The Organization for Economic Cooperation and Development (OECD) forecast that Argentina's economy will expand in 2021 and 2022, but will nonetheless remain way below pre-pandemic levels, according to its semi-annual report on World Economic Outlook released Monday in Paris.
The organization pointed out that bold and timely measures have been taken to contain the pandemic and support households. The OECD projects Argentina's economy will expand 6.1% in 2021 and 1.8% in 2022, the report said as it highlighted that persistent macroeconomic imbalances and new mobility restrictions will weigh on domestic demand and limit recovery.
Continued monetization of the fiscal deficit will keep inflation high and job creation will slowly pick up, but high informality will remain a concern, the report added.
The OECD also noted that stronger revenues, partly related to high commodity prices, slightly improved fiscal results, while spending related to the pandemic will gradually withdraw once the recovery takes hold. This will reduce the need for short-term monetary financing.
The organization also recommended that tracing a medium-term path towards fiscal sustainability would help strengthen confidence and reinforce investment and argued that improvements in the efficiency of public spending and review of exemptions in the tax system present a wide margin for tax savings.
The document also underlined that expanding conditional cash transfers can help reduce poverty, which affects 42% of the population, and support income, including workers.
The OECD considered that the new mobility restrictions imposed as of April are delaying the recovery. Employment fell drastically during 2020 in line with the economic activity. Annual inflation is around 40%, despite weak domestic demand and economic growth. [amid] strict price controls.
The report also pointed out that the delay in the agreement with the IMF and the uncertainties surrounding the next debt repayment created pressure on the value of public securities, some of which were restructured in September 2020.
The OECD praised all the instruments used to address the health emergency and pointed out that bold and timely measures have been taken to contain the pandemic and support households.
Enhanced unemployment benefits and transfers have supported the poor and vulnerable. Wage subsidies and lower payroll taxes have helped some companies partially offset the costs of the widespread ban on layoffs, the document went on.
The Covid-19 response included additional spending on social networks that reached 2.2% of GDP. Higher prices of raw materials and tax revenues associated with exports are limiting immediate pressures on the parallel exchange rate and the need for monetary financing in the short term, the OECD said as it forecasts Argentina's GDP to grow slightly above 6% in 2021 and below 2% in 2022.
The imbalances will weigh on domestic demand and limit recovery. The reopening of domestic activities and vaccination will advance slowly, and herd immunity is expected to be achieved in 2022, the document specified.
However, the OECD warned that unemployment, stagnant wages and growing informality erode the purchasing power of Argentines, especially for low-income households, while strict capital controls, a combination of policies of price controls and import restrictions and higher corporate taxes will weigh on investment and imports lead to downward prospects and include a disorderly correction of macroeconomic imbalances.
The OECD also emphasized that accelerating the vaccination process would help limit setbacks in the fight against covid-19 and reduce macroeconomic imbalances will be key to reviving confidence, and this will require prudent fiscal policies with less monetary financing of the deficit, strengthening the credibility and independence of the central bank, and, finally, the elimination of exchange controls.