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Argentina’s Inflation Strategy Greeted Warily : South America: Hyperinflation has resurged. But some fear that tightening the money supply may kindle a recession.

From Reuters

The latest efforts by Argentina’s government to rein in rampant inflation met mixed reviews Tuesday from local economists and business people.

As a second wave of hyperinflation in the past six months threatened to cripple the country’s economy, the government late Monday announced measures to shore up the crumbling currency, the austral, and to hold down short-term interest rates, which last week soared to 300% a month.

Economy Minister Antonio Erman Gonzalez said the money supply will be restricted to support the austral, which lost nearly half its value against the U.S. dollar in December.

“The announcements were absolutely clear. The markets will calm down gradually,” said Argentine Chamber of Commerce President Carlos de la Vega. “We don’t expect to return to normality in 48 hours after the past weekend’s madness, but if everything works out we will be all right.”

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But some worried that the government’s moves would break the inflationary cycle by causing a recession.

“We have tried this before. This is pure monetarism, and we know that it will lead us to a recession. This is not a clear sign for those who want to produce,” said Jaime Goldenblum, a spokesman for a group of small and medium-sized industries.

The government says December’s inflation will top 50% and expects a similar figure for January. In August, President Carlos Menem had pledged to keep inflation down to 15% for all 1990.

Many stores and supermarkets chose to remain closed Tuesday, uncertain about how financial markets will react to the new measures when they reopen today.

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Some economists said the government was on the right track. But others said further austerity measures would be needed to attack what is seen as the root of Argentina’s economic problems: a massive fiscal deficit.

“Once again, thanks to President Menem’s intuition, we are on the right path,” said economist Alvaro Alsogaray, a leader of the small, right-wing Democratic Center Union party.

“The measures address part of the problem of the fiscal deficit but they aren’t enough to close that gap like the government expects them to,” said Daniel Artana, chief economist at the Latin American Economic Research Foundation.

Artana said mounting inflation would erode the state’s revenues and force the government to raise gasoline prices and public utility rates to quickly replenish its coffers.

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Menem has been trying to rekindle the trust that allowed him to bring monthly inflation down to 5.6% in October from nearly 200% in July, stepping up his privatization plans and seeking support from opposition parties.

Trade unionists and politicians of the ruling Peronist party have warned that hyperinflation could spark new rioting in slum areas like the food riots that occurred shortly before Menem’s inauguration in July, when 15 people were killed and scores injured.


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