[Photo of President Javier Milei. Photo Credit to Wikimedia]

“There will be no money”; Argentina’s new libertarian president unveils a shock treatment including a devaluation of the currency - the peso, by 50% to the US dollar to proliferate hyperinflation.

Elected on December 10th, 2023, Javier Milei won power by promising several measures to tackle Argentina’s GDP fiscal deficit of 5.5% , hyperinflation at 150%, and heaps of debt over $100 billion.

Uprooting the cause of inflation starts by addressing Argentina’s prolonged collapsing currency .

In April 2023, the peso was overvalued and plunged against the US dollar.

The central bank responded by pulling the interest rate to 45% while concurrently selling billions of dollars in foreign currency, decreasing reserves.

Additionally, the populist government printed money to finance the extensive budget deficit, raising consumer prices.

Prices surged at a monthly basis of 8.4%, reaching a whopping 108.8%.

The constant fluctuation of prices and unanchored expectations of product prices created the phrase ‘quema la plata’ – which translates to ‘burn the money’ and generated an incentive to withdraw more than 1 billion USdollar deposits.

Unlike previous crises, one critical factor differentiates 2023’s inflation crisis from the 1980s and 2002 – a natural disaster.

In April, Argentina’s crop drought significantly increased prices on its own; the IMF reported Argentina’s growth forecast from 2% to 0.2%.

The drought cut down masses of soy, corn, and wheat exporters; the Buenos Aires Grain Exchange (BAGE) lowered 2023 soy production estimates from 22.5 million MT to 21.5 million MT.

As the world’s third largest corn exporter and first of soy oil and soy meal, the consequences could be seismic – consumers worldwide could face shortages.

To keep processors in business, Argentina has to import approximately 10 million tonnes of soybeans.

Contrary to previous president Fernández’s attempts to implement price freezers paired with a $57 billion relief package from the IMF, Milei strives to tackle the problem head-on with a ‘shock treatment’.

On December 12, an official exchange rate of 800 pesos per dollar, increased from 336 pesos, was set – a monthly devaluation of 2% totaling a 54% devaluation.

The central market is attempting to crawl the peg regime – switching the benchmark interest rate from their 28-day Leliq rate of 133% to a reverse repo rate of 100%.

This would close the gap of flourishing parallel markets from 2019, proposing dollar trades for over 1,000 pesos.

Theoretically, national exports would be more competitive in foreign markets whilst imports become more expensive, thus nudging consumers to local alternatives and lowering the current account deficit.

Milei warned the public that inflation could soar to 15,000% coupled with temporary tax hikes on exports and imports.

Promises to simplify the approval process for the current import system (SIRA), and remove portions of taxes once the emergency inflation situation is resolved are pledged to alleviate concerns.

Despite being an extreme and exponential increase, Milei dissects inflation as a symptom of underlying fiscal and external sustainability obstacles that require congruent aggressive fiscal adjustment.

To help lighten the pressure of short-term inflation, Milei vowed to compensate for economic losses by doubling the universal child allowance plan and increasing the food card plan program by 50%.

Additionally, the state plans to shrink around a third its total workforce, reducing secretariats from 106 to 54 and halving the number of ministries – promising an altruistic, bureautic, and leaner system.

State labour contracts lasting less than a year will not be renewed to prevent hereditary passages of privilege and power from the previous government.

Cancellation of pending developments, shifts of infrastructure projects to the private sector, and minimisation of discretionary transfers to provinces are being attempted in order to remain current on Argentina’s sovereign debt obligations to the IMF.

Despite protests against artificially pegged inflation, persistently high inflation and low growth will aggravate political support for tighter monetary and fiscal policies.