Argentina’s 300% inflation and the supported peso create a ghost town on the border with Paraguay.

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By Daniela Desantis and Lucinda Elliott

NANAWA, Paraguay (Reuters) – Paraguayan shoppers flocked to the border town of Nanawa to buy cheap imports from Argentina, where for years the weak peso kept relative prices low for fuel, medicine and groceries smuggled across the border.

Now Nanawa is a ghost town, where contraband prices have soared due to Argentina’s rare mix of nearly 300% inflation and a protruding peso that has even risen against the dollar on widely used parallel markets under libertarian President Javier Milei.

“Everything used to work very well, we sold everything,” said Marta, 57, a pharmacy worker in Nanawa who wanted to use only her first name. ‘Now there’s nothing left. We’ve been like this for two months, the city is dead.’

Shopkeepers in Nanawa, 30 km from the capital Asuncion, estimated to Reuters that sales had fallen by 60 to 80% since Milei took office in December, when he sharply devalued the official peso and ushered in austerity.

Since then, the peso has only been able to depreciate 2% per month on a controlled ‘crawling peg’, and monthly inflation – although slowing – is around 10-20% per month. This means that prices in dollars have risen enormously.

Something that cost 1,000 pesos on January 1 would have been worth $1.24 that day according to the official exchange rate. With an accumulated inflation rate of 65% in April, that same product would have cost 1,650 pesos, worth $1.88, on April 30, an increase of more than 50%.

That has made Argentina much more expensive in relative terms, fueling analysts’ claims that the peso is overvalued and a new devaluation is needed. Meanwhile, tourists and exporters have felt the pressure of less competitive local prices.

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“For Argentina, this process is painful,” said economist Gimena Abreu, who analyzes relative prices at the Uruguay-Argentina border at the Catholic University of Uruguay, adding that exports and tourism would be hit in the short term.

Data from her team shows that the price difference between Uruguay and Argentina fell from 180% in September before Milei took office to 50% in March, when Argentine relative prices skyrocketed.

“In the short term, Argentine exports will become less competitive,” Abreu said. Argentina’s main exports include soy products, corn, wheat, beef, energy products and automobiles.

INCREASED PRICES

That has raised costs for ordinary Argentinians, hurting consumption. A kilo of beef cost an average of 2,846 pesos (then about $3.70 at freely accessible parallel exchange rates) last September, official data show, far cheaper than a minimum of $7 in regional capitals such as Montevideo and Santiago in Chile.

The latest data from April shows that the Argentine beef price is up

6,505 pesos, almost $7, which largely negates the cost advantage.

“My relatively comfortable dollar-income lifestyle has gone to the other extreme,” says 37-year-old Buenos Aires resident Paige Nichols, who moved to Argentina from the United States 17 years ago. “I now have to be very careful about what I spend.”

Nichols told Reuters that her monthly household expenses have increased by about 150% since the December devaluation, mainly due to health insurance, utilities and groceries.

Products such as olive oil and toothpaste are becoming small luxuries. Reuters found that a half-liter bottle of olive oil in Buenos Aires costs an average of $15, with some brands costing as much as $26. Colgate toothpaste cost 4,976 pesos or $5 for a single 90-gram tube, twice what retailers in Paraguay and Uruguay charge.

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Nichols, who works in the travel industry, said cheap prices for tourists once fell in line with those of regional neighbors and even the United States. She said eating out in Buenos Aires was almost twice as expensive as a year ago.

‘FEWER PEOPLE CROSSING’

Despite this, government data shows that inbound tourist numbers rose in the first two months of the year, although there are signs of pressure as prices rise, a potential risk to the $3.2 billion of travelers who entered the economy last year brought.

Between January and March 2024, arrivals from neighboring Uruguay – which spent $1.3 billion in Argentina last year – fell 25% from a year ago, Uruguay’s outbound tourism figures show.

Border towns in Paraguay, Chile and elsewhere have seen lower local demand for imports from Argentina, but others have welcomed the changing trend, which has also led to fewer locals making day trips to Argentina in search of bargains.

“What I’m saying is that I heard that fewer people are crossing the bridge into Argentina to shop,” says Uruguayan cafe owner Lilian, who runs Helianthus Bistro in the border town of Fray Bentos, across the Uruguay River from Argentina.

“It’s getting more and more expensive there, so there are no longer rows of cars driving bumper to bumper across the bridge.”

Back in Nanawa, 36-year-old supermarket worker Raquel Alvarenga said booming demand for cheaper Argentine imports previously meant the store had to expand outside its doors to keep up with the number of customers. Now that was over.

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©Reuters.  A customer and a seller pose for a photo while holding Argentine and Paraguayan banknotes at a market near the border with Argentina, in Nanawa, Paraguay, May 16, 2024. REUTERS/Cesar Olmedo

“It’s been quite damaging. Sales are down 50% and it’s affecting trade… Argentinian companies are constantly raising their prices through the air. They change every day,” she said.

“We used to have to serve people outside because we couldn’t fit everyone in the store. Now we have time to drink (local tea) terere.”

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