Compared to January 2023, prices in Latin America’s third largest economy, Argentina, have risen at an annual rate of 254.2 per cent. President Javier Milei, known as a right-wing libertarian economist, elected in November, promised a radical plan of economic “shock therapy” with the hopes of reversing what the self-described “anarcho-capitalist” calls the “decades of decadence” which has propelled the nation’s economic turmoil. Policy responses are coming from two main fronts: public spending and currency.
Characterised by stark austerity measures, the President’s contested proposals entail huge cuts to government spending, taking form through slashing energy and transport subsidies, privatising state companies, and deregulating mining and other industries. For instance, a 360 per cent rise in bus and subway fares is expected in the coming months following Milei’s decision to scrap a $124mn regional transport subsidy fund in addition to unfreezing prices in Greater Buenos Aires. To add, nine government ministries have already been cut, which economic minister, Luis Caputo, highlights would reduce 34% of public sector jobs.
On the currency front, in December, the government weakened the value of its currency by more than 50% against the US dollar. In context, the official exchange rate was cut so that 800 pesos bought a dollar compared to roughly 391 initially. Argentina has artificially controlled the peso since 2019. The reasons for devaluing the currency, among others, include making exports more price competitive which in turn helps to reduce the trade deficit and defuse the costs of servicing foreign debt. Indeed, the nation holds the title as the International Monetary Fund’s (IMF) biggest debtor (and holds almost a third of the IMF’s total lending), owing $44bn (£35bn) to the creditor. One of many economic woes the country faces constitutes the black / ‘parallel’ market trading of the peso which has become a commonplace practice in the capital, instigated by the law which restricts Argentines to buy at only $200 a month at the official exchange rate.
One may ask how the economy reached such a dire state that these staggering measures have been implemented. Simply put, the preceding “decades of decadence” mentioned previously, marked a time of excessive government spending and the central bank printed money to finance the resulting debt, devaluing the peso in the process and driving up inflation i.e., household’s purchasing power had fallen. Argentina has been running a fiscal deficit (government spending > tax revenues) for the past thirteen years (~ 2.9% of GDP in 2023). As well as excessive spending, Argentina is known for its substantial borrowing and subsequent defaulting which has made creditors lose confidence in the country’s ability to repay its debt. The culmination of weak policymaking over many years has led the country to face its present-day economic conditions.
Unrefutably, these macro-level changes have translated to unfavourable consequences on a micro-scale. Notably, with 40 per cent of the population living below the poverty line, monthly inflation levels topping 20 per cent have placed more strain on more people, from both a financial and general well-being perspective. The Sal de la Tierra soup kitchen in Villa Fiorito, a poor Buenos Aires suburb found that 20 kilograms of pasta were sufficient to feed the dozens of families who visited earlier in February. A week later, the soup kitchen, reliant on individual contributions and volunteers, had to prepare 30 kilograms of pasta. Maria Torres, an unemployed volunteer cook with the charity makes the poignant remark, “There’s less and less to give and more and more hunger” as 70 families are to be fed today, up from 20 a few months ago.
In the short term, Milei’s austerity measures seem viable to curb inflation, but the everyday Argentinian must be prepared to bear the brunt of these rough interventions. As with most policy changes, there is a time lag before the long-term impacts of certain measures are felt. For Argentina’s macroeconomy, getting itself out of the inflationary quagmire that the country has landed itself in comes at a cost to growth. The IMF forecast the economy to shrink 2.8 per cent in 2024 following a contraction of 2.5 per cent in 2023. Argentina’s progress in reducing both its inflation levels and budget deficit while re-piecing the shattered foreign exchange market it operates in are among the things to look out for in the coming months.
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