Last year ended in Argentina with inflation at twice its 2004 rate. According to the latest data from the National Institute of Statistics and Census (INDEC), the cost of living rose 1.1% during December. Inflation for the entire 12 months reached 12.3%, compared with 6.1% during 2004. Experts say inflation is the main challenge facing the country’s brand-new minister of economics, Felisa Miceli.


Twenty days after she took office, Miceli confirmed that fact in her first meeting with business leaders. “Inflation is the government’s key challenge,” she said. Miceli also explained that in Argentina “it is more dangerous when prices rise above normal levels than it is when that happens in other countries.”


Miceli is the first woman in Argentine history to become Economics Minister. Before assuming that position, she held other public positions, most recently president of Argentina’s Banco Nación. Her mentor is Roberto Lavagna, the former finance minister whom she replaced last December as one of the most loyal supporters of President Néstor Kirchner. “Lavagna had his own base of support and political power, and his own reputation in markets,” comments Gerald A. McDermott, a management professor at Wharton. For all that, “the whole world thinks that Miceli is simply a puppet of Kirchner, someone who never had an economic policy during 12 years in the government of Santa Cruz province,” notes McDermott. According to some surveys, more than half of all Argentines do not approve of the removal of Lavagna.


As a result, most analysts feel that Miceli will need to demonstrate that she can function autonomously, especially during the first six months of this year. Sebastian Galiano, an economics professor at the University of San Andrés (UDESA), suggests that, short term, the main challenge for Miceli will be to slow down the growth in nominal demand. Galiano says that in 2005, nominal demand “grew by 20%, which was reflected in the 8% growth in production of goods and services, and the 12% rise in prices. The problem is that total investment is still down. Given the levels where it is now, the economy has the potential to grow by no more than 3.5%. So if they don’t slow down the growth in nominal demand, inflation could get out of control. Even if they don’t do that, it [inflation] will not drop from current levels.”


The first task Miceli tackled after taking her new job was to launch a “mega”-agreement with supermarkets and manufacturers to bring about a 15% drop in the prices of more than 150 products considered basic necessities.This showed that her top priority is controlling prices.


Although the agreement brought some positive results in supermarket aisles and department stores, it did not have that much of an impact on prices of beef, the most important ingredient on Argentinian dinner tables. Clearly, not all of the products that were subject to Miceli’s proposal wound up dropping their prices by 15%. In addition, many retailers were left without sufficient inventory, so consumers were unable to take advantage of lower prices.


Galiano insists that to solve inflation, Argentina must focus on every aspect of it. “First, you have to get people to stop talking about short-term inflation and talk about long-term inflation. Second, you have to repair the pricing system for [Argentina’s] privatized companies.” Prices for public utilities, including water and gas, have been frozen ever since the Argentine currency was devalued four years ago. That means prices still have not been brought up to date.


Another measure Miceli undertook, three weeks ago, was to establish a Banco Nación credit plan valued at $1.5 billion to provide companies with the opportunity to expand, purchase machinery, and acquire manufacturing inputs.


McDermott agrees that, in addition to the urgent need to expand investment in fixed capital, the challenge for 2006 is “the reconstruction of regulatory regimes and regulatory institutions in capital markets and public services. Most of them were poorly done during the 1990s, and Kirchner does not have much credibility in this sense. Nor does Julio de Vido, his minister of infrastructure.“


Nevertheless, in a recent Interview, Miceli said that “prices for services will not be renegotiated” in 2006.


The Double-Edged Sword of Paying the Debt


With the broad smile that characterizes all her press conferences, Miceli stood alongside Martin Redrado, head of the country’s Central Bank, a few days ago, to confirm that Argentina was repaying the debt it owed to the International Monetary Fund. On January 3, the sum of $9.53 billion in special draft rights was canceled in advance as a result of a personal decision by President Kirchner.


This long anticipated move gave Miceli a few moments to relax during her arduous negotiation sessions with various kinds of food producers. She is still trying to get them to lower their prices.


However, no one can say if the payment to the IMF will have a positive impact on Argentina. “It could be favorable but there are still no signs of that,” comments McDermott. In the current context, he says, “the appropriate fiscal policy is one that reduces the level of net indebtedness for the government. The repayment to the IMF does not do that; it replaces one liability with another one. In other words, it cancels external liabilities in favor of external assets of the Central Bank. The net indebtedness does not change.”


There are several areas of disagreement concerning the problems that could be in store for the Central Bank if more than $9.5 billion in reserves leaves the country. “It could be a problem if, as the result of the least little short-term financing need, the National Treasury reduces its fiscal surplus,” says Galiano. “When it comes to financial operations, in order for the Central Bank to disperse the reserves, the Treasury compensates the Central Bank with a non-transferable draft letter, payable in dollars over a ten year period, valued at the same amount as the canceled debt, which equalizes its liabilities and its assets.


McDermott wonders, somewhat critically: “Is the Central Bank now simply another department of the [Argentine] Presidency?” He believes that the institution should operate totally autonomously of the federal government.


Beyond the real impact of repaying or not repaying the IMF, there are other economic problems that must be resolved. McDermott advises observers not to overlook such challenges as Argentina’s “credibility in international markets, its institutional development for supporting the competitiveness and innovation of exporting sectors, and [domestic] poverty [within Argentina].”


On the other hand, experts point out that Argentina’s debt with the IMF is only a small portion of the country’s total foreign debt, which is now $124.332 billion.