‘Argentina’s foreign reserves…this is one of the main subjects of concern here in these times of uncertainty and political unrest,’ says Paola Pecora.

Buenos Aires, Argentina May 29, 2008

I was speaking with a friend the other day regarding my concerns about the current situation between the Argentine government and the farmers. Ironically, his reply was “Well, at least the central bank holds nearly $50 billion in foreign reserves”. I immediately responded without any doubts: “That is true… I do not know what would have happened if those reserves were not there…”.

So what exactly is the relationship of the current conflict, between the government and the farmers, and policies governing the accumulation of foreign reserves in the Central Bank of Argentina (BCRA)? At first glance one might think there is “not much” but in fact there is a connection. Were it not for the present level of foreign reserves, the current dispute could have unleashed a major crisis.

The Argentine press certainly cannot complain about the government of Cristina Fernández de Kirchner for journalists now rarely have time to become bored since events are unfolding at an extraordinary pace. There is the unionist, who on the one hand is hoping for a negotiated settlement with the government, while on the other hand is striking in the fields. The current Minister of the Economy is an unknown, while controversial export duties imposed by the former, and better known, Minister remain in place.
And let us not forget there is currently an inflation rate that we are told is supposed to console us… indicating that everything is going to be alright… just wait… patiently… etc, etc, etc….

When Cristina took office expectations were high. The economic situation was going astray and many changes were expected. So what did happen? What is happening currently with the Argentine economy? For one thing, the problems surrounding inflation were never adequately addressed and that is why those problems have not only continued to plague Argentina but also seem to be spiraling out of control. We can look to the current situation with salary negotiations to see an example of what is happening. Many unions are demanding wage increases in excess of 30% while at the same time groups that had already negotiated raises of around 20% are now coming back demanding even greater increases, motivated by the current effects of this inflation – inflation that we are told is meant to console and not to concern us. (i.e. the teacher unions for the province of Buenos Aires received a 24% increase in wages three months ago, yet are currently demanding more.)

Many were hoping with a new government in place that public expenditures would be reduced. But to the contrary, they are currently growing at an expected annual rate of 40%. The country has also seen little improvement with the energy situation and when coupled with expected lowered temperatures this year one can expect adverse effects in its aggregate supply, a situation already hit by the current standoff with striking farmers and disincentives regarding investments in production.

Additionally, rising inflation is pressuring the government to increase the amount of subsidies given to transportation and utility companies (among others) since they are not allowed to raise their rates. All the while the government has tried to sweep all this under the carpet. However, the current situation has become so untenable that they cannot expect to hide these things anymore. So what is going to happen if the government decides to decrease those subsidies? How much longer can they be sustained to avoid price increases?

Six months into Cristina’s new administration, it does not seem that things have improved very much. I would even go on to say that in trying to resolve existing problems, she has created new ones that are far more serious that the ones she was trying to address in the first place. And the most pressing concern so far seems to be the current dispute over the increase in export duties imposed as a means of domestic taxation, to increase current revenues.

This increase in farm export taxes is the straw that broke the camel’s back for it has created a conflict of historic dimensions. This fact has been determined not only by the duration of the conflict but also by the level of support given to the farmers. As an example: last Sunday over 300,000 people attended a rally in Rosario Province in a show of support. That is unheard of in this country. This situation has not only frightened foreign investors, who were the first to reduce their interests in Argentina, but local ones are becoming concerned now as well.

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