Argentina Set To Devalue Peso By Over 50%
The new Argentine government, led by President Javier Milei and Economy Minister Luis Caputo, has announced a substantial devaluation of the peso by over 50%, setting the official exchange rate at 800 pesos to the US dollar from the previous 366.5 pesos. This move aims to address soaring inflation, nearing 150% in the past year.
This “economic shock therapy” is part of the administration's strategy to address the deep fiscal deficit, which is currently at 5.5% of GDP.
Since 2019, Argentina had maintained an artificially strong peso through strict capital controls. The devaluation is expected to narrow the gap between the official and parallel exchange rates, providing a more realistic valuation of the currency.
Caputo emphasised the necessity of these measures, acknowledging the short-term pain they would inflict on the nation. He stated, "The objective is simply to avoid catastrophe and get the economy back on track," while highlighting the need to break the cycle of Argentina's historical dependence on fiscal deficits.
The government's plan also includes significant spending cuts, such as reducing fuel and transport subsidies, freezing spending on selected government contracts and advertising, and halving the number of government ministries.
President Milei, a libertarian figure who campaigned on promises of major spending cuts, faces the task of implementing these measures with a coalition that is only the third largest in the country's Congress.
The success of these economic reforms will be crucial in determining whether Argentina can navigate its way out of the current crisis without pushing the nation into further turmoil.
