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What lessons can African governments learn from inflation in Argentina?



Argentina may be the current world champion after its phenomenal success in the World Cup 2022 in Qatar, but its football success cannot, unfortunately, solve its economic woes. Indeed, Argentina has been experiencing levels of hyperinflation over the recent years. Argentina’s year-over-year inflation rate soared past the 100% mark in February 2023 for the first time in more than 30 years, which means that the prices of many consumer goods have doubled in the space of a year. It is extremely alarming for the Argentinian economy and it is a warning for the African countries that are currently experiencing high levels of inflation but which do not have (yet) hyperinflation. What has led to hyperinflation in Argentina? And what measures could African governments implement in their economies to avoid hyperinflation?

Why has inflation suddenly soared in Argentina? On May 12, Argentina’s official statistics agency confirmed that prices had surged by a mammoth 108.8% year-on-year in April 2023, having already posted 104.% in March and 102.5% in February. Indeed, According to the International Banker, the last time the Europe of South America posted such sky-high rates was back in 1991 when it was mired in a period of hyperinflation during which annual prices exceeded a 3,000% hike.

According to the article explaining why inflation surpassed 100% by the International Banker, inflation in Argentina has been massively elevated since the economy descended into a crisis in 2018, when its foreign-debt obligations ballooned to unsustainable levels and the Argentinian peso collapsed against the U.S. dollar. To tame the issue, the IMF issued a $57-billion relief package—its largest-ever credit package—which was agreed by then-President Mauricio Macri that year, with the understanding that Argentinian policymakers would reduce inflation and public spending among key conditions. Though, since the issuance of this relief package, inflation in Argentina continue to soar even higher as the country struggled to service its debt. In other words, inflation skyrocketed in Argentina due to bad monetary and fiscal policies.


Money Supply (M2), May 2022 - April 2023

Source: Central Bank of Argentina


On the monetary side, despite high-interest rates, the Argentinian central bank continued to increase the money supply, as we can see in the graph. According to the Central Bank of Argentina, the money supply increased from 13,436,941.80 million pesos in March 2023, to 14,573,629.30 million pesos in April 2023, which led to continued depreciation of the Argentinian pesos. The peso has lost a significant amount of its value against the dollar in recent years. This has made imported goods more expensive, which has also contributed to inflation. Moreover, the Argentine government has imposed currency controls in an attempt to prevent capital flight. However, these controls have also made it more difficult for businesses to import goods, which has also contributed to inflation.

On the fiscal policy side, the Argentinian government spending increased substantially after the issuance of the relief package. The Argentine government has been running large budget deficits for many years, which has led to the printing of more money. This has increased the money supply and put upward pressure on prices. And the large deficits being run by the government enlarges further their debt.

Several African countries have embarked on the same policies that the Argentinian government has been implementing over the last few years, which caused inflation. It is the case for Ghana, and Zimbabwe (again). For African countries that have not experienced such levels of inflation, it is important for their governments to apply fiscal and monetary discipline. The current economic conditions around the world do not permit African governments to be wasteful. They must be parsimonious. African governments must maintain their interest rates high while reducing the level of their money supply. Furthermore, they must reduce their spending to avoid increasing their deficits.

The current economic slowdown that many countries around the world are experiencing is based on bad government policies. Nothing more. Adding more government policies to solve the issue that government itself already created will not solve that very issue. The only major policy that ought to be applied is to keep interest rates high so inflation comes back to normal.

What is happening to Argentina can happen to any country around the world. No one is immune to fiscal and monetary follies. African governments must refrain themselves from interfering in their economies because doing so will only exacerbate the problem.

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