Argentina Sharply Devalues Its Currency and Cuts Subsidies as Part of Shock Economic Measures

AP Photo/Natacha Pisarenko, File
Pedestrians walk past a money exchange shop in Buenos Aires, Argentina, Oct. 10, 2023.

BUENOS AIRES, Argentina (AP) — Argentina on Tuesday announced a sharp devaluation of its currency and cuts to energy and transportation subsidies as part of shock measures new President Javier Milei says are needed to deal with an economic emergency.

Economy Minister Luis Caputo said in a televised message the Argentine peso will be devalued by 50% to 800 to the U.S. dollar from 400 pesos to the dollar.

“For a few months, we’re going to be worse than before,” Caputo said, two days after the libertarian Milei was sworn in as president of the second largest economy in South America and immediately warned of tough measures.

Milei has said the country didn’t have time to consider other alternatives.

Argentina is suffering 143% annual inflation, its currency has plunged and four in 10 Argentines are impoverished. The nation has also a yawning fiscal deficit, a trade deficit of $43 billion, plus a daunting $45 billion debt to the International Monetary Fund, with $10.6 billion due to the multilateral and private creditors by April.

As part of the new measures, Caputo said the government is canceling tenders of any public works projects and cutting some state jobs to reduce the size of the government.

He also announced cuts to energy and transportation subsidies without providing details or saying by how much, and added that Milei’s administration is reducing the number of ministries from 18 to 9.

He said the measures are necessary to cut the fiscal deficit he believes is the cause of the country’s economic problems, including surging inflation.

“If we continue as we are, we are inevitably heading toward hyperinflation,” Caputo said. “Our mission is to avoid a catastrophe.”

The IMF welcomed the measures, saying they provide “a good foundation” for further discussions with Argentina about its debt with the institution.

“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,” said IMF spokesperson Julie Kozack in a statement. “Their decisive implementation will help stabilize the economy and set the basis for more sustainable and private-sector led growth.”

The major figures in the former Peronist government of Alberto Fernández didn’t comment on the measures announced Tuesday.

But social leader Juan Grabois, who is close to former center-left president Cristina Fernández (2007-2015), said that Caputo had announced “a social murder without flinching like a psychopath about to massacre his defenseless victims.”

“Your salary in the private sector, in the public sector, in the popular, social and solidarity economy, in the cooperative or informal sector, for retirees and pensioners, will get you half in the supermarket,” he said. “Do you really think that people are not going to protest?”

“There’s no money,” has been a common refrains in Milei’s speeches, using it to explain why a gradualist approach to the situation is a non-starter. But he has promised the adjustment will almost entirely affect the state rather than the private sector, and that it represented the first step toward regaining prosperity.

Milei, a 53-year-old economist, rose to fame on television with profanity-laden tirades against what he called the political caste. He parlayed his popularity into a congressional seat and then, just as swiftly, into a presidential run. The overwhelming victory of the self-declared “anarcho-capitalist” in the August primaries sent shock waves through the political landscape and upended the race.

Argentines disillusioned with the economic status quo proved receptive to an outsider’s outlandish ideas to remedy their woes and transform the nation. He won the election’s Nov. 19 second round decisively — and sent packing the Peronist political force that dominated Argentina for decades. Still, he is likely to encounter fierce opposition from the Peronist movement’s lawmakers and the unions it controls, whose members have said they refuse to lose wages.

On Sunday, Milei was sworn in inside the National Congress building, and outgoing President Alberto Fernández placed the presidential sash upon him. Some of the assembled lawmakers chanted “Liberty!”

Many Argentines have wondered which Milei will govern their country, the chainsaw-wielding, anti-establishment crusader from the campaign trail, or the more moderate president-elect who emerged in recent weeks.

As a candidate, Milei pledged to purge the political establishment of corruption, eliminate the Central Bank he has accused of printing money and fueling inflation, and replace the rapidly depreciating peso with the U.S. dollar.

But after winning, he tapped Caputo, a former Central Bank president, to be his economy minister and one of Caputo’s allies to helm the bank, appearing to have put his much-touted plans for dollarization on hold.

Milei had cast himself as a willing warrior against the creep of global socialism, much like former U.S. President Donald Trump, whom he openly admires.

He said during his inaugural address, however, that he has no intention to “persecute anyone or settle old vendettas,” and that any politician or union leader who wants to support his project will be “received with open arms.”

His apparent moderation may stem from pragmatism, given the scope of the immense challenge before him, his political inexperience and need to sew up alliances with other parties to implement his agenda in Congress, where his party is a distant third in number of seats held.