Macri’s Disappointing First Year in Argentina

NEW YORK – Argentina’s economy is struggling. Last year, the country suffered stagflation, with GDP dropping by 2.3% and inflation reaching nearly 40%. Poverty and inequality increased; unemployment rose; and foreign debt grew – and continues to grow – at an alarming rate. For President Mauricio Macri, it was a disheartening first year in office, to say the least.

To be sure, Macri faced a daunting challenge when he took office in December 2015. The economy was already on an unsustainable path, owing to the inconsistent macroeconomic policies that his predecessor, Cristina Fernández de Kirchner, had pursued. Those policies led to imbalances that eroded the economy’s competitiveness and foreign reserves, pushing the country toward a balance-of-payments crisis.

But Macri also pursued a flawed macroeconomic policy approach. His administration needed to address the fiscal and external imbalances, without undoing the progress in social inclusion that had been made over the previous decade. His approach, based on four key pillars, has not achieved that.

First, Macri’s government abolished exchange-rate controls and moved Argentina to a floating currency regime, with the Argentine peso allowed to depreciate by 60% against the US dollar in 2016. Second, Macri’s government reduced taxes on commodity exports, which had been important to Kirchner’s administration, and removed a number of import controls. Third, the Central Bank of Argentina announced that it would follow an inflation-targeting regime, instead of continuing to rely mainly on seigniorage to finance the fiscal deficit.