Argentina devalues currency, unveils ‘shock’ measures to avoid ‘hyperinflation’

Issued on: 13/12/2023 – 03:49

3 min

The government of President Javier Milei, a libertarian who swept from obscurity to the top office vowing to chainsaw spending, also announced cuts to generous state subsidies and a halt to all new public construction projects.

In a pre-recorded video message, Economy Minister Luis Caputo took pains to explain to Argentines the causes of their decades of recurrent economic crises, debt, inflation and fiscal deficits.

Annual inflation is currently at 140 percent and poverty levels at 40 percent in Latin America’s third-biggest economy.

The government coffers are also empty, and Milei has repeatedly said: “There is no money.”

Caputo said the country had an “addiction” to spending to more than it earns, and had posted a fiscal deficit for 113 of the past 123 years.

“If we continue as we are, we are inevitably heading towards hyperinflation,” said Caputo, adding that for the first time the government would tackle the problem “at its roots.”

This is “precisely so that we do not have to suffer these consequences anymore, so that we do not have to suffer more inflation, so that we do not have to suffer more poverty,” said Caputo.

The International Monetary Fund (IMF) — to which Argentina owes $44 billion — welcomed the measures.

“These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime,” the IMF said in a statement.

‘Inflation to worsen’

Caputo announced the exchange rate would slide to 800 pesos to the dollar, from about 391 in recent days, a devaluation of a little over 50 percent

The Argentine government has for years strictly controlled the exchange rate of the peso to the dollar, which analysts have derided as an expensive fiction.

There was no immediate mention of lifting the controls which have birthed a multitude of dollar exchanges and a thriving black-market where the dollar has sold for up to three times the official rate at times.

“The devaluation was much, much more than I think most people had expected,” said Nicolas Saldias, a senior analyst with the Economist Intelligence Unit, adding this would have “significant impacts on inflation.”

Milei and his government have doubled down on the message that inflation, and the general economic situation, will worsen significantly before they get better.

“We are going to be in poverty, and the situation is going to be much harder,” said teacher Gabriel Alvarez, 57, reacting to the announcements.

Caputo also announced a reduction in the state’s generous subsidies of fuel and transport — with bus tickets costing only a few cents — without saying by how much.

He said politicians had long supported the subsidies to “deceive people into believing that they are putting money in their pockets. But as all Argentines will have already realized, these subsidies are not free, but are paid with inflation.”

‘There is no money’

Other spending cuts he announced include the suspension of all state advertising for a year — which he said had cost 34 billion pesos in 2023.

In addition “The state will not tender any more new public works, and will cancel approved tenders whose development has not yet begun.

“The reality is that there is no money to pay for more public works that, as all Argentines know, often end up in the pockets of politicians or businessmen on duty.”

He said infrastructure projects would be carried out by the private sector in future.

Another measure would be canceling the renewal of public jobs contracts that were less than a year old.

Milei has already slashed nine government ministries, which Caputo said would cut 34 percent of all political jobs.

However, in line with his promise to maintain welfare to the poorest, his government increased a child allowance and food card by 50 percent.

Saldias said this was “a really clear signal of how severe the inflationary crisis is going to be.”

Argentines remain haunted by hyperinflation of up to 3,000 percent in 1989/1990 and a dramatic economic implosion in 2001.

(AFP)