As a means of addressing its severe economic crisis, Argentina has implemented significant budget reductions and devalued its currency, the peso, by over 50%. This measure aims to improve the country’s financial situation, which is currently at its worst in many years.
The proposals, implemented by the recently elected administration led by Javier Milei, involve reducing energy subsidies and discontinuing the bidding process for government projects.
The economy minister, Luis Caputo, announced on live television after the local markets closed on Tuesday that the official exchange rate would be lowered to 800 pesos per dollar, a significant decrease from the previous rate of 366.5. He also stated that the central bank would aim for a 2% monthly devaluation.
Caputo stated that the actions, which the International Monetary Fund (IMF) approved of, will cause discomfort in the near future. However, they are necessary to reduce the nation’s fiscal shortfall and decrease the excessively high triple digit inflation.
The central bank of Argentina is set to declare fresh monetary actions on Wednesday.
Caputo stated in a recorded speech that the goal is to prevent disaster and restore the economy, as there are no additional funds available.
The speaker claimed that Argentina has had a long-standing issue with fiscal deficits, with the current deficit at 5.5% of their gross domestic product. This has been a recurring problem for the country, with 113 out of the last 123 years experiencing a fiscal deficit.
He stated that we need to address the root cause of this issue and fix our dependence on a fiscal deficit.
The nation in South America, known for its significant grain production, is facing an inflation rate of almost 150%, with the central bank’s reserves in a negative state and 40% of its citizens living in poverty. Additional actions have been revealed, such as reducing the number of government ministries by half.
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Argentina currently has a loan of $44 billion (equivalent to £35 billion) from the IMF.
“I appreciate the firm actions,” stated Kristalina Georgieva, the head of the IMF, referring to it as “a significant move towards reinstating stability and rejuvenating the nation’s economic capability.”
The International Monetary Fund praised the actions as “audacious” and stated that they would “aid in stabilizing the economy and establishing a foundation for long-term growth led by the private sector” following a series of significant policy challenges in recent times.
On Tuesday, Argentina’s markets for foreign currency and grains were closed while traders awaited the economic plan of the new government. Banks had already predicted a significant devaluation, leading some to lower their foreign exchange rate to 700 pesos per dollar.
Starting in 2019, the Argentinian government has implemented strict capital controls that artificially maintain the strength of the peso. This has created a significant disparity between the official exchange rate of 366 pesos per dollar and the unofficial rates, which can reach as high as 1,000 pesos per dollar.
According to Caputo, our approach has been ineffective because we focus on tackling the effects rather than the underlying issue. He believes that we need to shift our strategy and address the root cause in order to find a solution.
Source: theguardian.com
