Abstract: Issuing a quasi-currency, the Chacho by an Argentine province La Rioja highlights a growing divide between the Federal Government of President Javier Milei and the provinces over disbursal of federal funds to the provinces. The divide is widening and encompasses ideological lines and may prove to be a test for federalism in Argentina.
In September 2024, the province of La Rioja located in the north-west region of Argentina launched its quasi-currency called the Chacho[i] in response to President Milei’s economic policies which include a reduction in the budget for provinces. The Chacho is valued at par with the official Argentine currency, the Peso and is also known as the BOCADE (Bonos de Cancelación de Deudas) or the Debt-Cancellation Bond and may be used for paying salaries and conducting daily transactions.
Argentina has a history of its provinces issuing quasi-currencies in the backdrop of recurring economic crises. In 1985 and in 2001, the aforementioned provinces of La Rioja issued similar quasi-currencies and in 2002, 15 other provinces followed suit. While such quasi-currencies may seem to be an appropriate measure for the time being, its viability over an increased period of time is questionable and not good for Argentinean polity and economy.
The issuing of the Chacho may be observed within the larger framework of relations between the Argentine Presidency and the provinces. Ever since President Milei assumed office in December 2023 not only has, he faced economic challenges but also challenges in garnering support from other political parties and Provincial Governments for his policies. His party, the LLA (La Libertad Avanza) doesn’t have sufficient seats in the Argentine Congress and is not in power in any of these 24 provinces. Hence, to implement sweeping reforms, political support from allies is required[ii]. However, disgruntled by his policies of reducing the budget for the provinces many Provincial Governments have expressed dissatisfaction, leading to constant friction between the two entities.
The Governor of the province, Ricardo Quintela from the left-oriented Justicialist Party had on previous occasions criticised President Milei’s economic measures and justified the issuing of the Chacho. President Milei however, criticised the launch of the quasi-currency and defended economic measures adopted by his government which include reduction in social spending, adhering to the recommendations laid out by the International Monetary Fund (IMF) and suspending public works considering the country’s poor financial situation and to avoid a default.
Hence, few scenarios emerge in the current context. Primarily it highlights the growing divide between the province of La Rioja firmly in the grasp of the left-oriented opposition and the Presidency of Javier Milei, since the economic policies adopted by the current government have not been accepted warmly. There are speculations that other provinces may issue similar quasi-currencies given the financial condition even though President Milei and 18 Provincial Governors signed an agreement[iii] to cooperate on financial matters in May 2024[iv]. Finally, the long-term viability of the quasi-currency will be tested, given Argentina’s economic vulnerability.
This paper examines President Milei’s economic measures, the nature and viability of the Chacho and the growing political divide between the Presidency and the Provincial Governments.
President Milei’s economic adjustment
Argentina is facing economic turbulence since more than a decade, with one of the world's highest inflation rates, ongoing economic stagnation, and rising poverty. The main reason of Argentina's financial distress and chronic inflation is recurrent public expenditure, which is driven by money creation. To elaborate, Argentina has long struggled with persistent fiscal deficits and high inflation. From 2000 to June 2024, the inflation rate averaged 190%, and the government defaulted on its national debt nine times. Argentina's debt-to-GDP ratio in 2023 was 88.40 percent[v]. Over the last decade, the country's per capita income has dropped by 10.4%, and a third of its population lives in extreme poverty. Additionally, the country's history of sovereign defaults has resulted in prohibitively high interest rates in international credit markets, making international financing nearly impossible. The unavoidable result has been a drop in the value of the Argentine peso, resulting in less purchasing power. To prevent currency depreciation, policymakers implemented price and capital controls, as well as multiple exchange rates, negative real interest rates, import restrictions, and increased export taxes. However, these policies have only worked as stopgaps, causing pricing distortions, expanding the difference between official and informal market exchange rates, and deteriorating the central bank's balance sheet. As a result, although there is room for growth, recurring economic volatility has stifled many of these chances. Creating a financially sustainable state would boost national savings and capital flows, lower interest rates and foreign currency risk, and foster an atmosphere conducive to investment and growth.
Since President Milei assumed office on December 10, 2023, his administration adopted a dual approach to stabilising Argentina's economy. The initial component is fiscal reform, countering inflation and boosting the value of the Peso. Acknowledging chronic overspending as a major cause of inflation, the government has concentrated on eliminating the massive fiscal deficit. Some of his measures include, devaluation of the Peso coupled with tax adjustments, reducing the role of the State, temporary suspension of public works, and reduction in social spending. The rationale behind such economic measures is to avoid a glaring fiscal deficit, trim down inflation and boost productivity. In addition, the government is working towards complying with the IMF's specifications[vi] so as avoid another default on a US $ 44 billion loan. These measures have been met with mixed reactions, with the business sector and the International Monetary Fund (IMF) showing confidence in the government, while the opposition questioned the measures.
While these measures have brought out the country from the brink of a default, reduced month-wise inflation (although yearly inflation remains high), led to a gradual growth in international reserves and stabilised the currency exchange rate, the social and economic costs are quite high. Reduction in subsidies and social spending led to protests as real wages tumbled and has driven the country into recession. Focussing on the balancing act between stabilising the economy and nurturing growth, the Argentine economy needs copious amount to time to implement fresh monetary policies to keep up with the IMF’s recommendations and enable economic growth.
Explaining the quasi-currency of La Rioja- the Chacho in response to President Milei’s economic adjustments
In January 2024, La Rioja Province approved the creation of the Chacho[vii], a quasi-currency that would be used to pay salaries and wages. This was created in response to the federal government's fiscal adjustment and reduction of funding to the province amounting to 9.3 billion Pesos. Although no other province has yet announced the creation of quasi-currencies to offset budgetary deficits, there are speculations that it may occur in the future. The notes will be printed in various denominations[viii]. To clear out any confusion regarding the Chacho, the provincial government of La Rioja has termed the quasi-currency as bonds as only the federal government has the authority to issue currencies. The Chacho may be used for payments as well at establishments which are in agreement with the provincial government, on presenting identification and may also be exchanged for Pesos[ix].
While the Chacho may seem like a simple medium of exchange and may have limited reach, being restricted only in the province of La Rioja, there are far reaching effects. As explained earlier, Argentina’s persistent economic troubles have led to a reduction in the real value and the purchasing power of the Peso. Consequently, a lower valued currency coupled with extremely high inflation makes imports, payment for goods and services expensive leading to restricted savings[x]. The provincial government’s rationale for issuing the Chacho is to counter lack of cash liquidity, fill up budget deficit and enable the people of the province to carry out their daily business seamlessly. It is also a financial instrument to boost local consumption and generate economic growth[xi]. However, while the Chacho may be a short-term method to boost cash liquidity, its long-term viability is uncertain[xii].
Argentina’s previous experiences[xiii] with quasi-currencies led to financial uncertainty, and erosion of savings and in turn, stressed the federal treasury. Even in the current scenario, there are possibilities of financial establishments refusing the accept the Chacho as a legal tender. Since, its restricted only within the province of La Rioja, payments beyond it especially at the federal level are impossible, which restricts its usability. Besides, it may lead to overspending, thus driving up consumption and inflation without any financial cushion to absorb such inflationary shocks[xiv]. This may also lead to a complete loss of value of the Chacho, thus exacerbating the problem of inflation and liquidity crunch. A provincial-level currency also erodes the federal structure of a polity and dilutes state structures. It destabilizes the economy and erodes trust in it. Circulating a fiat currency at the provincial level can not only be inflationary but also adversely affect state solvency.
A widening rift between the Federal Government and the Provinces
The quasi-currency is an economic and political response to the economic policies adopted by President Milei. The Governor of La Rioja, Ricardo Quintela from the Justicialist Party and President Milei representing a more libertarian outlook disagree on various economic and political views. Javier Milei, a libertarian, argues for drastic economic reforms, such as a major reduction in government spending and a shift towards free-market principles. In contrast, Ricardo Quintela, a Peronist favours more traditional social welfare measures and government participation in the economy.
In the context of the Chacho, the political divide between both political figures, and their policies seems to widen. President Milei criticised the creation and launch of the quasi-currency terming it as illogical and that it disrupts market dynamics. The Argentine President feels that having numerous currencies hinders effective monetary policy and supports dollarization as a more stable option in combatting hyperinflation and restoring trust in the financial system. In defence of the Chacho, the Governor of La Rioja expressed that the economic policies of President Milei is more in tune with the recommendations laid out by the IMF while ignoring the needs of the provinces. He explained that the Chacho is primarily intended for use within the province, to boost the local economy and overcome liquidity crunch.
However, the divide between the Presidency and the Provincial Governments may further increase, as Governors of other provinces may take similar steps in issuing regional quasi-currencies. President Milei’s struggle to pass the Ley de Bases, a fiscal law and the annual Budget, was opposed by Provincial Legislatures and received a lukewarm response in the Congress, with the opposition contesting it. It may be possible that different Governors may exhibit intention to defend their provincial interests in the light of such austerity plans rolled out by the Presidency. This could also entail, political realignment among Governors who have different ideologies. For instance, the League of Patagonian Governors[xv] bearing different ideologies laid out the foundation of regional unity and a common agenda to defend their own interests. They expressed their disagreement with the Presidency especially in the context of passing the Omnibus Law and Decree 70/2023[xvi] which would enable sweeping economic reforms by the Presidency but at the cost of a reduction in the budget for the provinces[xvii]. This is important considering that the Patagonia region of Argentina is well-known for its natural resources such as hydrocarbons, fisheries and agriculture and has considerable sway over the economy.
Furthermore, in February 2024, the Governor of the province of Chubut, Ignacio Torres and President Milei shared disagreements over budgetary allocation to the province. Governor Torres alleged that the Federal Government withheld funds, causing an economic crisis in the province and response would suspend the transfer of hydrocarbon resources to the rest of the country. The position of Governor Torress received endorsement from 23 other Provincial Governors including that from Governor Ricardo Quintela and is seen as support transcending party and ideological lines. It is interesting to note that Governor Torres is from the political party, Republican Proposal which extends support to President Milei in the Argentine Congress. In addition, Governors from different provinces such as La Rioja, La Pampa, Misiones, Río Negro and Santiago de Estero filed lawsuits at various courts against the economic policies of President Milei[xviii], while the budget was criticised by Governors of various provinces including Maximiliano Pullaro, the Governor of Santa Fe[xix] and whose party Radical Civic Union extends support to the Presidency of Javier Milei.
Hence, the challenges in front of the Presidency are enormous. Not only do the plans for economic revival require attention, but skilful political management with the Governors and the Congress will be required. While the opposition Justicialist Part has 11 governors, the Juntos por Cambio coalition[xx] has 10. The remaining are governed by regional parties. In addition to that President Milei’s party has just 38 seats out of 256 in the Chamber of Deputies and only 7 seats in the Senate which has 72 members, without sufficient strength in the national Congress and a single Governor in any of the provinces, President Milei will have to rely on dialogue and negotiations to garner support for his economic plans, cutting across ideological lines.
Conclusion
The issuance of the Chacho represents the first serious response to the Presidency of Javier Milei and his economic policies. This goes beyond just a financial instrument; it holds significant political implications for the country, particularly in the context of relations between the Presidency and the provinces. The contrasting political and economic views of President Milei, who advocates a libertarian approach to the financial crisis, and Governor Ricardo Quintela, who favours a more left-oriented strategy, appear to be gaining traction following the launch of the Chacho. In this context, a scenario may unfold where Provincial Governments set aside their political and ideological differences to compel the Presidency to adhere to their demands, given that President Milei needs support from allies and Governors to implement substantial financial plans. Ultimately, this situation serves as a test for Federalism in Argentina and the Presidency of Javier Milei, given the ongoing economic crisis.
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*Dr. Arnab Chakrabarty, Research Fellow, Indian Council of World Affairs.
Disclaimer: Views expressed are personal.
Endnotes
[i] Named after a local military hero, Ángel Vicente “Chacho” Peñaloza who rebelled against the federal government of Buenos Aires in the 1850s.
[ii] Although he has support from the PRO (Republican Proposal from the Juntos Por Cambio coalition) and other parties, which also have governments in some provinces the test of maintaining healthy relations with these provinces is crucial for smooth functioning of the Presidency.
[iii] Casa Rosada. (2024). The May Pact was signed. Accessed 23rd September 2024. https://www.casarosada.gob.ar/international/latest-news/50573-the-may-pact-was-signed.
[iv] On 25th May 2024, President Milei and the Governors of 18 provinces entered into an agreement, known as the May Pact to cooperate on financial matters such as distribution of resources, simplifying the system of taxation, improving the fiscal balance and pension reform to name a few. The provinces that entered into the Agreement were, Autonomous City of Buenos Aires, Tucumán, Catamarca, Chacho, Chubut, Córdoba, Corrientes, Entre Ríos, Jujuy, Mendoza, Neuquén, Río Negro, Salta, San Juan, San Luis, Santa Fe, and Santiago del Estero.
[v] Economics Observatory. (2024). Argentina under a new government: what are the big economic challenges? Accessed 22nd September 2024. https://www.economicsobservatory.com/what-economic-challenges-does-argentina-face-today.
[vi] International Monetary Fund. (2024). IMF Executive Board completes the Eight Review of the Extended Arrangement Under the Extended Fund Facility for Argentina. Accessed 23rd September 2024. https://www.imf.org/en/News/Articles/2024/06/13/pr24217-imf-completes-eighth-review-of-the-extended-arrangement-under-the-eff-for-argentina.
[vii] MRI Banker’s Guide to Foreign Currency. (2024). Argentina- La Rioja: Chachos, the provincial banknotes, are in circulation. Accessed 24th September 2024. https://mriguide.com/argentina-la-rioja-chachos-the-provincial-banknotes-are-in-circulation/.
[viii] Numistimatic News. (2024). Argentine Province releases ‘Chachos’ Accessed 22nd September 2024. https://www.numismaticnews.net/paper-money/argentine-province-releases-chachos#:~:text=Argentinian%20Debt%20Cancellation%20Bonds%20(Bocade,commonly%20known%20as%20%22Chachos.%22&text=The%20Argentine%20province%20of%20La,alternative%20to%20the%20Argentine%20peso..
[ix] Gobierno de La Rioja, Republica de Argentina. (2024). Bono de Cancelacion de Deuda (BOCADE). Accessed 24th September 2024. https://www.larioja.gob.ar/chachos/.
[x] Balino Tomas. (2024). Frameworks for Stability: Policy Issues and Experiences. Accessed 24th September 2024. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://jpia.princeton.edu/sites/g/files/toruqf1661/files/2000-4.pdf.
[xi] Ambito. (2024). Los Chacos ya circulan en La Rioja: que son y cuanto valen. Accessed 23rd September 2024. https://www.ambito.com/economia/los-chachos-ya-circulan-la-rioja-que-son-y-cuanto-valen-n6025055.
[xii] AireDigital. (2024). La Rioja creo los Chachos una cuasi moneda para pagar gastos y salarios: puede pasar algo parecido en Santa Fe? Accessed 24th September 2024. https://www.airedesantafe.com.ar/economia/la-rioja-creo-los-chachos-pagar-gastos-y-salarios-puede-pasar-algo-parecido-santa-fe-n589193.
[xiii][xiii] Quasi-currencies issued during the 2002 economic crisis were the Patacón, Crédito, and the LECOP.
[xiv] Perfil. (2024). En la Rioja ya circula una cuasimoneda para desafiar a Javier Milei. Accessed 24th September 2024. https://www.perfil.com/noticias/bloomberg/bc-gobernador-desafia-a-milei-y-lanza-su-propia-moneda-los-chachos.phtml.
[xv] The League is made up of the Governors of 5 Argentinean provinces located in the Patagonia region. These provinces are La Pampa, Río Negro, Tierra del Fuego, Chubut and Santa Cruz.
[xvi] Decreto de Necesidad y Urgencia or Necessity and Urgency Decree enables the President to pass laws without a mandate of the Congress.
[xvii] Mercopress. (2024). Argentina: Patagonia League relaunched to protect local interests from national government. Accessed 29th September 2024. https://en.mercopress.com/2024/01/12/argentina-patagonian-league-relaunched-to-protect-local-interests-from-national-gov-t/comments.
[xviii] Manuel Tarricone. (2024). Milei vs. gobernadores: que provincias demandaron a la Nacion por el recorte de fondos. Chequea. Accessed 28th September 2024. https://chequeado.com/el-explicador/milei-vs-gobernadores-que-provincias-demandaron-a-la-nacion-por-el-recorte-de-fondos/.
[xix] “Ámbito. (2024). Maximiliano Pullaro cruzo a Javier Milei por el Presupuesto” No corresponde que nosotros hagamos más esfuerzo. Accessed 29th September 2024. https://www.ambito.com/politica/maximiliano-pullaro-cruzo-javier-milei-el-presupuesto-no-corresponde-que-nosotros-hagamos-mas-esfuerzo-n6060383.
[xx] The Juntos por Cambio coalition is made up of the Republican Proposal, Radical Civic Union and the Civic Coalition.