Argentina, under the new government of Janier Milei, is set to devalue its currency by more than 50 percent against the U.S. dollar as part of extensive economic reforms aimed at addressing the country's severe economic crisis.
Fresh off his inauguration, Milei has unleashed the first wave of his economic plan, aiming to tame the hyperinflation in the country. Through its official exchange rate, the peso dropped from 365 to 800 pesos per dollar, Economy Minister Luis Caputo said after the local markets closed on Tuesday. The central bank now targets a monthly devaluation of two percent.
Caputo highlighted that while the actions might cause a blow to the country's already struggling citizens in the short term, they are essential to reduce Argentina's fiscal deficit and tackle rampant triple-digit inflation. With this decision, Argentina's central bank is set to unveil new monetary measures on Wednesday.
The International Monetary Fund (IMF), to whom the country owes $45 billion, welcomes this initiative. The IMF lauded the move as "bold" and promised assistance to "help stabilize the economy and set the basis for more sustainable and private sector-led growth" after months of concerns regarding policy decisions in the country.
Alongside the peso devaluation, Caputo outlined further economic initiatives and reiterated Milei's campaign theme that "there is no money." The measures include slashing energy and transportation subsidies, canceling public works contracts and reducing the number of ministries by half.
Caputo also emphasized the country's other deep-rooted challenge—a 5.5 percent budget deficit relative to its Gross Domestic Product (GDP). This deficit, Caputo noted, has persisted for much of Argentina's history, with 113 out of the last 123 years marked by fiscal imbalances.
"The objective is simply to avoid catastrophe and get the economy back on track," Caputo said in a recorded, televised speech. "There is no more money."
Caputo's move faced sharp criticism from the left, with activist Juan Grabois comparing it to a "social murder." Meanwhile, analysts like Jimena Blanco from Verisk Maplecroft expressed concerns that the government was merely attempting to soften the blow of an inevitable economic crash landing.
"He promised a very tough pill to swallow and he's delivering that pill," Blanco said. "The question is how long will popular patience last in terms of waiting for the economic situation to change."
Argentina's economic issues
Since 2019, strict capital controls have maintained the artificial strength of the Argentinian peso. This led to a notable disparity between the official exchange rate and the unofficial "blue dollar" exchange rate, which is currently near 1,000 pesos. Deutsche Bank's Jim Reid noted that the recent action has reduced the gap. This brings the year-to-date devaluation of the peso to 78 percent.
The South American nation, known for its significant grain production, faces nearly 150 percent inflation and depleted central bank reserves, with approximately 40 percent of its population living in poverty.
Throughout his campaign, Milei consistently advocated for the dollarization of the Argentinian economy. Although Caputo didn't announce plans to ditch the peso, a move toward dollarization in the South American nation would involve exchanging all pesos held by residents and businesses for dollars, alongside assigning a dollar value to all assets and contracts.
Dollarization would relinquish Argentina's independent control over crucial monetary levers like interest rates and money supply, effectively handing them from the Central Bank of Argentina to the U.S. Federal Reserve.
There are multiple challenges to dollarizing Argentina's economy. Not only is the country short on the dollar reserves needed to replace the peso, but experts caution that such a radical shift wouldn't work as well as projected. While smaller nations like Ecuador, El Salvador and Panama have successfully embraced dollarization, these countries are not comparable in economic scale or complexity to Argentina's.