Argentina Sharply Devalues its Peso Currency to Tame Inflation

Argentina’s Economy Minister Luis Caputo said the new government will also trim energy and transportation subsidies as well as cancel any public works projects that have yet to be started.
Argentina’s Economy Minister Luis Caputo said the new government will also trim energy and transportation subsidies as well as cancel any public works projects that have yet to be started.

Summary

President Javier Milei, who pledged economic shock therapy, is also cutting back government ministries and energy subsidies while halting public works projects.

Argentina will devalue its peso currency and slash public spending to reduce the fiscal deficit in a bid to revive the economy and tame triple-digit inflation, the top economic official in President Javier Milei’s new government said Tuesday.

Economy Minister Luis Caputo, unveiling the first economic measures since Milei’s inauguration as president Sunday, said the peso’s official exchange rate will be set at 800 per U.S. dollar, compared with about 360 per dollar before taking office. The peso’s unofficial, black market rate is currently trading around 1,070 per dollar.

In a video message, Caputo also said the government will trim energy and transportation subsidies as well as cancel any public works projects that have yet to be started. The number of ministries is being cut to nine from 18, he said, and other departments throughout government would also be slashed.

“There isn’t any more money, we can’t keep spending more than we take in," Caputo said. The economy minister said the country’s “addiction" to fiscal deficits is the root of the nation’s perpetual economic crises, including the current turmoil with inflation at more than 140%.

The International Monetary Fund said it welcomed the new measures, saying they would help to stabilize the economy and lead to sustainable growth. Argentina owes the IMF more than $40 billion after it received a bailout during an earlier financial crisis in 2018.

“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," the IMF said in a statement.

Milei, a political outsider and libertarian economist, was swept into office in November’s election after pledging to drastically reduce public spending. He took power from the ruling Peronist movement, under which poverty rose to 40% and factories had to shut down because of an inability to access financing for parts and supplies.

Milei has since moderated his fiery tone and put some of his most radical economic proposals on hold, including closing the central bank, cutting government ties with China, and adopting the dollar as the national currency.

The government, however, remains firm about the need to slash public spending to revive the economy.

Caputo, who was a top economic official in the center-right administration of former President Mauricio Macri, said that the painful spending cuts are essential if Argentina is to avoid hyperinflation.

“Our mission is to avoid a catastrophe," he said.

The measures, though, are expected to send inflation even higher in the coming months before the situation improves, the minister said. “For a few months, we are going to be worse off than before," he said. “It’s preferable to say an uncomfortable truth than a comfortable lie. But this is the right path."

Still, Caputo said the government would increase assistance to the poorest households to help them cope in the coming months, including offering cash transfers for households with children.

Argentine officials have in the past worried that cutting public spending would spark social unrest.

Write to Ryan Dubé at ryan.dube@wsj.com

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