Argentina begins the de-escalation of energy subsidies

Argentina begins the de-escalation of energy subsidies

Official aid to gas and electricity companies reached 2.3% of GDP in 2021, prior to the spike in international prices

Protesters protest against the agreement of the Fernández Government with the IMF, in the Plaza de Mayo, on July 14, 2022.Natacha Pisarenko (AP)

Protesters protest against the agreement of the Fernández Government with the IMF, in the Plaza de Mayo, on July 14, 2022.Natacha Pisarenko (AP)
Argentina has a large fiscal hole as a result of the billions of dollars it allocates in the form of subsidies to energy generating companies. This Friday, after months of delay, the Government of Alberto Fernández began a plan to reduce these contributions, one of the commitments it made in January before the International Monetary Fund (IMF). The idea is that state assistance does not reach the richest households, to concentrate it on the middle and lower strata. The tariff segmentation according to income will mean savings of 15,000 million pesos (115 million dollars) in 2021 and 80,000 million in 2022.

The process begins with an affidavit that all users must complete digitally. If family income exceeds the equivalent of 3.5 basic baskets (about 2,700 dollars at the official exchange rate), or if they own more than three properties or vehicles, they will lose the subsidy. The official calculation is that almost a million people will stop receiving the aid only in Buenos Aires and its outskirts.

The segmentation of rates by income was a plan devised by Economy Minister Martín Guzmán. He resigned two weeks ago without being able to apply it due to the rejection of Kirchnerism, the sector of the government coalition that responds to the vice president, Cristina Kirchner. This Friday, one of his officials, Darío Martínez, was in charge as Secretary of Energy of announcing the start of the program. “As of today, a new stage begins with respect to the efficiency in the use of subsidies in Argentina. There is a decision to protect Argentines in a world that is not protecting its citizens. In Europe there are 400, 500 and 700% (of increases), scheduled cuts in China in many of its provinces and record fuel price values. Realities that are not happening in Argentina,” Martínez said at a press conference.

Energy subsidies in Argentina predate the scenario described by Martínez by years. Cristina Kirchner already applied them during her management as a dam against inflation. Mauricio Macri tried to reduce them during his administration, but gave in to temptation again in 2019, when he feared that the rise in the CPI and the crisis would cost him re-election, as it finally did. In December 2019, the Government of Alberto Fernández received a 50% rise in the CPI and frozen electricity and gas rates. And so he kept them.

The intervention begins at the wellhead. The State buys at market prices from producers and sells at a subsidized price to distributors, who thus avoid passing on increases to households and businesses. The State today covers more than 65% of the cost of gas and 70% of the cost of electricity. Such a scheme is very expensive for the treasury and is one of the main sources of the bleeding of dollars that prevents the Central Bank from accumulating reserves and the Government from reducing the deficit. Last year alone, $11 billion was spent on subsidies, a sum that this year will be much higher. In the first five months of 2022 alone, before the onset of winter and with the war in Ukraine still having a limited impact, the state paid companies 547.675 million pesos, equivalent to 4.2 billion dollars.

Lowering that figure is part of the agreement that Argentina signed in January with the IMF to refinance a debt of 44,000 million dollars. The problem that the Government has is that eliminating the subsidies not only has an impact on the poorest, its electoral base; it also fuels inflation, today above 60% per year.

A family of four pays about 20 dollars in total for their gas and electricity consumption. Kirchnerism made subsidies a State policy, considering them redistributive, although they were applied to all households equally, regardless of income level. Guzmán’s attempts to promote segmentation earned him the worst criticism from Kirchner and a boycott from the Kirchnerist cadres who control the Secretary of Energy. The proposal of that sector was to segment by geographic location, a strategy that would allow the Government to hit or benefit the regions according to their political orientation. But they have had to give in to the urgencies of the crisis.

After the resignation of Martín Guzmán from the Ministry of Economy, the peso and the Argentine debt bonds collapsed. The country risk, which is the differential over the rate that the US pays for its debt, is above 2,700 points, default values. Silvina Batakis, Guzmán’s replacement, came to Economy with Kirchner’s approval. That did not prevent her from promoting a pro-market program: she promised to honor the agreement with the IMF, adjust state spending and control inflation. Subsidy reduction is part of those promises.

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