FOREIGN TRADE UNIVERSITY

SCHOOL OF ECONOMICS & INTERNATIONAL BUSINESS

----000----

MACROECONOMICS REPORT

A CASE STUDY OF THE ARGENTINA’S

CURRENCY CRISIS OF 2018

Instructor: Assoc. Prof. Dr. Hoang Xuan Binh

Class: KTE402E(HK1-2324)2.1

GROUP 04

Hanoi, December 2023

 TEAM MEMBERS

Name Student ID

Phạm Hải Anh 2212140009

Ngô Thùy Dương 2213140020

Nguyễn Hải Giang 2212140023

Nguyễn Hương Giang 2212140024

Lê Quỳnh Nga 2212140063

Nguyễn Trần Bảo Ngọc 2212140065

Phạm Thị Minh Ngọc 2212140066

Nguyễn Hương Quỳnh 2212140071

Hoàng Thủy Tiên 2212140074

Phạm Thị Minh Trang 2212140080

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 TABLE OF CONTENTS

1. Introduction and Research gap 4

2. Theoretical Framework 6

2.1. The Money Market 6

2.2. The Goods and Services Market 7

2.3. Foreign Exchange 7

2.4. Monetary and Fiscal Policies 8

2.5. IS-LM-BP Model 8

3. Causes of Argentina’s Currency Tension 15

3.1. Domestic Factors 15

3.1.1. Long History of High Inflation 15

3.1.2. Fiscal and Current Account Deficits 16

3.1.3. Confusing Policy Moves and Loss of Investors’ Confidence 17

3.1.4. 2017-2018 Historical Drought 17

3.2. International Factors 18

3.2.1. An Increase in the US’s Interest Rates 18

3.2.2. The Tension of Global Food Trade 19

4. Effects of Argentina’s Currency Crisis 20

4.1. Depreciation of Argentina’s Peso 20

4.2. Sovereign Debt Default 21

4.3. High-interest Rate and Inflationary Pressure 22

4.4. Capital Flight (Loss of Investor Confidence) 24

4.5. Social Impact 25

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 4.6. Political Shifts 26

5. Government Response 26

5.1. Requested Financial Assistance (IMF) 26

5.1.1. Overview 26

5.1.2. Key Points in Timeline 27

5.1.3. Problems and Outcomes 31

5.2. Contractionary Fiscal Policy 32

5.2.1. Overview 32

5.2.2. Key Points 32

5.2.3. Problems 35

5.2.4. Outcomes 36

5.3. Monetary Policy 38

5.3.1. Overview 38

5.3.2. Key Points 38

5.4. Exchange Rate Policy 42

5.4.1. Currency Crisis and Floating Exchange Rate (2018) 42

5.4.2. IMF Program and Exchange Rate Interventions (2018-2019) 43

5.4.3. Currency Controls and Multiple Exchange Rates (2019-2020) 43

5.4.4. Unified Exchange Rate and Managed Float (2020-the present) 43

6. Lesson Learned 43

7. Conclusion 45

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 1. Introduction and Research gap

The currency crisis that unfolded in Argentina in 2018 was a significant event that had

far-reaching implications for the country's economy and its citizens. This essay aims to

provide a comprehensive analysis of the causes and impacts of the Argentinian currency crisis

within the framework of the IS-LM-BP model. Furthermore, it seeks to extract valuable

lessons from this crisis to enhance our understanding of currency crises and inform future

policy decisions.

The scope of this study is centered on Argentina, a nation known for its historical

struggles with currency volatility and economic instability. By examining the unique

economic, political, and institutional factors that contributed to the 2018 currency crisis, we

aim to deepen our understanding of the dynamics at play during such crises. While currency

crises are not unique to Argentina, the country's experience provides valuable insights into the

challenges faced by emerging economies with volatile exchange rates and high levels of debt.

The primary objective of this research is to analyze the causes and impacts of the

Argentinian currency crisis that occurred in 2018, utilizing the IS-LM-BP model. This model

provides a framework for understanding the interactions between the real sector (IS curve),

monetary policy (LM curve), and the balance of payments (BP curve) that influence a

country's currency. This model provides a comprehensive framework to assess the interplay

between monetary and fiscal policies, external shocks, and market expectations, allowing us

to gain deeper insights into the underlying dynamics of the crisis. By employing this widely

recognized framework, we aim to unravel the intricate relationships among these variables

that contributed to the crisis.

By conducting an in-depth examination of Argentina's currency crisis of 2018, this

research aims to contribute to the existing body of knowledge on currency crises and their

management. The findings of this study can inform policymakers and economists in designing

effective policies to mitigate the impact of such crises and enhance the resilience of

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economies in the face of external shocks. Furthermore, the lessons learned from Argentina's

experience can have broader implications for countries facing similar challenges, offering

valuable insights into crisis prevention and management strategies.

In conclusion, the Argentinian currency crisis of 2018 serves as a compelling case

study that offers valuable insights into the causes, impacts, and lessons learned from a

significant financial event. By analyzing the crisis within the framework of the IS-LM-BP

model, we can identify the key variables and their interplay that led to the crisis, as well as the

subsequent effects on the Argentine economy. Through this research, we aim to deepen our

understanding of currency crises, contribute to the academic discourse, and provide practical

insights for policymakers and researchers.

The research on Argentina's currency crisis of 2018 has provided valuable insights into

the factors that contributed to the crisis, but several significant research gaps persist. Firstly,

there is a need for a more comprehensive understanding of the underlying causes. While

existing literature highlights some factors such as economic policy decisions, external shocks,

fiscal imbalances, and structural issues, a deeper analysis is required to unravel the complex

interplay of these factors. Understanding the root causes of the crisis would provide a more

nuanced perspective and help develop effective preventive measures.

Moreover, the crisis in different sectors of the economy remains relatively unexplored.

While macroeconomic aspects have been extensively studied, there is a lack of detailed

analysis regarding the heterogeneous impacts across industries, businesses, and households.

This research gap hinders the formulation of targeted interventions and support measures.

Investigating the sector-specific consequences would provide valuable insights for

policymakers and stakeholders, enabling them to address the challenges faced by different

sectors and design effective crisis management strategies.

Additionally, there is a research gap in analyzing the socio-political and political

economy aspects of Argentina's currency crisis of 2018. While some research has touched

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upon these elements, more in-depth analysis is needed. Exploring the socio-political

consequences would provide insights into the relationship between economic events and

political developments, contributing to a holistic understanding of the crisis's wider impact.

Additionally, studying the role of political factors and interest groups in shaping the crisis and

its management would offer valuable insights and potential policy implications.

Addressing these research gaps would contribute to a comprehensive understanding of

Argentina's currency crisis of 2018, its implications, and the lessons to be learned from it. It

would provide valuable guidance for policymakers, economists, and researchers interested in

currency crises, economic stability, and the challenges faced by emerging economies. By

filling these gaps, researchers can contribute to the knowledge base necessary for effective

crisis management and the formulation of policies that promote sustainable economic growth

and stability.

2. Theoretical Framework

2.1. The Money Market

Dobb (2012) defines the money market as an umbrella term covering categories of

transactions between two stakeholders: lenders and borrowers. Money markets allow lenders

including banks, money managers, and retail investors, to make secure, liquid, and short-term

investments and offer borrowers including banks, broker-dealers, hedge funds, and

non-financial firms access to low-cost funds. The assets are purchased and sold in the short

term, and they are easily converted into cash. As a result of global financial crises,

understanding different segments of money markets and their relations is of fundamental

importance.

Money markets include instruments including bank accounts (term certificates of

deposit), interbank loans (loans between banks), money market mutual funds, commercial

paper, treasury bills, and securities lending and repurchase agreements (Dobb, 2012). The

most typical money market instruments are bank deposits in which depositors consider banks’

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credibility and governmental policies that insure deposit security. Other instruments include

interbank loans which are not secured by collateral, requiring lenders to closely investigate

borrowers’ credibility and repayment capacity.

The International Monetary Fund (n.d.) states that the money markets act as a medium

for governments to manage the money supply and lay the foundation for the implementation

of monetary policies through indirect instruments. With a view to develop and maintain

functions of money markets, the three following fundamental conditions should be satisfied.

The first one is that banks and other financial institutions are motivated in response to

commercial incentives to manage risk and maximize profit. The second one is central banks

must shift from direct to indirect instruments of monetary policy enforcement. The third one

is governments must be capable of cash management and endow banks with freedom in

forming operations procedures.

2.2. The Goods and Services Market

The goods and services market is defined as a platform of transactions in which

households purchase consumable goods and services and firms sell goods and services. The

interdependence of households and businesses is demonstrated in a circular flow of model in

the factor market and the goods and services market.

2.3. Foreign Exchange

According to the International Monetary Fund (n.d.), foreign exchange refers to any

kind of financial instrument used to make payments between nations. Foreign exchange assets

include foreign currency notes, deposits in foreign banks, debt obligations of foreign

governments and foreign banks, monetary gold, and SDRs. SDRs are international reserve

assets, which are not a currency but are evaluated based on the value of a five-currency basket

including the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British

pound sterling.

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2.4. Monetary and Fiscal Policies

According to the CFA Institute (n.d.), monetary policy pertains to the actions

undertaken by a central bank to impact the amount of money and credit circulating in an

economy. In contrast, fiscal policy encompasses the government's choices regarding taxation

and spending. Both monetary and fiscal policies serve as mechanisms for overseeing

economic activity. They can be deployed to stimulate growth during economic slowdowns or

to curb excessive growth and activity during periods of overheating. Furthermore, fiscal

policy has the potential to address the redistribution of income and wealth. The primary

objective of both monetary and fiscal policy typically revolves around establishing an

economic climate characterized by consistent and positive growth, along with stable and low

inflation rates. The crucial aim is to guide the underlying economy in a manner that avoids

economic booms followed by prolonged periods of low or negative growth and elevated

unemployment. In such a stable economic setting, individuals can confidently make

consumption and saving choices, while businesses can focus on investment decisions, meeting

regular coupon payments to bondholders, and generating profits for shareholders.

2.5. IS-LM-BP Model

According to Lope Gallego (2017), the IS-LM-BP model, also known as the

Mundell-Fleming model, was formulated by two economists Robert Mundell and Marcus

Fleming to demonstrate the intersection of the goods and services market, the money market

and the balance of payments. The Mundell-Fleming model is an extended version of the

IS-LM model for an open economy. Understanding the basics of the IS-LM-BP model

requires investigation into the representation of three curves and their relationships.

The three curves IS-LM-BP represent equilibrium in the goods and services market,

the money market, and the balance of payment respectively.

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 Figure 1: IS-LM-BP Model (Source: Policonomics.com)

The IS curve refers to the inverse relationship between interest rate and investment.

The equilibrium condition in the goods and services market is defined by the equation of

production output to the sum of consumption, investment, government expenditure, and net

exports: Y = C(Y-T) + I + G + NX. Since interest rate and investment have a negative

relationship, an increase in interest rate puts downward pressure on investment, thus reducing

production output level.

Contrary to the IS curve, the LM curve representing liquidity and money circulation

reflects a positive relationship between interest rate and output. The interest rate in an open

economy is determined at the equilibrium of real supply and demand of money which

indicates that an increase in production output leads to an increase in interest rate to offset the

rising demand for money.

The BP curve represents equilibrium in the balance of payments or the combinations

of production output and interest rate ensuring equal capital inflows and outflows. The curve

slope depends on the volume of capital mobility in which the higher the mobility, the flatter

the curve. Any points above the BP curve demonstrate a balance of payments surplus, and any

points below the BP curve indicate a balance of payments deficit.

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 The following section examines the IS-LM-BP model under the conditions of perfect

and imperfect capital mobility, fixed and flexible exchange rates, and expansionary monetary

and fiscal policy (Lope Gallego, 2017).

2.5.1. Perfect Capital Mobility

2.5.1.1. Fixed Exchange Rate

An expansionary monetary policy shifts the LM downwards, moving the equilibrium

below the BP curve, equal to a balance of payments deficit. Governments intervene by

purchasing domestic currency and selling foreign currency, decreasing the money supply and

shifting the LM curve to the original position. The effect of monetary policy is zero under a

fixed exchange rate and perfect capital mobility.

Figure 2: Expansionary monetary policy under fixed exchange rate and perfect capital

mobility (Source: Policonomics.com)

An expansionary fiscal policy shifts the IS curve upwards, moving the equilibrium

above the BP curve, meaning a balance of payments surplus. Governments intervene

oppositely: purchasing foreign currency and selling domestic currency to increase the money

supply. The LM curve shifts downwards, indicating higher output with the same original

interest rate. Fiscal policy works effectively under a fixed exchange rate and perfect capital

mobility.

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 Figure 3: Expansionary fiscal policy under fixed exchange rate and perfect capital mobility

(Source: Policonomics.com)

2.5.1.2. Flexible Exchange Rate

An expansionary monetary policy shifts the LM curve downwards, moving

equilibrium below the BP curve. Under a flexible exchange rate, the balance of payments

deficit depreciates the domestic currency, thus increasing net exports and shifting the IS curve

upwards. The new equilibrium is at the same interest rate with higher output. Monetary policy

works effectively under a flexible exchange rate and perfect capital mobility.

Figure 4: Expansionary monetary policy under flexible exchange rate and perfect capital

mobility (Source: Policonomics.com)

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 An expansionary fiscal policy shifts the IS curve upwards, moving equilibrium above

the BP curve. A balance of payments surplus appreciates the domestic currency, decreasing

net exports and shifting the IS curve to the original position. There is no change in the final

equilibrium; therefore, fiscal policy does not work under a flexible exchange rate and perfect

capital mobility.

Figure 5: Expansionary fiscal policy under flexible exchange rate and perfect capital mobility

(Source: Policonomics.com)

2.5.2. Imperfect Capital Mobility

2.5.2.1. Fixed Exchange Rate

An expansionary monetary policy shifts the LM curve downwards, resulting in a

balance of payments deficit. Governments purchase domestic currency and sell foreign

currency, decreasing the money supply and shifting the LM curve to the original position.

Monetary policy does not work under a fixed exchange rate, whether with perfect or imperfect

capital mobility.

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 Figure 6: Expansionary monetary policy under fixed exchange rate and imperfect capital

mobility (Source: Policonomics.com)

An expansionary fiscal policy shifts the IS curve upwards. High capital mobility

results in a balance of payments surplus and low capital mobility results in a balance of

payments deficit. Governments intervene by buying and selling both domestic and foreign

currency. This will shift the LM curve, a balance of payments surplus is the same scenario as

in a fiscal policy with perfect capital mobility and fixed exchange rates while the balance of

payments deficit corresponds to the monetary policy scenario. Fiscal policy is effective under

a fixed exchange rate and imperfect capital mobility.

Figure 7: Expansionary fiscal policy under fixed exchange rate and imperfect capital mobility

(Source: Policonomics.com)

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2.5.2.2. Flexible Exchange Rate

An expansionary monetary policy shifts the LM curve downwards, moving the

equilibrium below the BP curve. The balance of payments deficit depreciates the domestic

currency, increasing net exports and shifting the IS curve upwards. In addition, the BP curve

shifts to the left as a result of depreciated domestic assets. The final equilibrium indicates

higher output with ambiguous changes in interest rate. An expansionary monetary policy

works well under flexible exchange rate and imperfect capital mobility.

Figure 8: Expansionary monetary policy under flexible exchange rate and imperfect capital

mobility (Source: Policonomics.com)

An expansionary fiscal policy shifts the IS curve upwards, moving the equilibrium

above the BP curve. High capital mobility results in a balance of payments surplus and small

capital mobility results in a balance of payments deficit. In the case of a balance of payments

surplus, Considering flexible exchange rates, the domestic currency appreciates, decreasing

net exports and shifting the IS curve downwards and the BP curve to the left. The final

equilibrium indicates higher output with a relatively higher interest rate. In case of a balance

of payments deficit, fiscal policy will be more efficient the smaller capital mobility is.

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 Figure 9: Expansionary fiscal policy under flexible exchange rate and imperfect capital

mobility (Source: Policonomics.com)

3. Causes of Argentina’s Currency Tension

The Argentine currency crisis in 2018 had multiple interconnected causes, contributing

to a complex economic situation. These factors can be divided into two groups, domestic and

international.

3.1. Domestic Factors

3.1.1. Long History of High Inflation

Argentina has been notorious for high inflation and the country has been grappling

with this recurring challenge over several decades. Ever since 2007, Argentina has been

experiencing an inflation rate over 15% annually.

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 Figure 9: Argentina descriptive statistics (Libman and Palazzo, 2020)

Having a record of high inflation erodes the purchasing power of the peso and

contributes to a loss of trust in the Argentine peso. When affected by rising U.S. interest rates,

Argentinians did not hesitate to convert their pesos into dollars for their savings and overseas

investments, believed to be a result of high inflation and rapid losses in purchasing power of

the peso (Castillo-Ponce and Lai, 2020). International investors have long lost their trust in the

currency. Both of these have put a drain on the country’s foreign exchange reserves, fueling

the almost endless cycle of devaluation of the peso.

3.1.2. Fiscal and Current Account Deficits

One of the primary reasons for the fiscal deficit in Argentina was the high level of

public spending. This can arguably be traced back to the government headed by Cristina

Kirchner from December 2007 to November 2015, when the Kirchner government had

committed significant resources to various programs, including subsidies and social welfare

programs. These expenditures, while addressing certain social and economic needs, strained

the budget and contributed to the fiscal deficit, as they were based on foreign borrowing and
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 later loans from the central bank. The fiscal deficit then put upward pressure on demand for

imports and contributed to a widening current account deficit. In order to finance its deficits,

Argentina had to rely even more on foreign capital inflows, thereby increasing the country’s

vulnerability to capital outflows (Castillo-Ponce and Lai, 2020).

The new government lead by Mauricio Marci, who took over from December 2015,

though promised to revive the economy crippled by Kirchner’s public spending policies, still

struggled to cut deficits and foreign debt.

3.1.3. Confusing Policy Moves and Loss of Investors’ Confidence

Confusing policy moves and responses from the Argentine central bank startled and

raised doubts among investors about the credibility of the central bank to tackle the already

dire economic situation. For 2018, the central bank loosened its inflation target from 12% to

15%. A month later, the central bank continued to startle investors by reducing the interest

rate by 1.5% to 27.25% even when inflation expectations were deteriorating fast and actual

annual inflation was running at over 20%. As a result, investors were skeptic and lost

confidence in the Argentine government, viewing the government to be too slow in

maneuvering the situation. The economy continued to struggle with spiraling inflation, falling

currencies, and mounting debt burden with no end in sight anytime soon. The elevated default

risks because of rising U.S rates, along with growing fears of further devaluation of the peso,

prompted foreign investors to fled and currency markets witnessed a large-scale selloff of the

peso (Castillo-Ponce and Lai, 2020).

3.1.4. 2017-2018 Historical Drought

Argentina depends on export revenue to secure foreign exchange for imports and debt

payments. The agricultural sector, particularly soybean, corn, and wheat, contributes more

than half of the country's exports, serving as a crucial economic driver.

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 However, a historical drought during the 2017-2018 growing season had detrimental

effects on Argentina's exports and tax collection. This resulted in economic contraction,

amplifying the nation's economic fragility.

3.2. International Factors

3.2.1. An Increase in the US’s Interest Rates

In 2015, when Mauricio Macri (Juntos por el Cambio 2015-2019) was elected

President, the inflation rate exceeded 25% and a number of ill-devised subsidies had pushed

the fiscal deficit to about 6% of GDP. This new governor gradually sparked off a number of

economic reforms, which included cutting export taxes, increasing currency controls and

resolving the issue with the holdouts, in an attempt to allow Argentina to resume access to

international capital markets. Meanwhile, he channeled significant amounts of funds for social

assistance and public investments. Taking advantage of the promising global conjuncture and

the resolution of the holdout conundrum, the Macri government issued US$56 billion in

external debt between January 2016 and June 2018. What ensued was a significant increase in

the proportion of foreign debt to GDP on one facet, but on the others, this allowed the Central

Bank to return to inflation targeting through interest rates as its only remit.

Provided this context, the Central Bank raised interest rates to 25% to counteract

hyperinflation. However, the country's increasing dependence on external sources for

financing its national coffers and current account deficits left it devastated by changes in the

cost and availability of financing.

Facetiously, the timing could not be more optimal: already in late 2017, the US

Federal Reserve began raising interest rates, minimizing investor interest in Argentine bonds.

Investors began selling Argentine assets, causing the peso to depreciate. The elevated default

risks, along with growing fears of further weakness in the peso, prompted foreign investors to

pull money out of Argentina’s stocks and bonds. As more and more wary investors fled,

currency markets witnessed a large-scale selloff of the peso (see Figure 10).

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 Figure 10: The US Dollar (USD) to Argentine Peso (ARS) Exchange Rate in Monthly

Averages, FRED Database, Federal Reserve Bank of St. Louis

With most of its debt denominated in dollars, a depreciated peso increased the value of

the debt in terms of pesos. With an insurmountable amount of debt accumulated, Argentina

got itself into an unprecedented era of financial crisis and economic recession in 2018.

This volatility was exacerbated by wider emerging market jitters as the U.S. Federal

Reserve introduced a contractionary monetary policy while surging global prices, including

high energy costs that badly hit Argentina's balance of payments, restraining its ability to

build up much-needed foreign reserves.

3.2.2. The Tension of Global Food Trade

Argentina’s ongoing battle with inflation traces back to the 1980s, or even earlier.

Nevertheless, the global COVID-19 pandemic, coupled with the war waged between Russia

and Ukraine, shrinking global food supplies have sent shock waves across an already battered

economy. Numerical data indicates that nearly 4 in 10 Argentines currently live below the

poverty line.

Among the exogenous factors, droughts and unfavorable weather patterns speak

loudly to be responsible for global food supplies and Argentina’s great crisis. The country's
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drought has big repercussions on global food markets, forcing farmers to slash harvest

outlooks and denting grain supply from the world's top exporter of soy oil and meal, the No. 3

for corn, and a major wheat and beef supplier. There was a significant number of farmers in

the area moaning they have lost early-sown corn, wheat and soy. Thus, in an effort to rake

back income they have planted fields with more drought-resistant cotton. Many have lost

cattle, which threatens to hit beef supply and push up prices.

This in effect puts Argentina's ability to build up much-needed reserves of dollars in

jeopardy, threatening to derail an already fragile economic revival and leave the government

unable to meet debt repayments amid spiraling inflation and a deep fiscal deficit.

Furthermore, a depletion in the amount of crops yielded also had severe aftermaths on

Argentina’s export revenue. According to expectations of Julio Calzada, head of economic

research at the Rosario exchange, "Argentina would lose about $8 billion worth of exports,"

he said, adding that this would represent a loss of some $3.5 billion in terms of government

revenues, hurting already depleted currency reserve levels.

4. Effects of Argentina’s Currency Crisis

4.1. Depreciation of Argentina’s Peso

Figure 11: Argentine peso at record low (Source: Bloomberg)

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 The peso underwent a substantial depreciation, losing nearly 50% of its value

compared to U.S. dollar, resulting in a rapid erosion of its purchasing power. The currency's

value declined significantly due to factors such as loss of confidence, increased risk

premiums, economic slowdown, and rising inflation. (see Figure 11, 12) (Castillo-Ponce and

Lai, 2020).

Figure 12: Short-term indicators have deteriorated (Source: Central Bank, INDEC,

CEIC.)

4.2. Sovereign Debt Default

In 2018, Argentina was considered one of the riskiest countries to borrow money from,

just behind Venezuela. To pay off its debts, the government took over private pension funds.

In June of that year, Argentina had to ask the International Monetary Fund (IMF) for a

$50-billion bailout, which was the largest loan the IMF had ever given (see Figure 14). 70%

of it is denominated in foreign currency. Additionally, it would lead to a rise in external debt,

which currently stands at 55% of GDP, nearly five times higher than the country's currency

reserves. (see Figure 13) (Oecd-ilibrary.org, 2019)

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 Figure 13: External debt has risen (Source: IMF, CEIC)

Figure 14: IMF and Argentina: A long history of lending (Source: International Monetary

Fund)

4.3. High-interest Rate and Inflationary Pressure

In late August, Argentina's central bank significantly raised its benchmark interest rate

to 60% (see Figure 5), making it the highest in the world, due to the government raising prices

on gas and electricity. (Argentina raises rates as peso plummets, 2018)

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 Figure 15: Monetary policy has been contractionary (Source: INDEC, CEIC)

Argentina’s interest rates and inflation are both sky-high as the country grapples with

years of stubbornly rising prices that force it to hike interest rates to keep savings in pesos.

Argentinians are worried about inflation because it has been happening a lot in the past five

years. This has made people expect that prices will keep going up in the future. Because of

this, people tend to buy things now instead of waiting, which makes prices go up even more.

(Mark, 2023)

As a result of these developments, Argentina's economy was left in a state of disarray,

with unemployment rates surging. The continuous increase in inflation further exacerbated the

situation, leading to a decline in the country's export competitiveness. This, in turn,

contributed to the widening of Argentina's current account deficit. (see Figure 16)

(Oecd-ilibrary.org, 2019)

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 Figure 16: General government net lending/borrowing and current account balance (Source:

International Monetary Fund)

The economy became increasingly vulnerable as the fiscal deficit remained high and

capital inflows remained strong. This led to widening fiscal and external imbalances. The

current account deficit doubled in size between the end of 2015 and mid-2018, reaching 6% of

GDP. Although the headline fiscal deficit continued to rise, it did not show a clear

improvement until mid-2018. (see Figure 17)

Figure 17: Fiscal and external imbalances have widened (Source: INDEC, Ministry of the

Treasury, CEIC)

4.4. Capital Flight (Loss of Investor Confidence)

In response to the economic challenges, many Argentinians decided to convert their

pesos into dollars as a way to protect their savings and invest overseas. This created a strain

on the country's foreign exchange reserves. Additionally, Argentina became more dependent

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on foreign capital inflows to fund its deficit, making it more vulnerable to capital outflows. As

a result, numerous foreign investors lost confidence in the Argentine government and

withdrew their investments from the country's stocks and bonds. (Castillo-Ponce and Lai,

2020).

Figure 18: Currency reserves are low in international comparison (Source: IMF, CEIC,

OECD Economic Outlook, Database)

Before September 2018, the central bank's interventions in currency markets resulted

in reserve losses of $13 billion, but they only had limited success in stabilizing the currency.

Argentina's currency reserves, which amount to 18% of GDP, are considered average in

international comparison.

4.5. Social Impact

Figure 19: Labour market conditions have deteriorated (Source: INDEC, CEIC)

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 Rising inflation harmed household consumption, particularly affecting low-income

earners. Unemployment rates increased, and average real wages experienced a decline of 12%

in the first 11 months of 2018. (see Figure 20)

4.6. Political Shifts

In 2018, Argentina entered into a program with the International Monetary Fund

(IMF) aimed at addressing economic challenges. The initial program, established in June

2018, focused on fiscal consolidation, inflation targeting, social protection, and gender

equality. However, financial conditions deteriorated, leading to a revamping of the program in

October 2018 with increased financing and revised economic targets.

Despite signs of stabilization in December 2018, ongoing challenges, including

inflation and exchange rate pressures, persisted. The program faced further difficulties in

2019, and by August, its implementation effectively ceased. Financial turbulence, downgrades

by rating agencies, and policy changes by the government marked this period. The program

officially ended in September 2019, falling short of its objectives.

Subsequent to the 2019 elections, a new government took office and initiated debt

restructuring efforts, leading to defaults and the cancellation of the Stand-By Arrangement

(SBA) with the IMF in July 2020. The program's overall impact was limited, and Argentina

faced ongoing economic uncertainty.

5. Government Response

5.1. Requested Financial Assistance (IMF)

5.1.1. Overview

Due to the severe economic downturn, with a large fiscal deficit, high inflation and

sharp depreciation, the Argentine government was struggling to service its debt obligations

and was at risk of defaulting again. In May 2018, after a sharp weakening peso, the

government requested a $50 billion loan from the international lender of last resort - the IMF,

to help stabilize the economy and avoid a default (Guardian, 2018). The deal marks a turning

26
 point for Argentine people, which for years considered IMF “a bad word” with its rigid

exchange rate mistake in the country’s 2001 debt crisis (Politi, 2018a). The program

supported by the SBA aimed to galvanize investor confidence, on the assumption that

Argentina was facing a temporary liquidity crunch. To that end, fiscal and monetary policy

would be tightened to demonstrate commitment to eliminating underlying imbalances, and

substantial financing would be provided by the IMF (Lagarde, 2018). Considerable emphasis

was placed on the administration’s ownership of program policies, with explicit provisions

made for social protection.

5.1.2. Key Points in Timeline

● Initial program (June 2018)

The government pledged to design the IMF-support economic plan, which aimed to

strengthen the Argentine economy by focusing on 4 key pillars:

- Restore market confidence: The core of the program is a significant fiscal adjustment

by reducing the fiscal deficit from 2.2% to 1.3% of GDP in 2019. The deal also calls

for fiscal balance in 2020 and a fiscal surplus of 0.5% of GDP in 2020 (IMF, 2018a).

This measure will ultimately lessen the government financing needs, put public debt

on a downward trajectory, and relieve a burden on Argentina’s back (Macri, 2018).

- Protect society’s most vulnerable: Steps will be taken to strengthen the social safety

net, such as redesigning assistance programs and raising female labor force

participation (IMF, 2018a). Despite reducing the federal government’s spending, the

level of social spending will be protected to reduce poverty rates or even increase if

there are well-targeted assistance projects or social conditions worsen (IMF, 2018a) .

- Strengthen the credibility of the central bank’s inflation targeting framework:

Reinforce the central bank with institutional and operational independence and

autonomy to achieve the inflationary targeting framework (IMF, 2018a). Bring

inflation to 17% in 2019 and to single digit at 9% by the end of the three-year

27
 Stand-By Arrangement (SBA) period (IMF, 2018a). Ensure the central bank has a

healthy sheet and diminish its vulnerability from a short-term peso-denominated debt

(IMF, 2018a).

- Progressively lessen the strains on the balance of payments: Rebuild international

reserves (IMF, 2018a). Reduce the country’s vulnerability to pressure on the capital

account (IMF, 2018a).

On 7th June, the IMF approved a three-year SBA for Argentina amounting to US$50

billion (about 1,11% of Argentina’s quota in the IMF), and it was more than double the

amount of usual SBA and also the largest bailout in the Fund’s history. The funds were

released in tranches throughout the arrangement, with immediate $15 billion upfront after the

approval and the remainder as “precautionary” (Lagarde, 2018).

● First Review (October 2018)

Although the original agreement was reached in June, financial conditions continued

to deteriorate, the exchange rate depreciated sharply and monetary targets were missed. This

thus required a new arrangement to be negotiated in September (IMF, 2018b). In October

2018, the IMF allowed to increase the lending package to $5.7 billion, bringing total

disbursements since June to about $20.4 billion (IMF, 2018c). The Board also approved an

augmentation of the Stand-By Arrangement to increase access to about US$56.3 billion

(equivalent to SDR 40.71 billion or 1,277 per cent of quota). Fund disbursements for the

remainder of 2018 would more than double compared to the original Fund-supported

program, to a total of US$13.4 billion (on top of the US$15 billion already disbursed).

Planned disbursements in 2019 were also nearly doubled, to US$22.8 billion, with US$5.9

billion planned for 2020-21. The resources available in the program were no longer expected

to be treated as precautionary and the authorities have requested the use of IMF financing for

budget support (IMF, 2018c). Therefore, as a part of the deal, the government had to

accelerate more austerity measures:

28
 - Fiscal Policy: reduce its budget deficit by revenue-enhancing and cost-cutting

measures that include: introducing taxes on exports, increasing the wealth tax, scaling

back inefficient energy subsidies, reprioritizing capital spending, and improving the

structure of federal transfers to provinces (IMF, 2018c).

- Monetary Policy: temporarily replace the inflation targeting regime with a monetary

base target. At the center of the new framework is a commitment to cap the growth of

money to 0% per month until June 2019, to decisively bring down inflation and

inflation expectations. This framework is supplemented by a commitment not to allow

short-term rates to fall below 60 per cent until 12-month inflation expectations

decisively fall for at least two consecutive months (IMF, 2018c).

- Exchange Rate Policy: the authorities are allowing the currency to freely float.

However, if there is a significant overshooting of the exchange rate, the Central Bank

is prepared to intervene in a limited, simple, and rules-based way (IMF, 2018c).

- Social Protection and Gender Equality. The program continues to emphasize

improving gender equality, protecting society’s most vulnerable, and laying the

foundation for growth and job creation. The authorities have already taken measures to

increase social assistance programs and have prioritized social assistance and childcare

spending in the 2019 budget (IMF, 2018c).

● Second Review (December 2018)

By the time of the second review, there were signs of stabilization: short-term interest

rates had fallen back, albeit only to the level of September 2018, and the exchange rate had

stayed within the non-intervention band. The 2019 budget, featuring more ambitious fiscal

adjustment, had been passed. All quantitative performance criteria for end-October had been

met, and most structural benchmarks had been observed, albeit with some delay (IMF, 2018c).

● Third Review (April 2019)

29
 The end-December 2018 and end-March 2019 performance criteria were met, and

structural reforms relating to the debt strategy and the submission of a new BCRA charter

were moving ahead as envisaged. However, inflation and inflation expectations were again

increasing, following a de facto relaxation in monetary policy and firms’ pass-through of costs

arising from administered prices. Argentine financial assets were under renewed pressure,

with markets viewing the continuing struggle to tame prices and revive the economy as

potentially leading to a change in government following the October general elections (IMF,

2019a).

● Fourth Review (July 2019)

As with previous reviews quantitative and structural program conditions had been met

or were on track to be met, and exchange rate pressures had eased. However, the IMF noted

that the most challenging period for the program was still to come— especially as gross

financing needs remained high. Market sentiment was skittish in advance of the general

elections. (IMF, 2019b).

Figure 20: Exchange Rate in Argentina throughout four Reviews (Source: IMF)

After the Fourth Review, the program continued to struggle, and its implementation

effectively ceased by August 2019. The IMF program in Argentina was supposed to last for

twelve reviews, but it only lasted for four. The program was supposed to help Argentina

30
 restore confidence in its fiscal and external viability and foster economic growth, but it did not

achieve these goals. The program effectively ended in August 2019 when the government

stopped implementing its policies. The new government that took office in 2019 restructured

its debt and defaulted on it in May 2020. The government canceled the SBA in July 2020

(IMF, 2021).

5.1.3. Problems and Outcomes

Due to several factors, including:

- The Argentine government's unwillingness to take critical measures, such as a debt

operation and reintroduction of capital flow management measures hindered the

program's effectiveness (IMF, 2021).

- The IMF's acceptance of the authorities' overly optimistic macroeconomic projections,

did not accurately reflect the country's economic realities and weakened the program's

robustness (IMF, 2021).

- The low quality of fiscal consolidation and lack of structural reforms were inadequate

to address Argentina's deep-seated economic issues. In an environment with currency

mismatch, standard consolidation measures were likely to be problematic, prompted

by a vicious circle by which fiscal and monetary tightening had the potential to lower

growth, raise risk premia and weaken the currency, worsening balance sheet positions

and putting viability further out of reach (IMF, 2021).

- The early and large disbursements under the SBA, owing to the overall size of the

arrangement. Deteriorating financial conditions quickly prompted a switch to a fully

disbursing arrangement. The resulting increase in access and frontloading incorporated

at the First Review raised further the financial risks to the IMF (IMF, 2021).

- The deep-seated structural challenges and political realities of Argentina limited the

effectiveness of economic policy options (IMF, 2021).

31
 - The lack of confidence in Argentina's fiscal and external sustainability due to

persistently weak public finances, rigid budget structures, high dollarization, limited

domestic financial sector, and narrow export base severely restricted the scope of

effective economic policy options (IMF, 2021).

The SBA did not succeed in improving confidence and delivering on its objectives.

Despite the size of the arrangement, Argentina had to borrow considerable amounts in the

markets, and the exchange rate continued to depreciate, increasing inflation and the peso value

of public debt, and weakening real incomes, especially of the poor (Bianchi, 2022).

Consequently, the program's growth and inflation objectives were missed.

5.2. Contractionary Fiscal Policy

5.2.1. Overview

Fiscal dominance has been central to Argentina’s economic challenges for decades.

Argentina's fiscal policy in 2018 was contractionary, with primary expenditure increasing less

than income, leading to a narrowing of the primary deficit (United Nations Publications,

2019). However, the overall fiscal deficit remained significant, and public debt increased

sharply due to new liabilities and the exchange rate depreciation. Given the fiscal deficit

financing needs, the Argentine Government agreed on the SBA with the IMF for the largest

loan in the Fund’s history. After the First Review, along with an increase in the total amount

of the loan, a further acceleration of fiscal consolidation is required.

5.2.2. Key Points

The fiscal policy committed to in the arrangement includes the goal of attaining a

primary fiscal balance by 2019, to be achieved by real cuts in public expenditure on subsidies

(energy and transport), public sector wages, transfers to the provinces and public investment.

This also includes the possibility of increasing social spending if necessary (IMF, 2018b). The

SBA called for significant fiscal consolidation efforts to reduce the government's budget

deficit and stabilize its debt trajectory. The primary balance, a measure of the government's

32
ability to pay its debts without borrowing more, was targeted to improve from 3.8% of GDP

in 2017 to zero by 2019. Besides, this funding was intended to support the implementation of

the program's fiscal and structural reforms and help restore investor confidence (Politi,

2018b).

In the model of IS-LM-BP, under flexible exchange rate and mobile capital,

contractionary fiscal policy by spending cuts and tax increases shifts the IS curve to the left

and the economy moves from A to B. At B, there is an incipient deficit in the Balance of

Payments because the level of capital inflows is insufficient to offset the deficit in the CA that

prevails at B. The incipient deficit in the BoP means the exchange rate is depreciating (there

are unwanted pesos on the foreign exchange market). As the exchange rate depreciates (e

increases), Net Exports increase because the relative price of domestic goods on international

markets has fallen. As NX rises, it has two effects that occur simultaneously: 1) Total

Expenditures increase therefore the IS curve moves right, and, 2) the Current Account

improves therefore the BP curve moves right. Note that the cases with flexible exchange rates

and non-perfectly mobile capital differ from the perfect capital mobility case. In the latter, the

BP curve does not shift because the capital in/out flows are infinite, and therefore they

overwhelm the effect that the change in NX has on the CA. The new equilibrium occurs at C,

where the economy has had an increase in Y. In abbreviated notation this would be: ↓G → ↓

TE → IS left: A to B; at B: incipient BoP deficit (below the BP curve): ↑e (depreciates) As

e↑→ ↑ NX → ↑TE → IS right; → ↑CA → BP right.

Together, these cause the economy to move from B to C, resulting in lower output Y

and lower interest i.

33
 Figure 21: The IS-LM-BP model under Flexible Exchange Rate, Mobile Capital and a

Contractionary Fiscal Policy (Source: Research Group)

A rightward shift in the BP curve indicates a stronger demand for money at all interest

rates (Mankiw, 2021; Pindyck & Rubinfeld, 2017; Samuelson & Nordhaus, 2019). This

phenomenon isn't just a passive reflection of existing market sentiment; it can act as a catalyst

for further confidence building, creating a positive feedback loop for the economy (Mankiw et

al., 2021). There are some implications of a rightward shift in the BP curve to restore market

confidence. Firstly, as the BP curve shifts right, the central bank may lower interest rates to

accommodate the increased demand for money. This can make it cheaper for businesses and

consumers to borrow, potentially stimulating economic activity (Pindyck & Rubinfeld, 2018).

Secondly, the increased demand for money can also make it easier for businesses and

consumers to access credit. This can facilitate investment, expansion, and spending, further

stimulating economic growth. The rightward shift sends a powerful message to investors and

businesses: the local currency is stable, and the economy is healthy. This reduces uncertainty

and risk perception, key concerns for investors, acting as a positive signal for future

investment and lending. As market confidence rises, the BP curve shifts further right,

signaling even greater stability and attracting more investment. This creates a virtuous cycle

34
 where rising confidence fuels economic growth, which further strengthens confidence

(Mankiw et al., 2021). Therefore, contractionary fiscal policy is planned to increase

willingness to hold money, lower perceived risk and higher foreign investment.

5.2.3. Problems

Argentina's fiscal policy under the International Monetary Fund's (IMF) Stand-By

Arrangement (SBA) was a delicate balancing act between the need for fiscal consolidation to

address the country's debt sustainability concerns and the potential negative effects of such

consolidation on short-term economic growth.

The program initially called for a gradual improvement in the primary balance from

2017 to 2020. However, due to mounting concerns about Argentina's debt situation and the

need to restore market confidence, the adjustment was later accelerated and brought forward

to 2019. This meant that the government had to implement more significant fiscal measures in

a shorter time frame, which raised concerns about the potential negative impact on economic

activity. To address these concerns, the IMF used higher-than-typical fiscal multipliers in its

projections of the program's impact on the economy (IMF, 2021). Higher multipliers suggest

that a given fiscal adjustment would have a larger negative impact on growth. The use of

higher multipliers reflected the IMF's recognition that Argentina's economy was particularly

vulnerable to fiscal consolidation due to factors such as its weak export base, shallow

domestic financial system, and history of defaults. Despite the use of higher multipliers,

analysis conducted early in the program period indicated that even larger multipliers would

have made little difference to the assessment of Argentina's debt sustainability (IMF, 2021).

This suggests that the adverse growth effects of the fiscal consolidation were likely due to

other factors, such as the sharp depreciation of the Argentine peso, capital flight, and

heightened uncertainty.

Furthermore, while initial staff proposals included structural revenue reforms such as

expanding the scope of personal income tax (PIT) on labor income and strengthening the VAT

35
 which would have broadened the tax base and increased revenue sustainably, the authorities

deemed these reforms “politically sensitive” (IMF, 2021). Instead, the government not only

relied on a temporary tax on exports and other small measures that offered quick gains but

lacked long-term sustainability but also lowered the corporate income tax rate, canceled

planned utility tariff increases, and cut many other taxes. While some initiatives aimed to

improve tax compliance, they couldn’t compensate for the significant revenue losses from

other policies. Overall, Argentina's revenue situation is characterized by a lack of political will

to implement meaningful reforms, a preference for short-term gains over long-term

sustainability, and policy decisions that actively undermine revenue generation. This

combination has left the government with a significant shortfall and limited resources to

address its economic challenges.

Debt sustainability was also undermined by exchange rate depreciation, offsetting this

shock through fiscal consolidation alone would have required a major additional adjustment

(IMF, 2021). Argentina missed an opportunity to address its debt vulnerabilities through early

debt reprofiling. While some fiscal progress was made, it wasn't enough to overcome the

challenges posed by exchange rate depreciation and reliance on low-quality measures. This

highlights the importance of proactive debt management and structural reforms alongside

fiscal consolidation for achieving sustainable public finances.

5.2.4. Outcomes

The primary balance targets were met, mainly by lowering expenditures, although the

measures were generally of low and decreasing quality throughout the program.

Notwithstanding early efforts to reduce the wage bill and energy subsidies, most expenditure

measures taken during the program period were temporary and relatively easy to reverse,

undermining the credibility of the consolidation effort; moreover, revenue measures were

limited and of low quality (IMF, 2021). The quality of measures deteriorated over time as the

36
authorities sought to meet targets in a worsening macroeconomic environment; policy was

later loosened in the run-up to the election.

- Revenues fell short of what was projected at program approval by about 1 1⁄4 percent

of GDP for 2018 and 1 3⁄4 percent of GDP for 2019, in part reflecting cyclical factors

(with tax buoyancy well below unity) (IMF, 2021).

- Improvements in the primary balance contributed to lowering the debt ratio.

Higher-than-expected inflation also helped improve debt dynamics, as the nominal

effective interest rates on debt (about 11 percent in 2018 and 6 percent in 2019) were

far below nominal GDP growth rate at 37 and 51 percent, respectively (IMF, 2021).

However, these effects were more than offset by the effects of exchange rate

depreciation.

- The primary fiscal deficit was reduced from 3.8 percent of GDP in 2017 to 0.4 percent

of GDP in 2019, close to the program target of zero. However, the adjustment was

flattered by one off revenue measures of 0.7 percent of GDP and cuts in capital

spending, and did not lay the foundations for a durable increase in tax receipts and

stabilization of expenditures (IMF, 2021).

- The recession hit income and consumption tax receipts, while decisions in early 2019

to freeze utility tariffs until the end of 2019 and provide generous tax incentives to

SMEs created additional fiscal uncertainties. The federal government's primary deficit

therefore remained subject to significant risks. The exchange rate depreciation

overwhelmed the fiscal targets, as the debt ratio escalated to nearly 90 percent of GDP

(IMF, 2021).

In sum, the fiscal adjustment and reforms under the program did not achieve fiscal

sustainability.

37
 5.3. Monetary Policy

5.3.1. Overview

In the period from 2018 to 2019, to decisively reduce inflation, the Central Bank

shifted toward a contractionary monetary policy regime, temporarily replacing the

inflation-targeting regime with a monetary base target. At the center of the new framework is

a commitment to cap money growth to zero percent per month (calculated as the change in the

monthly average) until June 2019, to decisively bring down inflation and inflation

expectations (IMF, 2018). However, due to the impacts of the Covid-19 pandemic in the next

few years, monetary policy in this country continued to see some fluctuations between a

contractionary and expansionary approach.

5.3.2. Key Points

In 2018, Argentina implemented a contractionary monetary policy as part of its efforts

to address macroeconomic imbalances, reduce inflation, and stabilize the economy. The

Central Bank of Argentina, Banco Central de la República Argentina (BCRA), raised interest

rates to control inflation and stabilize the currency. The BCRA also increased the benchmark

interest rate, known as the Leliq rate, to high levels to restrain credit growth and curb

inflationary pressures. The purpose of raising interest rates was to reduce aggregate demand

and cool down the economy, aiming to bring inflation under control. BCRA also implemented

measures to manage monetary aggregates and reserve requirements. It adjusted reserve

requirements for banks, requiring them to hold a higher portion of their deposits as reserves,

which reduced the availability of funds for lending and tightened credit conditions.

Controlling the money supply through reserve requirements aimed at limiting the expansion

of credit and reducing liquidity in the economy (BCRA, 2018).

Under the IS-LM-BP Model, under the conditions of a contractionary monetary policy,

flexible exchange rate regime, and imperfect capital mobility, the LM curve shifts to the left

(from LM to LM'), which makes the equilibrium go from E0 to E1, indicating an increase in

38
interest rates and a decrease in output levels. Raising interest rates and reducing the money

supply make domestic assets more attractive to foreign investors. This increased demand for

domestic assets, therefore, leads to an appreciation of the local currency. An appreciation of

domestic currency can make exports relatively more expensive for foreign buyers and imports

relatively cheaper for domestic consumers. As a result, net exports decrease, which makes the

BP curve shift to the left (from BP to BP'). In addition, a decrease in output levels typically

indicates a decrease in private investment and consumption. This decrease in aggregate

demand results in a leftward shift of the IS curve (from IS to IS'). Therefore, with capital

mobility, flexible exchange rate, and contractionary monetary policy, the final equilibrium

will be at point E2, resulting in generally higher interest rates and lower output levels.

Figure 22: The IS-LM-BP model under a flexible exchange rate, imperfect capital

mobility, and a contractionary monetary policy (Source: Research Group)

Despite short-term success in controlling inflation and stabilizing currency, Argentina

still experienced a high annual inflation rate of 47% by the end of 2018 and the peso

continued to weaken throughout the year. Furthermore, a combination of massive fiscal and

monetary tightening kept the economy in recession during 2018 and 2019. Private

39
consumption and investment remained depressed due to lower real incomes and higher

interest rates, and unemployment rose (OECD, 2018).

Figure 23: Fiscal, External Imbalances, Inflation, and Exchange Rate in Argentina

(Source: INDEC, Ministry of Economy, CEIC, Thomson Reuters, and StatLink)

Figure 24: Demand, Output and Prices in Argentina (Source: OECD Economic

Outlook 104 Database)

As the year progressed, there was a gradual shift towards a more expansionary

approach to support economic growth and address the issue of the recession. In 2020, in

response to the Covid-19 pandemic and its economic consequences, the Central Bank of

40
Argentina adopted an expansionary monetary policy. This involved lowering interest rates and

implementing measures to inject liquidity into the economy. The objective was to support

businesses, stimulate economic activity, and mitigate the effects of the crisis (CEPAL, 2022).

In 2021, monetary policy was expansionary. The central bank kept its nominal policy

interest rate at 38% per year (equivalent to an effective annual rate of 45.5%), which was

below the year’s average inflation of 48.4%. During the same period, the monetary authority

provided financial assistance to the National Treasury to meet expenses arising from the

package of fiscal measures introduced to support the economic recovery. This financing was

provided through temporary advances and the transfer of central bank profits (CEPAL, 2022).

In 2021, the national government and the central bank continued to promote a package

of measures and programs to expand the supply of credit to the private sector under more

favorable conditions than those prevailing on the market. This included a set of programs run

by the Ministry of Productive Development under which new loans, subsidies on borrowing

costs, and loan guarantees were granted (CEPAL, 2022).

Figure 25: Inflation and Interest Rate in Argentina (2018 - 2023)

(Source: Refinitive Eikon, BCRA)

In 2022, the central bank raised its policy interest rate in response to rising inflation. In

August, the policy rate reached 69.5% per year (equivalent to an effective annual rate of

41
 96.8%), after year-on-year inflation for July had come in at 71.0%. This latest increase raised

the floor rate on individual time deposits of up to 10 million pesos —set according to the

policy rate— to 69.5% (an effective annual rate of 96.6%). As price increases gathered pace,

inflation-indexed time deposits grew significantly —by 35.5% in real terms in the first seven

months of the year. On the other side of the market, lending in pesos to the private sector saw

a significant increase in collateralized credit associated with the purchase of automobiles,

machinery, and capital goods, within the framework of the financing measures implemented

by the Ministry of Productive Development and the central bank (CEPAL, 2022).

As of the second quarter of 2022, the rise in international food, energy, and fertilizer

prices, fuelled by the outbreak of the war in Ukraine, compounded by general uncertainty,

caused several macroeconomic variables to deteriorate. Inflation rose to 59.3% in the first

seven months of the year; the primary fiscal deficit widened to 1% of GDP in the first half of

2022 (compared to 0.4% in the year-earlier period); and the trade surplus for the first half of

the year shrank by 54%. This contributed to international reserves remaining at low levels and

led to the adoption of measures to reduce payments for a set of imports, as well as a more

contractionary monetary policy (CEPAL, 2022).

5.4. Exchange Rate Policy

5.4.1. Currency Crisis and Floating Exchange Rate (2018)

In 2018, Argentina faced a severe currency crisis, with the Argentine peso

experiencing significant depreciation. As a result, the government moved away from a fixed

exchange rate regime and adopted a floating exchange rate system in response to server

currency crisis. Under a floating exchange rate, the value of the peso was determined by

market forces of supply and demand. This allowed the currency to freely float and adjust

based on market conditions (IMF, 2018)

42
5.4.2. IMF Program and Exchange Rate Interventions (2018-2019)

To address the currency crisis and stabilize the economy, Argentina sought financial

assistance from the International Monetary Fund (IMF). As part of the IMF program, the

Argentine government implemented exchange rate interventions to manage the currency's

fluctuations. These interventions involved occasional central bank interventions in the foreign

exchange market to influence the exchange rate and prevent excessive volatility (IMF, 2018)

5.4.3. Currency Controls and Multiple Exchange Rates (2019-2020)

In 2019, amid ongoing economic challenges and capital outflows, the Argentine

government introduced currency controls. These controls included restrictions on foreign

currency purchases and transfers, aimed at preserving foreign exchange reserves and limiting

capital flight. Additionally, multiple exchange rates were introduced, with different rates for

different types of transactions. This led to a complex and fragmented exchange rate system

(CEPAL, 2022)

5.4.4. Unified Exchange Rate and Managed Float (2020-the present)

In October 2020, Argentina took steps to unify its exchange rate system and move

towards a more managed floating exchange rate. The multiple exchange rates were gradually

phased out, and a single official exchange rate was established. However, the government

retained some control over the exchange rate through interventions and restrictions on foreign

currency access. (CEPAL, 2022)

6. Lesson Learned

The currency crisis that struck Argentina in 2018 served as a wake-up call, exposing

vulnerabilities and providing valuable lessons for both Argentina and the international

community.

Firstly, it spotlighted the vulnerability of an economy heavily reliant on specific

sectors, particularly agriculture. The severe drought and the strengthened U.S. dollar

significantly impacted Argentina's economic performance, triggering trade imbalances and an

43
abrupt devaluation of the national currency. This highlighted the risks associated with an

overdependence on particular industries and the need for economic diversification to mitigate

external shocks and stabilize the economy over the long term.

Secondly, the crisis underscored the pivotal role of clear, consistent, and trustworthy

economic policies. Argentina's fluctuating strategies to manage inflation and interest rates

created confusion and eroded investor confidence. The loss of faith among investors

exacerbated the crisis, intensifying the depreciation of the national currency. This emphasized

the necessity of coherent and credible economic policies to instill confidence in investors and

maintain stability within financial markets, ultimately safeguarding the country's economic

well-being.

Additionally, the crisis illuminated the detrimental effects of high foreign debt levels

coupled with a devalued currency. The combination of these factors heightened the strain on

Argentina's economy, leading to inflation, recession, and increased poverty rates. Such

economic turmoil eroded public trust in the government's capacity to address the crisis

effectively, highlighting the importance of managing foreign debt prudently and ensuring a

stable currency to sustain economic growth and maintain public confidence in the

government's ability to manage economic affairs competently.

Moreover, the crisis emphasized the critical necessity for prompt and comprehensive

economic reforms in addressing economic challenges. Delays in implementing effective

policy measures exacerbated the severity of the crisis, emphasizing the urgency for swift,

well-defined reforms to counter economic downturns and prevent them from escalating.

Although international aid, particularly from organizations like the IMF, provided temporary

relief, it became evident that enduring solutions necessitate deeper structural reforms within

the national economic framework to prevent recurring crises.

Lastly, the crisis highlighted the intricate link between politics and economics. The

uncertainty surrounding the upcoming elections significantly influenced investor sentiments

44
and economic recovery prospects. This interplay emphasized the imperative of political

stability in fostering an environment conducive to economic growth and recovery,

underscoring the need for coherent economic policies insulated from political uncertainty.

In conclusion, the Argentine currency crisis of 2018 provided crucial lessons regarding

economic diversification, the importance of clear and credible economic policies, prudent

management of foreign debt and currency, the urgency for swift and comprehensive reforms,

and the indispensable connection between political stability and economic resilience. These

lessons serve as guiding principles for mitigating economic vulnerabilities and steering

toward sustainable growth while minimizing the likelihood of future economic crises.

7. Conclusion

The currency crisis in Argentina in 2018 was a complex event with far-reaching

consequences for the country's economy. This case study aimed to provide an in-depth

analysis of the causes, impacts, and lessons learned from the crisis within the framework of

the IS-LM-BP model.

The analysis revealed that a combination of domestic and international factors

contributed to the currency crisis. Domestic factors such as a long history of high inflation,

fiscal deficits, loss of confidence, and a historical drought in 2017-2018 played a significant

role in destabilizing the economy. International factors, including rising interest rates in the

United States and global food trade tensions, further exacerbated the crisis.

The effects of the currency crisis were widespread and severe. The depreciation of the

peso led to increased import costs and inflationary pressures, eroding the purchasing power of

individuals and businesses. A sovereign debt default further undermined investor confidence

and limited access to international capital markets. Capital flight intensified as investors lost

faith in the economy, exacerbating the economic turmoil. The social impacts were significant,

with rising poverty rates, unemployment, and social unrest, while political shifts occurred as a

result of public discontent.

45
 In response to the crisis, the government implemented various measures. Requested

financial assistance from the International Monetary Fund (IMF) aimed to stabilize the

economy and restore investor confidence. Contractionary fiscal and monetary policies were

adopted to address fiscal imbalances and inflationary pressures. Exchange rate policies were

implemented to manage currency volatility and restore stability, accompanied by structural

reforms to address underlying weaknesses.

The lessons learned from the crisis provide valuable insights for policymakers and

researchers. The analysis within the IS-LM-BP model highlighted the importance of

considering the interplay between monetary and fiscal policies, external shocks, and market

expectations. These insights can inform the design of effective policies to mitigate the impact

of future currency crises and enhance economic resilience.

In conclusion, the Argentinian currency crisis of 2018 serves as a significant case

study that deepens our understanding of the causes, impacts, and lessons learned from major

financial crises. The analysis of domestic and international factors, effects, and government

responses provides valuable insights into managing currency crises. Applying these lessons

can guide policymakers in designing effective crisis prevention and management strategies,

contributing to the stability and resilience of economies facing similar challenges.

46
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