Facing skyrocketing inflation, poverty, and depleted government reserves, Argentina unveiled drastic policy changes on Tuesday aimed at stabilizing the economy and avoiding an economic catastrophe.
The South American country devalued its currency by over 50% against the US dollar while eliminating subsidies and halting infrastructure projects in an effort to control runaway government spending. Additional austerity measures included public sector job cuts and strict limits on advertising expenditures.
“If we continue as we are, we are inevitably heading towards hyperinflation,” warned Economy Minister Luis Caputo in a televised national address detailing the emergency fiscal plan. “We have an addiction to spending more than we earn.”
Caputo Emphasizes Need for Change to Break Cycle of Crises
Emphasizing the recurrent nature of Argentina’s economic troubles, Caputo said the country has run budget deficits in 113 of the past 123 years. He made the case that business-as-usual policies inevitably result in higher inflation, increased poverty and the kinds of painful crises that Argentines have endured time and again.
“These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthens the foreign exchange regime,” the International Monetary Fund (IMF) commented, signaling support for the government’s drastic measures.
The IMF is one of Argentina’s largest creditors, currently owed $44 billion by the cash-strapped government. President Javier Milei has made restoring market confidence and gaining access to international capital key priorities since taking office this year on vows to revive the flagging economy.
Peso Devalued Over 50% to Close Gap Between Official and Black Market Exchange Rates
Among the most impactful changes revealed Tuesday was the devaluation of the Argentine peso from around 390 to the US dollar to 800, representing a drop of over 50%. The move brings the official exchange rate closer in line with pricing on the black market, where desperate Argentines have been paying upwards to three times the artificially inflated official rate.
While perhaps painful in the near-term, allowing the peso to float more freely could restore credibility in financial markets and attract the foreign capital investment the country desperately needs.
Government to Slash Energy and Transportation Subsidies
Another major initiative aims to roll back public subsidies that have kept prices for transportation, electricity and fuel exceptionally low, saving Argentines money but bleeding state finances. Economy Minister Caputo referred to the subsidies as a deception used by previous administrations to curry favor with voters.
Bus tickets that currently cost mere pennies will see a price hike. Exact details and timelines involved in reducing the subsidies were not announced.
Infrastructure Projects Halted as Public Sector Spending Curbed
In tandem with cuts to subsidies, the government revealed a freeze on new infrastructure projects and public works. Any projects without construction underway already will be canceled outright. Caputo said bloated budgets and corrupt contracting practices necessitated shutting off the flow of public money into the sector entirely.
Going forward, infrastructure development will need to be funded solely by private enterprise in order to reduce strain on overextended government balance sheets. The authorities plan to review approved public tenders to potentially nix those not yet in active development as well.
State Advertising Budget Slashed, Public Hiring Frozen to Cut Costs
Among a slate of other cost-cutting measures, public sector advertising will be completely suspended for 1 year following expenditures of 34 billion pesos in 2023 alone. A freeze has also been placed on renewing any public employee contracts shorter than 1 year in duration.
The government has already moved to eliminate 9 separate ministries and 34% of political appointments, according to Caputo.
Safety Net Expanded After Devaluation Expected to Sting Consumers
While most of the economic adjustments introduced are intended to reign in public debts, President Milei remains committed to supporting the nation’s most vulnerable. In the lead up to Tuesday’s announcements, food assistance and child allowance benefit programs were expanded by 50%.
Officials braced citizens for significant near-term pain, as high inflation grinds away at household budgets. But the government says resetting expectations now could stop the snowballing crisis from transforming into a full-on repeat of the hyperinflation crisis of 1989-90.
Nicolas Saldias, Economist Intelligence Unit senior analyst for Argentina, called the reforms “much, much more than I think most people had expected.” He anticipates inflation worsening as subsidy cuts make goods and services more costly for the average consumer.
The Coming Months Likely to Test Public Trust in Milei’s Shock Plan
President Javier Milei is no typical technocrat or status quo politician. His rise has challenged the dominance of Peronist-aligned parties and aims to revolutionize governance. Dubbed “the anarchist”, his views veer toward radical libertarianism.
And they have found an audience hungry for an alternative. Argentines first catapulted Milei from obscurity into a seat in Congress then into the nation’s highest office, won over by the promise of slashing red tape and dismantling bloated bureaucracies weighing down private enterprise.
But having been dealt an exceptionally poor hand to start his presidency, Milei now faces the true test: asking Argentines to endure even greater hardships and stay the course, while reforms work their way through a complex economy ensnared by crises.
Officials have warned conditions will likely deteriorate before seeing improvement. In an already grim environment where 4 in 10 live below the poverty line, the coming months will severely test public confidence that the shock therapy will ultimately revive the country’s financial health.