Ultra-Liberal Javier Milei’s Austerity Measures and Their Impact on Argentina’s Economy

2023-12-13 02:49:55

Milei, a 53-year-old economist who during the campaign used a chainsaw to symbolize his idea of ​​​​cutting public spending, took office on Sunday and assured that the country needs a “shock” treatment to overcome the crisis.

Photo: EFE – Enrique García Medina

The government of ultra-liberal Javier Milei announced this Monday its long-awaited package of austerity measures, which includes a devaluation of more than 50% of the official exchange rate and the reduction of energy and transportation subsidies.

The person in charge of the announcement was the Minister of Economy, Luis Caputo, who warned that the country is at risk of falling into hyperinflation. “The genesis of our problems has always been fiscal,” emphasized the portfolio leader, who maintained that the country must solve its “addiction” to the deficit in public finances. “If we continue as we are, we are inevitably heading towards hyperinflation.” The minister announced that the dollar at the official exchange rate will remain at 800 pesos, once morest 391 pesos per greenback on Thursday, the last business day of Alberto Fernández’s government.

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Praise from the International Monetary Fund for Milei’s decisions

The new president, a 53-year-old economist who during the campaign used a chainsaw to symbolize his idea of ​​​​cutting public spending, took office on Sunday and assured that the country needs a “shock” treatment to overcome the crisis. In that sense, he ruled out any “gradualism.” The president proposes to make a fiscal adjustment equivalent to 5% of the Gross Domestic Product.

His first decisions were praised by the International Monetary Fund, with which Argentina maintains a credit program for US$44 billion. The organization expressed that it “supports Milei’s measures.”

Argentina is going through a serious economic crisis, with annualized inflation of more than 140% and a poverty rate that exceeds 40% of the population. Víctor Beker, an economist at the University of Belgrano, pointed out that the measures will “surely” lead to “a recessionary process.” According to him, “the point is at what point will we get out of this situation; “It will depend on the extent to which the political change implies the arrival of investments.”

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How is the exchange rate in Argentina?

“The official exchange rate will be worth 800 pesos, so that the productive sectors really have the appropriate incentives to increase production,” Caputo said in a previously recorded speech. The Government maintains, for now, the currency control system that has been in force since 2019, with a dozen different exchange rates.

With a history of successive crises, Argentines distrust their currency and are guided by the dollar to save or buy and sell assets, such as real estate or cars. They fear the variations in the exchange market that even impact the prices of basic products.

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What will happen to the subsidies?

“Today, the State artificially maintains very low prices in energy and transportation rates through these subsidies,” said the minister, referring to the money that the public treasury spends on maintaining reduced prices for various consumer items.

“But these subsidies are not free, but are paid with inflation. What they give you in the price of the ticket, they charge you with the increases in the supermarket. With inflation, it is the poor who end up financing the rich,” Caputo said. Martín Carrascal, a 19-year-old Public Relations student, questioned whether subsidies would be completely eliminated. “I don’t think they will remove them completely because people will not be able to live.”

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And social assistance?

In his investiture speech, Milei warned that times will be “hard,” although he promised that “the light” will be seen later. He also maintained that the State will consider spending on social assistance “for the fallen.” Along these lines, Caputo assured that the social work plans in cooperatives and other social organizations will be maintained, and that the economic allocations that the most humble receive for minor children and for the purchase of food will be strengthened through direct transfers.

Will there be public works?

The austerity measures include a reduction in the size of the State and, above all, the paralysis of infrastructure work initiatives financed with public funds that have not yet begun. From now on, Caputo explained, public works will be financed with private funds.

The brake on public works “will have a significant impact on the economy, especially in the provinces that largely depend on it to generate employment,” said Nicolas Saldrias, analyst at the Economist Intelligence Unit.

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