MercoPress. South Atlantic News Agency

Kirchner's obsession with one digit inflation and subsidies

Argentina managed in 2006 to keep inflation below the two digits (9.8%) as promised earlier in the year, but the Buenos Aires press reveals the cost of such an achievement: the equivalent of 1.47 billion US dollars in Treasury handouts to keep the most sensitive items in the consumers and wholesales indexes in line with the target.

According to La Nacion those funds (subsidies) were mostly geared to transport and energy bills, although the hyper active Secretary of Domestic Trade, Guillermo Moreno, is very precise as to what areas he closely monitors: only those which make the official Consumer Prices and Wholesale prices indexes belonging to the INDEC office. Road transport, --urban, short and long distance--, plus cargo and trains had the lion's share with the equivalent of 867 million US dollars, which is approximately 2.5% of the federal budget points out La Nacion. All urban buses in Argentina have subsidized fuel to help companies have normal balance sheets, but those in metropolitan Buenos Aires (the federal capital plus the surrounding suburbs which make up Great Buenos Aires) have an additional ticket compensation item. Why? Because the Consumers Index takes into account the minimum transport urban rate in Buenos Aires. Actually Buenos Aires City colored buses collected 470 million US dollars in transfers from a special Transport System fund which is fed with a 22% tax on each gas oil liter sold. Besides in 2006 two salary increases for the buses unions were addressed with direct support from the Treasury totaling 193 million US dollars. Trains to ensure a minimum ticket value, received 130 million US dollars, and the rest of the lump sum went to cargo transport. Certain destinations of airlines were also contemplated but with an insignificant 5 million US dollars compared to the other sectors. Another important beneficiary of government funds was electricity generation to keep energy supply at demand levels even when costs soared. This was the case in thermal units that instead of working on natural gas had to burn fuel oil which is several times dearer. The operation is estimated in 450 million US dollars for the first eleven months of 2006 according to the balance sheet from the Electricity Wholesale Market Managing Company. The whole project is geared to avoid increasing public utilities rates to the consumer and thus keeping the level at values of 2001, adds La Nacion. Another area which is covered with government support is the Bolivian natural gas operation which is purchased at 5 US dollars per million BTU but is sold in the domestic market at 1.50 US dollars. Last year this misbalance demanded the equivalent of 110 million US dollars plus additional taxes on natural gas exported, which obviously infuriated Chileans who consider it a breach of long term contracts. The subsidies or price support issue has triggered a growing controversy in Argentina which has divided opinions with some arguing the government is entitled to such practices, when justifiable, while others demanding an open debate insisting that for example poor peasants in the north of the country should not be forced to subsidize Buenos Aires bus commuters. But 2007 being an election year it's hard to anticipate changes in the one digit obsession. Furthermore in line with what has happened with some basic food items such as beef and wheat, where temporary ban exports were imposed to cool domestic prices pushed by international demand, a similar system has been announced for the dairy industry. Dairy exports must contribute to a fund to help maintain the domestic price of milk in Argentina. "These restrictions plus export taxes are a clear transfer of farmers to consumers, which is totally unfair and conditions medium and long term investment", complain Argentine farmers' organizations. However Ricardo Jaime, Transport Secretary defends the subsidies system which allowed the current fares system to prevail. "Eliminating subsidies would mean doubling transport fares", admitted Jaime who insisted that the government's prices and fares policy "is decided by President Kirchner and the minister of the area".