Shock Therapy Produces A Fiscal Surplus

President Javier Milei’s controversial plan to shock Argentina’s economy back into growth has chalked up a significant win.

After years of rising debt, the country has now posted four consecutive months of fiscal surplus, the first in 16 years. It now eyes a full year of positive balances. The country also posted a positive financial surplus, including interest payments, in April. Against a current 40% interest rate, the figure reached 17.4 billion pesos ($19.6 million).

The International Monetary Fund (IMF) has lauded the government’s economic blueprint, with its combination of austerity policies and lowering interest rates. It describes the current results as the first fruits of “an ambitious stabilization plan, anchored on a large upfront fiscal consolidation, along with actions to rebuild reserves, correct relative price misalignments, strengthen the central bank’s balance sheet, and create a simpler, rules-based, and market-oriented economy.”

In Argentina’s case, lowering interest rates appears to have helped dampen consumer price rises. That’s because the main driver of currency devaluation was the country’s ballooning debt, accentuated by a 50% interest rate benchmark.

Recognizing the country’s improved outlook, the IMF has agreed to release the next tranche of loans under a bailout program with Argentina. The payout, scheduled for release later this month, stands at roughly $800 million.

The “consensus is the government will achieve a full year of financial surplus in 2024, or, failing that, a primary surplus,” says Ricardo Amarilla, economist at TC Economatica. He cautions, however, that more than 60% of Argentina’s expenses usually hit in the second half of the year, meaning the government will probably need to double down on austerity and inflation reduction to keep the plan moving. “Among the main challenges are stopping the use of inflation as a mechanism to adjust public spending,” Amarilla says, “and also achieving political agreements that result in laws with genuine spending cuts.”