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A worker receives Argentine peso banknotes at a store in Buenos Aires, Argentina, on Tuesday, September 26, 2023.
New York CNN –
Argentina will devalue the peso by more than 50% as part of emergency measures to support the country's struggling economy Minister Luis Caputo announced this on Tuesday.
The drastic move changes the official exchange rate from 365 pesos to 800 pesos per dollar and comes just days into President Javier Milei's term.
During the election campaign, Milei promised to abolish the peso and replace it with the dollar in order to get the economy going again. The peso has been artificially supported for years by strict capital controls and its value has fallen about 52% against the U.S. dollar this year.
Argentina's central bank has been printing more pesos in recent years to help the country's government avoid defaulting on its debt. This has led to skyrocketing prices.
The move represents the first of several steps to curb hyperinflation, which led Argentina's central bank to raise its key interest rate to 133% in October.
Caputo on Tuesday reiterated Milei's campaign theme of “There is no money” while outlining other measures, including cutting new public works projects. plans not to renew labor contracts that have been in force for more than a year and to cut energy and transport subsidies.
“We will be worse off for a few months, mainly because of inflation,” he said.
Regarding public works, Caputo said that “there is no money to finance works that often end up in the pockets of politicians and businessmen.”
The International Monetary Fund said on Tuesday following Caputo's comments that it supported the new initiatives.
“IMF staff welcomes the measures announced today by Argentina's new Economy Minister Luis Caputo. “These bold initial measures aim to significantly improve public finances to protect the most vulnerable in society and strengthen the foreign exchange system,” said Julie Kozack, IMF communications director, in a press release.
In his victory speech on Sunday, Milei provided few details about his economic plan. But the self-described “anarcho-capitalist,” who brandished a chainsaw during the election campaign to symbolize his plans to cut government spending, promised “drastic” reforms.
“I want you to be clear that after more than a hundred years of decline, we will begin to rebuild Argentina and redefine the ideas of freedom. Even if we have to go through a time of hardship, we will move forward. Milei, an economist, told the crowd as he took office.
While Caputo did not mention plans to abolish the peso on Tuesday, dollarizing the South American country's economy would require Argentina to convert all pesos held by residents and businesses into dollars and assign a dollar value to all assets and contracts.
This would effectively transfer the role of controlling the country's monetary policy – the power to control interest rates and print money – from Argentina's central bank to the US Federal Reserve.
A possible attempt to dollarize Argentina poses a number of challenges. Chief among them is the fact that the country does not have enough dollars to eliminate the peso, and it is unlikely that the transition would single-handedly save the country's struggling economy.
While other countries have taken this step – including Ecuador, El Salvador and Panama – none have been as large as Argentina.
Milei has already met with senior U.S. officials since taking office and his economic team has worked with the IMF to change the country's foreign policy and revive its economy.