Argentina Implements Emergency Economic Reforms, Decides to Devalue Peso by Over 50%
Argentina's economy takes drastic measures to combat its struggles as it announces a devaluation of the peso by over 50%, aiming to revive the nation's financial stability
Argentina's Economy Minister, Luis Caputo, announced on Tuesday that the country will devalue the peso by more than 50% as part of emergency measures to support the struggling economy. This move will change the dollar conversion rate to 800 pesos per dollar from 365 pesos, just days into President Javier Milei's term.
Milei promised to eliminate the peso and adopt the dollar to revive the economy. The peso has been propped up by strict capital controls for years, but its value has dropped by around 52% against the US dollar this year.
In an effort to prevent the government from defaulting on its debt, Argentina's central bank has increased the printing of pesos in recent years, leading to steep inflation.
The move is the first in a series of steps aimed at reducing the hyperinflation in Argentina. This hyperinflation led the country's central bank to raise its benchmark interest rate to 133% in October. Caputo, on Tuesday, restated Milei's campaign theme that "there is no money" and outlined additional measures. These include a reduction in new public works projects, non-renewal of labor contracts lasting more than one year, and cuts to energy and transportation subsidies.
"He mentioned that we will be in a tougher position for a few months, especially with inflation," he stated.
In relation to public construction projects, Caputo mentioned that "there are no funds available to finance projects that frequently result in profit for politicians and business leaders."
The International Monetary Fund expressed its support for the new initiatives following Caputo's remarks on Tuesday.
"IMF staff are pleased with the steps announced today by Argentina's new Economy Minister, Luis Caputo. These ambitious initial measures are intended to make substantial improvements to public finances in a way that safeguards the most vulnerable in society and reinforces the foreign exchange system," stated Julie Kozack, IMF director of communications in a press release.
A plan for sweeping economic measures
In his victory speech on Sunday, Milei did not offer many details about his economic plan. However, the self-proclaimed "anarcho-capitalist," who prominently used a chainsaw during the campaign to represent his intentions to reduce government spending, pledged to implement "drastic" reforms.
"We are embarking on the reconstruction of Argentina after a century of decline, redefining the concept of freedom. Though we will face tough times ahead, we will progress," stated Milei, an economist, during his inauguration address.
Although Caputo didn't explicitly state intentions to eliminate the peso, dollarizing Argentina's economy would necessitate exchanging all pesos held by residents and businesses for dollars, as well as assigning a dollar value to all assets and contracts.
This would essentially transfer the responsibility of managing the country's monetary policy, including interest rates and currency issuance, from the Central Bank of Argentina to the US Federal Reserve.
There are numerous challenges that overshadow the possibility of Argentina adopting the US dollar as its currency, notably the lack of sufficient dollars to replace the peso and the unlikelihood that this transition would alone solve the country's economic crisis.
Other countries such as Ecuador, El Salvador, and Panama have also taken this step, but none have done so on the same scale as Argentina.
Milei has already held meetings with top US officials since assuming office, and his economic team has collaborated with the IMF to revise the country's foreign policy and boost its economy.
CNNs Hanna Ziady and Anna Cooban contributed to this report.
