Argentina is planning economic crisis measures to avoid major devaluations

Argentina will on Monday announce a new round of emergency government measures, including raising interest rates by 600 basis points to 97 percent, to try to avert the country’s worst economic crisis in two decades.

The Peronist government is desperate to avoid a major devaluation before the October elections. But the South American country is also running out of foreign exchange reserves as Argentines abandon the rapidly devaluing peso and embrace the US dollar.

Driven by money printing to finance a large government deficit, Argentine inflation hit 1[ads1]09 percent on the year in April, the highest level since 1991. The economy ministry said the new measures, to be announced on Monday, will involve the central bank stepping up intervention in the foreign exchange market to try to slow the peso’s fall.

Economy Minister Sergio Massa is also trying to persuade the IMF to speed up the disbursement of agreed loans and will travel to China on May 29 to seek greater use of the renminbi in foreign trade. Last month, Argentina activated a currency swap with China that allowed it to pay just over $1 billion of its imports this month in renminbi.

The IMF has already shown leniency to Argentina over the past year, giving it more leeway on targets to boost reserves and reduce money printing in an effort to keep a $44 billion loan program on track. It is unlikely to want to speed up payments in the months before a potential general election, which the government is likely to lose.

Massa also plans to allow food imports at a zero tariff to try to bring down inflation, a first in a country that is one of the world’s biggest grain exporters. The government will also lower interest rates on a state-run scheme for Argentines to buy locally produced products on credit, part of an effort to boost national industry.

The latest package of measures does not represent a change of course, rather an attempt to repeat policies of heavy government intervention that have failed to bring down inflation or grow the economy. It also involves risk: constant interest rate rises make servicing a huge pile of domestic debt increasingly expensive.

“This just kicks the can a few inches down the road,” said Hector Torres, a former managing director of the IMF and Argentine diplomat who is now at the Canadian think tank CIGI.

“I have nothing against central banks using reserves to smooth out volatility and fight speculators. But we are already out of reserves, deeply in debt to the IMF, without access to capital markets. In that situation, it is reckless to sell what we owe to the IMF to support an exchange rate that is clearly not sustainable. It can only invite speculators to bet on a new standard.”

Economists have criticized the government’s currency and price controls for creating huge distortions, deterring investment and depressing production. Many forecasters expect Argentina to enter recession this year, with Oxford Economics projecting a 1.6 percent drop in GDP, the worst outlook for any major Latin American economy.

Amid a bitter row over politics between President Alberto Fernández and his powerful vice-president Cristina Fernández de Kirchner, Massa is seen as one of the Peronist movement’s few remaining options as a presidential candidate for the October election.

However, his plan to try to patch up the economy with temporary interventions to avoid painful austerity ahead of the election has run into increasing difficulties, compounded by a severe drought that has hurt agricultural exports. Massa’s chances as a candidate now depend on the success of his financial plan over the next few months.

The center-right opposition has yet to agree on a presidential candidate this year, with support split between Horacio Rodríguez Larreta, the centrist mayor of Buenos Aires, and conservative law-and-order candidate Patricia Bullrich.

A far-right candidate, Javier Milei, has risen rapidly in the polls and could yet reach a second round if he can increase support beyond greater Buenos Aires. Milei has campaigned on a radical anti-establishment platform that includes abolishing the central bank and dollarizing the economy.