According to the new government in Argentina, the value of the country’s currency will drop by more than 50% relative to the US dollar. President Javier Milei claims the nation needs “economic shock therapy” to address its greatest crisis in decades, and this is a component of it.

Deep cuts to public spending were also announced by Economy Minister Luis Caputo. These consist of cutting back on gasoline and transit subsidies as well as stopping expenditure on some significant government contracts and advertising.

According to Caputo, he is taking precautions to prevent hyperinflation because he has inherited the worst economic legacy in Argentina’s history.

“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 struggling with extreme inflation, as prices have increased by around 150% in the past year. It also faces challenges from low government debt and financial reserves, and 40% of the population lives below the poverty level.

Argentina owes $44 billion to the International Monetary Fund (IMF), which praised the actions as “bold” and stated they will foster the expansion of the private sector.

“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.”

Caputo announced that the rate of exchange would be reduced from approximately 391 pesos to 800 pesos to the US dollar. Argentina has rigorously regulated currency movement since 2019 in order to maintain the artificial strength of its currency.

Because of this, the US dollar was in high demand on the black market for currencies, where the peso was selling at a far lower rate than on the official exchange. On Sunday, Milei, a libertarian who emerged victorious in a fiercely contested election from relative obscurity, took the oath of office.

He ran on a platform of significant budget cutbacks, and throughout his campaign, he gained notoriety for cutting large amounts of government spending with a chainsaw during rallies.

It is unclear if his alliance, which currently occupies the third-largest seat in the legislature, will be able to enact the significant spending cuts that are required to support the economy without causing it to falter.

Caputo stated that Milei’s elimination of nine government ministries would result in a 34% decrease in public sector employment.

Caputo stated: “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” in reference to the government’s cuts to expenditure on infrastructure projects.

(Adapted from BBC.com)

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