NEW YORK – Argentina’s economy is struggling. Last year, the country suffered stagflation, with GDP droppingby 2.3% and inflationreachingnearly 40%. Poverty and inequality increased; unemployment rose; and foreign debt grew– and continues to grow – at an alarming rate. For President Mauricio Macri, it was a disheartening first year in office, to say the least.

To be sure, Macri faced a daunting challenge when he took office in December 2015. The economy was already on an unsustainable path, owing to the inconsistent macroeconomic policies that his predecessor, Cristina Fernández de Kirchner, had pursued. Those policies led to imbalances that eroded the economy’s competitiveness and foreign reserves, pushing the country toward a balance-of-payments crisis.

But Macri also pursued a flawed macroeconomic policy approach. His administration needed to address the fiscal and external imbalances, without undoing the progress in social inclusion that had been made over the previous decade. His approach, based on four key pillars, has not achieved that.

First, Macri’s government abolished exchange-rate controls and moved Argentina to a floating currency regime, with the Argentine peso allowed to depreciateby 60% against the US dollar in 2016. Second, Macri’s government reduced taxes on commodity exports, which had been important to Kirchner’s administration, and removed a number of import controls. Third, the Central Bank of Argentina announced that it would follow an inflation-targeting regime, instead of continuing to rely mainly on seigniorage to finance the fiscal deficit.

Finally, Macri’s government reached a deal with the so-called vulture fundsand other holdout creditors that for more than a decade had blocked the country from accessing international credit markets. Once the deal was concluded, Argentina pursued massive new external borrowing, with the emerging world’s largest-ever debt issue, to help address its sizable fiscal deficit. In the interest of lowering its borrowing costs, the authorities issued the new debt under New York law, despite the expensive battlethat the country had just lostprecisely because it had borrowedunder that legal framework.

Macri’s macroeconomic policy approach – which also included increasing prices for public services that had been frozen by the previous government and implementing a tax amnesty program that provided the government with more fiscal revenues – rested on several controversial assumptions. Above all, the radical change in policy course was supposed to establish the conditions for dynamic growth.

The currency depreciation, it was assumed, would address external imbalances, by encouraging, with the help of lower export taxes, increased production of tradable goods. The deal with the vulture funds was supposed to reduce the cost of financing and boost investor confidence, thereby attracting inflows of foreign direct investment (FDI). Investment-led growth would help the entire economy.

These assumptions haven’t been borne out. Contrary to the government’s expectations, the peso’s depreciation had a large impact on consumer prices – as critics had warned. This reduced households’ purchasing power and weakened aggregate demand, while diminishing the devaluation’s overall impact on the country’s external competitiveness.

The central bank’s new focus on inflation is unlikely to help matters, either, because it will undermine economic activity and exacerbate the pain experienced by the most vulnerable, for whom unemployment may be worse than rising prices.

Moreover, Argentina’s fiscal deficit has increased, owing to the drop in revenues brought about by the recession. And there were no significant FDI inflows, because, as Macri’s critics had cautioned, the uncertainty surrounding his policies deterred investment.

The government has done one thing right: it rebooted the National Institute of Statistics and Census, which had lost credibility after interventions by the previous administration. But the overall situation remains bleak. At the end of Macri’s first year in office, Argentina faced the same macroeconomic imbalances that it did when he took office, but with significantly higher external indebtedness.

Furthermore, public anger is reaching fever pitch, owing to the effective redistribution of wealth away from workers brought about by Macri’s policies. Demonstrations abound, even causing the first day of school to be delayed. On April 6, the government faced its first nationwide general strike.

As it stands, Argentina’s prospects are uncertain. External borrowing is becoming a serious problem – one that is likely to intensify, as continued interest-rate hikes by the US Federal Reserve raise the costs of rolling over debts. Unstable macroeconomic dynamics are reproducing the same imbalances as they did before. For example, the capital inflows associated with external borrowing are putting upward pressure on the peso, threatening sectors that are important for job creation.

In the run-up to this year’s legislative elections, Macri’s government could try to stimulate economic activity by taking on more debt. But a debt-based recovery would be short-lived, and would sow the seeds of more acute debt troubles in the future.

To escape its perverse debt dynamics, Argentina must reduce its fiscal deficit. But it can do so only in the context of a sustainable and inclusive recovery of economic activity – and that requires a more competitive economy. Under current conditions, attempting to resolve the problem through a fiscal contraction would merely aggravate the recession.

Macri’s government should be working to develop a long-term macroeconomic strategy based on credible, not controversial, assumptions. Without a substantial mid-course correction, Argentina will settle onto a destabilizing debt path that leads nowhere good.

Martin Guzman, a research associate at Columbia University Business School and an associate professor at the University of Buenos Aires, is a co-chair of the Columbia Initiative for Policy Dialogue Taskforce on Debt Restructuring and Sovereign Bankruptcy and a senior fellow at the Centre for International Governance Innovation (CIGI).

Copyright: Project Syndicate.