The Argentine government of ultra-liberal Javier Milei has, as promised, initiated shock therapy, announcing on Tuesday December 12 several measures including a devaluation of more than 50% of the peso, the reduction of transport and energy subsidies, to stabilize a economy eaten away by chronic debt and inflation.

End of public infrastructure projects, which will now move to the private sector, non-renewal of public contracts of less than one year, drastic reduction in ministries and the senior civil service… The “emergency” measures announced by the minister of the Economy Luis Caputo aim, according to him, to avoid “the catastrophe of hyperinflation” which threatens the third largest economy in Latin America.

Kristalina Georgieva, the director of the International Monetary Fund, Argentina’s main donor, which is helping to repay a $44 billion loan granted in 2018, called the austerity measures “an important step towards restoring stability ” in Argentina.

The peso lowered in its place

The peso was considered notoriously overvalued at nearly 400 to the dollar, in the last days of the outgoing (center left) government, and described as “excrement” by candidate Milei. He ultimately aims for a “dollarization” of the Argentine economy, since for him the Argentines “have already chosen” the dollar for their savings and transactions.

The peso will rise to 800 to the dollar on Wednesday. A devaluation destined to very strongly and immediately affect the purchasing power of Argentines, already 40% below the poverty line, by having repercussions on prices, like the last devaluation (20% in August).

This devaluation is “much greater than what most people expected, at 800 to the dollar, double the official exchange rate, this will have significant repercussions on inflation”, estimated Nicolas Saldrias, analyst for AFP. of the Economist Intelligence Unit.

“The devaluation was planned, but for us it will be a much more complicated situation, we will fall into poverty,” moaned Gabriel Alvarez, a 57-year-old teacher.

Subsidies dried up

The State “will reduce” long-standing public subsidies for transport and energy, announced Luis Caputo, without detailing a timetable or minimum objective. “The state artificially supports very low prices via these subsidies, to make people believe that they have money, but (…) it is not free and people pay for it in inflation,” he said. -he denounced.

This measure should also very directly affect the daily lives of millions of Argentines, particularly in greater Buenos Aires, which has long benefited from notoriously cheap public transport.

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As of Tuesday evening, it aroused the strongest reactions. “I don’t believe they can cut subsidies, at least transport, because people have to move, but salaries are not at the level and perhaps never will be there,” predicted Martin Carrascal, a 19 year old student. “People won’t let it happen.”

“We are going to be worse than before for a few months” but “this is the way to go,” argued Luis Caputo.

The State partly “divided”

The ministries are already reduced from 18 to 9, the secretariats and general directorates will go from 106 to 54, or “a reduction of 34% of political positions in the State” according to Minister Caputo.

“The genesis of our problems has always been budgetary,” he affirmed, estimating that for the first time, by voting with a large majority for Javier Milei who promised austerity, the Argentines showed that they understood “ that there is no money.”

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With the same concern for austerity, the State “will no longer present offers” for public projects, and cancel contracts signed “which have not already started”. “Infrastructure projects in Argentina will be carried out by the private sector, because the State has neither money nor financing to carry them out,” he explained.

The same goes for state announcements and advertisements, particularly in the media, suspended for one year. They cost 34 million pesos in 2023, according to Luis Caputo, who insisted: “There is no money for what is not strictly necessary.”

The social amortization

To cushion the inevitable social shock of the measures, Luis Caputo announced the maintenance of social programs, such as assistance with access to employment, and will “strengthen social policies received directly by those who need it most , without intermediaries,” he insisted. Thus, “food cards” (purchase vouchers for the most deprived) will increase by 50% and the universal family allowance will double.

Javier Milei warned in his inauguration speech on Sunday that “the situation would get worse in the short term” before the economy, the third largest in Latin America, reaps the fruit of budgetary austerity, by controlling inflation. chronic, currently at 143% over one year. For him, inflation should not be brought under control for “18 to 24 months”.

With AFP