maximum since the reunification of the country with 7.3% per year, inflation is worrying, but it does not resemble the one suffered by Argentina for years .
In December, Argentina closed the year with an annual inflation rate of 50.9%, the highest in Latin America after Venezuela. The inflation record was in 2019, the last year of the Mauricio Macri government and when the index ended the year at 53.3%. The National Institute of Statistics and Census released this Wednesday the March inflation number: 6.7% in the last month, the highest record in the last two decades. Economists project year-on-year inflation of 55% by 2022, although it could exceed 73.5% if last month’s record is maintained.
The root of the problem
The increase in the general level of prices in the world has its origin in the pandemic and the economic effects of the war in Ukraine. Argentina is not exempt from what is happening in the world. In 15 of 34 countries classified as advanced economies by the International Monetary Fund, last year’s inflation exceeded 5% in December 2021, according to World Bank data.
But this country adds its own ingredients. “Argentina has a recurring dollar shortage problem. When one looks at the long inflation series, of the last 50 years, finds a correlation with the exchange rate. That is to say, if you lack dollars, that puts pressure on the exchange rate and if you devalue, it goes directly to prices,” Hernan Letcher, director of the Argentine Center for Political Economy, told elDiario.es.
The lack of dollars in circulation responds to a greater extent to the flight of capital abroad: Argentines have almost 420,000 million dollars outside the national financial system, an amount similar to the 460,000 million dollars of Argentina’s GDP in 2021. This is an issue that is being debated by Congress after the senators of the governing coalition, the Front of All, present a bill to lift the fiscal secrecy of the evaders who took dollars abroad.
But it also responds to the fact that those Argentines who have a margin of savings usually exchange the difference received in pesos for foreign currency. This is the simplest way to hoard money for vacations or home repairs without your savings losing value.
Another factor that affects prices is the high monetary issue. Injecting more money into the economy from the State with the aim of reactivating the economy, especially in times of pandemic, has an impact on prices that ends up destroying the value of the Argentine peso.
“Today it would be unfeasible to update every three months. The situation in the country forces you to update prices every month. If you don’t have the muscle to pay for all of your products, unfortunately, you choose to increase by eye and cross your fingers not to lose,” says Juan, 34, in charge of three gastronomic establishments in Buenos Aires.
Inflation affects the poorest sectors, many of them unemployed or in informal conditions, but also the middle classes with registered jobs and small entrepreneurs who are forced to update prices every month. “Investing in a country with inflation is quite exhausting. Prices change from month to month and the cost of financing your clients is devalued with each week that goes by without getting paid,” says Santiago, 33, a local beer producer.
the informal economy
Argentina is full of parallel lanes and illegal channels through which the economy circulates. The purchase and sale of foreign currency is one of them. Argentines, having a currency that is constantly devalued, save and think in dollars.
Lorena, a middle-aged woman, is one of the many people in charge of receiving pesos and exchanging them for dollars in a private apartment in the Palermo neighborhood. The mechanism is simple, every time someone wants to change money, she writes to Lorena on WhatsApp, asks how much she has it for and she answers, generally, the value of the parallel dollar. The transaction is as simple as it is frequent, without papers or bank records.
Due to the restriction for the purchase of dollars imposed by recent governments known as “exchange stocks”, which only allows some Argentines to exchange a maximum of 200 dollars per month, the gap between the value of the official dollar and the parallel one, called “blue dollar” is 73%. Although the agreement with the IMF, added to the increase in the international price of grains due to the war in Ukraine, improved the situation, the distance in the value of the dollar this year exceeded the 112% on January 27 last.
The collapse in prices has caused absurd jumps in food, as happened with lettuce in February, which shot up its price by 72.7%. For this reason, when the rise in prices begins to be felt, it is the sellers of the small shops themselves who recommend to the customer what to buy to keep in the cupboard. Meanwhile, products such as oil and cans of tuna have become luxury items for some time. Large supermarkets choose to put alarms on them and place them near the cash registers to prevent their theft.
This leads to each of the Argentines deploying a type of small-scale speculative behavior in each daily expense: they buy more than they need in case the price rises or if it runs out, and some even think about how to take advantage of a possible increase in demand.
On the other side, there are those who, to avoid wasting so many hours of their day doing accounts and doing domestic economic analysis, spend everything. What they have and what they don’t have. “Yes, the money is no longer worth it,” they say. They get into debt in payments of 12 installments a year with credit cards, speculating that annual inflation will cushion the price, and they buy subscriptions to paper newspapers just to access discount cards in hundreds of businesses ranging from mattresses to ice cream parlors. .
The picture is not very different for small investors. “We have many dollarized costs of imported and domestic supplies that are commodities. As long as the official exchange rate moves in a predictable way, it doesn’t create chaos for us,” says Santiago. However, “the official exchange rate today changes at a stable and gradual rate. The problem is how much it hits big jumps, that’s where everything collapses, ”adds the local producer in the country where everyone talks about the economy.
Both the accelerated inflation and the always latent threat of a possible abrupt devaluation, which reduces the gap in the exchange between the official value of the dollar and the parallel, makes small local investors try to increase a profit margin to reduce the risk of being overdrawn by selling below the cost of production, a practice that also ends up increasing the prices of things even more.
Poor with jobs and wages destroyed
Having a job in Argentina is no guarantee of avoiding poverty. For more than half a decade, the real salary of Argentines has not stopped falling. Today each Argentine who earns in pesos earns less than a third of what he earned six years ago based on its equivalent in dollars. In November 2015, when Cristina Fernández de Kirchner left the presidency, the average salary of registered workers (Ripte) was equivalent to 1,230 dollars. In 2021, the average salary is equal to 37% of 2015, an estimated $461.
For this reason, many middle-class workers have chosen to add new jobs to those they already had in order to maintain the standard of living they had ten years ago with a single job. “I work every day, from Monday to Monday, to be able to pay for fixed expenses. At the time of the pandemic I had to spend some savings to be able to live. That makes it very difficult to plan and project”, says Mariano, a private worker in wood and steel.
But the hours of the day have a limit. “I have as many hours as possible as a teacher, I can only try to make ends meet better by cutting my expenses,” says María Laura, a 54-year-old university professor.
In the second half of 2021, in a context of economic recovery and job creation, the poverty fell to 37% of the populationmore than three percentage points below the level recorded in the first half of 2021. Although the expansion of the economy in the middle of last year with an increase of 10.3% put an end to three years of recession and allowed the creation of 1.8 million jobs, informality and the loss of real value of wages due to the constant rise in prices means that the quality of life continues to decline.
The most obvious consequence of living in one of the countries with the highest inflation in the world shatters not only confidence in investing in the country but also the possibility of the middle classes and popular sectors of projecting a life in the medium term. “When there is work, I find myself in the need to grab everything that appears, I overexploit myself in the face of the uncertainty of not knowing if the economy is going to hold up or is going to explode,” says Mariano.
The dollarization trap
In Argentina, a debate that seemed buried with the collapse of the neoliberal governments of the 1990s has taken center stage in recent weeks: dollarization. The possibility of resolving inflation by changing the Argentine peso for the dollar or adopting a bi-monetary system are scenarios that seemed unthinkable a couple of years ago.
But the solution seems to be worse than the problem. Not only would Argentina lose control over its currency, but for several economists it is technically unfeasible. “Dollarization makes no sense for Argentina. There are not enough dollars to dollarize. If it were intended to do so today, you would start with a 100% devaluation. This would imply pulverizing the already meager salaries of the Argentine workers. Dollarization in Argentina does not solve any of the existing problems but deepens each one of them”, says Latcher.
“I don’t think my situation is the most complex because I have the privilege of having been able to finish a degree and be hired,” says Malena, a 27-year-old professional with a job in the public sector. “But the reality is that it still gets more and more complicated. There is no discussion of being able to save or give yourself certain tastes, but rather being able to make ends meet with what you earn”.