Will Argentina’s provinces issue their own quasi-currencies?

10th October 2019

By Fermín Koop

Will Argentina’s provinces issue their own quasi-currencies?

In line with the financial woes faced by the Mauricio Macri administration at a national level, several provinces are starting to raise the alarm over their own difficult financial situation, even suggesting the possibility of issuing their own quasi-currencies as an emergency measure – just like it happened in 2001.

The crisis now faced by Argentina has caused a decline in tax collection, which is bad news not only for the national government but also for the provinces, who receive part of those funds. Now, with less money available, some districts are facing problems to meet regular payments such as wages and debt maturities.

</p> <p>The situation got even more complicated recently. Macri cut taxes as a relief measure after the primary elections, part of whose proceeds were automatically transferred to provinces, prompting a <a href="">Supreme Court ruling</a> in favor of the governors.</p> <p>Although provinces were saved for the day, the growing depth of the economic crisis means that they could be vulnerable to another shock to their coffers in the near future. For now, they have been protected from emergency measures such as default and the return of quasi-currencies by the favorable fund distribution they secured during Macri’s administration, in exchange for their support in key Congressional votes.</p> <p>“The structural situation of provinces has improved over the years, with the national government sending more funds,” Rafael Flores, board member at the Public Budget and Financial Administration Association, told <em>The Essential</em>. “But the lower tax collection is affecting their resources and the consequences are starting to become visible.”</p> <h2><strong>Emergency currencies</strong></h2> <p>Chaco, Chubut, Córdoba, Santa Fe, Catamarca and Tucumán provinces have already openly admitted to be discussing the possibility of issuing their own alternative currencies, which would provide some financial relief amid the current lack of funds.</p> <p>In Tucumán, Governor Juan Manzur said he will do “everything in his reach” to avoid their comeback, claiming there are provinces in a more difficult situation. Chaco is among them, with Governor Domingo Peppo asking for help from the Macri administration.</p> <p>“The last thing we would do is implement those kinds of currencies, but to avoid them we need help from the national government. It’s an extreme measure but I don’t rule it out. We are facing one of the largest crises the province has ever seen,” Peppo recently said.</p> <p>For the national administration, the possibility remains distant. Interior Minister Rogelio Frigerio described it as a “fantasy,” claiming all provinces are much better off than during Cristina Fernández de Kirchner’s administration due to the larger amount of funds distributed to them.</p> <p>Economists consulted by <em>The Essential</em> acknowledged the provincial hardships but said the comeback of alternative currencies was not realistic yet. It will all depend on whether they can make a deal with the national government, they claimed.</p> <p>“Provinces have fewer funds to face their expenses and have a limited access to funding. Quasi-currencies are one of their alternatives, but it’s an extreme one,” Joaquín Waldman, economist at Ecolatina, said. “It would end up affecting the purchasing power of the workers who get paid with those currencies instead of pesos, as not all stores would accept them.”</p> <h2><strong>Fears of 2001</strong></h2> <p>Back in 2001, complementary currencies were implemented by fifteen provinces, including the national administration, amid the country’s economic and political crisis. The currencies were basically bonds, but circulated simultaneously with the peso and allowed provinces to keep paying their employees and propping up consumption amid a dried-up economy due to the country’s restrictions on <a href="">bank withdrawals</a>.</p> <p>Their issuance had stark consequences for those paid with them, mainly state workers. Not all stores accepted them and, when they did, it was often not at face value, as salesmen feared the state would not swap the bonds back for sound money when their expiration came.</p> <p>As the country’s economy regained strength in 2003, all of the currencies gradually disappeared as they were absorbed by the national government. The fact that so many districts implemented them meant the currencies represented 40 percent of the monetary issuance at one point.</p> <h2><strong>Different scenarios</strong></h2> <p>But although provinces are crying wolf, some analysts say it might not be at the door yet, as the governors’ situation is not as bad as after the turn of the century.</p> <p>In 2001, when they were implemented, the financial deficit of provinces was at 2.3 percent of their GDP, while this year will finish at 1.3 percent on the worst-case scenario, according to estimations by the Abeceb consultancy, formerly led by Macri’s Labor and Production Minister Dante Sica.</p> <p>“We don’t see this kind of currencies as something likely in the short-term. It will depend on whether the provinces are able to reach a deal with the national government,” Nicolás Vanoli Long, economist at Abeceb, said. “So far the possibility of local quasi-currencies seems distant.”</p> <p>The consultancy adjusted its forecasts downwards since the primary elections, from an estimated provincial surplus of 55 billion pesos to a more modest 3 billion surplus. The 1.3 percent deficit scenario would only come if financial problems deepen further.</p> <p>Still, cases have to be analyzed individually. According to the consultancy, Buenos Aires and Córdoba are among the most troubled ones.</p> <h2><strong>Problems ahead</strong></h2> <p>The trouble for provinces is not just their reduced income from the national government due to the fall in federal tax collection. The fiscal agreement they signed with the federal administration also committed regional governments to cutting taxes. This has a direct impact on the funds that they can collect in each of their territories.</p> <p>At the same time, they also face large debt payments, as many of them issued bonds in international markets since Macri’s administration lifted currency controls in 2015.</p> <p>Provinces now hold up to US$14 billion in bonds issued in foreign currency, mainly due to issuances in 2016 and 2017, according to consultancies’ estimations. The devaluation of the peso meant that returning dollar-denominated loans is becoming more costly.</p> <p>According to the Fiscal Analysis Institute (IARAF), provinces faced a decline in their income in 2018 and 2019 when considering the inflation rate. This year they will face a similar scenario, creating a situation of “fiscal and socioeconomic stress,” the consultancy said.</p> <p>“Provinces won’t likely be able to maintain their promise of reducing taxes as they simply can’t afford it,” Nadin Argañaraz, IARAF head, said. “Their local incomes are declining due to that deal and at the same time they are receiving less money from the national government. It’s a difficult combination.”</p> <p>

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Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.