What do you do when your salary hits your account? You pay your monthly expenses, save or invest some money, and rest you might splurge. In Argentina, as soon as people receive their salaries, they try to convert their pesos into US Dollars.
The Argentinian Economy is in crisis. They have an inflation rate of more than 100%, that’s the third highest in the world, only behind Venezuela and Lebanon. For context, the current world inflation rate is 8.2 %
This means, that every year, the price of necessities in Argentina doubles.
Why are Argentinian Economy getting converted to Dollars
This means Argentinian people have lost trust in their currency. Since it’s entirely possible that what's the value of one milk for e.g in the morning would have increased till afternoon. Since Pesos (Argentinian Currency) is losing value so fast, it becomes imperative for citizens to convert their currency into USD. This is also called the Dollarization of Economy.
The Argentinian government allows for official conversion to Dollars, but it's limited to $200. This results in a black market for Dollars, which is also called the Parallel economy in Argentina, since it's not legal, but everyone knows about it and is involved in it.
Official Conversion Price - 360 pesos
Unofficial Conversion Price - 960 pesos
This has resulted in a situation where if you want to buy a loaf of bread in a supermarket in Argentina, and if you, for some reason delayed buying it, you would not be able to buy it at the same price in the evening.
Hence the phenomenon of converting local currency to US dollars is called Dollarization, and it's not just happening with Argentinian Economy but in other hyperinflated economies as well.
Why is the Economy going down?
Argentina was one of the richest economy one time, but a series of poor decisions across many decades have now put them in a precarious financial situation. In 1946, when Juan Domingo Peron was the president, he was inspired by Mussolini’s Fascist Italy. So he decided to implement his version in Argentina. He wanted very strong governmental involvement in the economy, along with strong labor laws, which included 8-hour work days, high wages, and welfare schemes. He also pushed for economic isolation.
This weakened Argentina’s economy in the long term and they were unable to adapt to the modern changes taking place in the world.
His legacy continues. For example - $12.5 Billion which is 2% of Argentina’s GDP was used for providing Electricity Subsidies.
Also, 1/3rd of the entire population is working for the government, and most of the money goes into providing wages and pensions.
This has resulted in being in Fiscal Deficit for the past 13 years.
To counter this, Argentina borrowed a lot of money and defaulted on its payments. As of the time of writing, it has the highest amount of debt owned to the International Monetary Fund
As a solution, they have tried printing more money, but that has only resulted in hyperinflation and Argentinian Peso losing its value very quickly.
To protect the value of the currency and restrict the movement of dollars outside the country, the government has come up with a variety of exchange rates for different purposes
For example - There is Soybean Dollar - Which is a favorable rate, especially for Soy beans, since it’s one of the most exported product from Argentina.
Then there is Dollar Qatar - Where you have to pay Official dollars to travel along with tax on top of it. This was specially created for the World Cup in Qatar
There is Dollar Coldplay - If someone wants to organize a concert, they not only have to pay the fees official fees for it but a 30% premium on top of it as well.
What are the possible solutions?
There is no easy solution in sight for Argentina. They need to reduce their spending and need to win the trust of citizens and markets again.
However, currently, no government has enough support to take harsh steps, like devaluing currency, especially with Election season nearby. In fact, a candidate, which is the current Finance Minister of Argentina, has promised to remove Income Tax also for the citizens, which is extraordinary, since already there is no money with the government.
While things will have to become worse before they become better for Argentina, there is still hope, something similar happened to their neighbor, Brazil in the mid-90s. |
Being a great tourist spot and having fertile lands, with a young population, Argentina does have tools to dig itself out of the trouble, but politics will be required for the same and a lot will depend on the upcoming elections.
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