Argentina begins ‘shock therapy’ by devaluing peso by 50%on December 13, 2023 at 5:14 am

Argentina’s new government says it will weaken the value of its currency by more than 50% against the US dollar.

It is part of the “economic shock therapy” that President Javier Milei says the country needs to fix its worst crisis in decades.

Economy Minister Luis Caputo also announced deep cuts to public spending.

They include a reduction in fuel and transport subsidies and the freezing spending on some major government contracts and advertising.

Mr Caputo said he had inherited the worst economic legacy in Argentina’s history and he was taking steps to avoid hyperinflation.

“We are going to be worse off than before for a few months, particularly in terms of inflation. And I say that because, as the president says, it is better to tell an uncomfortable truth than a comfortable lie,” Mr Caputo said in a televised address.

Argentina is battling soaring inflation, with prices rising by around 150% over the last year. It is also struggling with low cash reserves, high government debt, while 40% of the population is living below the poverty line.

The International Monetary Fund (IMF) – to which Argentina owes $44bn (£35bn) – called the measures “bold” and said they will help create the environment for private sector growth.

“I welcome the decisive measures,” IMF chief Kristalina Georgieva said, adding that it is “an important step toward restoring stability and rebuilding the country’s economic potential.”

Mr Caputo said the exchange rate would be cut to 800 pesos to the US dollar, from roughly 391 pesos.

Since 2019, Argentina has kept its currency artificially strong by strictly controlling the movement of the currency.

That helped drive demand for the US dollar on the informal currency market, which saw the peso trading at a much lower rate that the the official level.

Mr Milei, a libertarian who rose from relative obscurity to the top office in a bitterly fought election, was sworn in on Sunday.

He campaigned on promises of major spending cuts and was known for wielding a chainsaw at rallies to depict his intentions to slash government spending.

It is not clear if his coalition, which is only the third largest bloc in the country’s Congress will be able to implement enough major spending cuts needed to shore up the economy without pushing it into turmoil.

Mr Milei has already cut nine government ministries, which Mr Caputo said would reduce 34% of public sector jobs.

Speaking about the cuts to government spending for infrastructure projects, Mr Caputo said: “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”.