Argentine Economy Minister Luis Caputo unveiled a raft of measures including a 118% devaluation of the peso in an opening gambit by the new government to slash the fiscal deficit avert hyperinflation by .
In a pre-recorded video, Caputo listed nine measures designed to slash government spending and avoid inflation from spiraling out of control, saying that mismanagement of public finances has been at the root of Argentina’s recurring financial problems over the past century, including nine sovereign defaults.
The central bank will devalue the peso to ARS800 per US dollar from ARS366.50, helping to spur exports, the minister said in his first public address since taking office on Sunday under President Javier Milei, a right-wing economist who swept to power in a runoff election last month.
The devaluation will take the official rate closer in line with the black-market rate, which was ARS1,045/dollar on Tuesday, a level considered closer to the true value of the peso. At the same time, an import tax will be kept in place to protect manufacturers from a potential flood of cheap imports.
SLASHING SPENDING
Caputo also announced a series of spending cuts. Any government job contract less than a year old will not be automatically renewed and all state advertising will be suspended for a year, while the number of ministries will be cut in half to nine and secretariats to 54 from 106, he said.
Additionally, transfers to provincial governments will be reduced to a minimum and any public works that have not started will be canceled. Import controls will be lifted, while energy and transport subsidies will be removed and social programs will only be kept in place for those who need them, the minister said.
To help the poorest people get through the hard times ahead, Caputo said a child welfare program will be doubled and a food program increased by 50%.
FISCAL DEFICIT
The package of measures is designed to attack the root cause of the country’s recurring financial crises of the past century: the fiscal deficit.
Caputo said most Argentines say that the country’s biggest problems are its large debt, high inflation and weak currency, when in fact the budget gap and how it is financed is the cause of all three.
The government, he said, traditionally spends more than it collects in revenue and finances the difference by printing pesos, a practice that over the past few years has left the country shackled with high inflation, slow economic growth, a bankrupt central bank, depressed prices of public services, a weak currency and a $400 billion national debt.
The crisis, he warned, is pushing the country toward the fastest inflation in its history. The inflation rate, when stripping away price controls, is touching 300% annual, well above the official rate of 143% in October. If nothing is done to reduce the fiscal deficit — estimated at 15% of GDP — inflation could reach 15,000%, taking the price of milk from ARS400 ($1.09) to ARS60,000 in a year, he added.
“Our mission is to avoid this catastrophe,” Caputo said, adding that the “correct path” is to cut spending to slash the fiscal deficit.
“If we continue down the other path, we will inevitable wind up with much more poverty, a lot more inflation and a lot more suffering,” he said.
Eventually eliminating the fiscal deficit will put Argentina back on track for sustainable growth so the economy can finally return to the level it was at in the late 1800s and early 1900s, then one of the strongest in the world, Caputo added.
“Argentina is rich in natural and human resources,” he said. “If we finally do the tasks that we have never wanted to do, we will be able to dream again to become once again the great country that we were 100 years ago.”