Buenos Aires, Dec 13 (EFE). – Argentina reacted on Wednesday to the first “shock” measures announced by the government of Javier Milei with calm in the alternative currency markets following the sudden 50% devaluation of the official exchange rate, and with steep price increases in supermarkets and gas stations.
The new president of the Central Bank of the Argentine Republic, Santiago Bausili, met with local banking representatives to explain the scope of the announcements made on Tuesday by Economy Minister Luis Caputo.
The “shock” plan implies a strong fiscal adjustment with the goal of achieving a balanced budget in 2024. It includes several cuts in public spending and the reduction of state subsidies for public services and transportation as of January.
Government spokesman Manuel Adorni said at a press conference on Wednesday that these “urgent” measures were “unavoidable” to achieve a “zero deficit” and avoid the “catastrophe” of hyperinflation.
The package includes staff cuts in public administration, and there are fears that state salaries, pensions and aid to vulnerable sectors will lose purchasing power against high inflation, which officially reached 12.8% in November (160.9% year-on-year), with further projections of monthly rates of 20-40% through February.
After learning of the executive’s measures on Tuesday, the General Confederation of Labor (CGT), Argentina’s main labor union, criticized the harsh adjustment, saying that “it will be paid by the people and not by the caste.”
“The fiscal and currency adjustment plan announced by the government will cause a strong acceleration of the inflationary process that will dynamite the purchasing power of workers’ salaries,” the CGT said in a statement.
In addition, its secretary general, Héctor Daer, explained that “when he talks about eliminating subsidies, he is talking about multiplying each of the rates by three” and that “at the same time, he is not talking about income or how to solve the problem for the most vulnerable sectors.”
Milei assured that with the shock fiscal plan announced on Tuesday, the government is trying to avoid an annual hyperinflation of 15,000%.
A figure that, according to economists interviewed by Argentine media, is the result of extrapolating data from previous inflationary crises in Argentina, such as those of 1976 and 1989, but despite the critical situation of the Argentine economy, this figure should be taken with caution.
Nevertheless, the new Argentine authorities say that they are fighting for a “price showdown” because, according to their diagnosis, prices are “capped”, meaning that they believe that the economic policies of previous governments have kept prices artificially low and a correction is due.
In monetary terms, the price of the dollar in banks and exchange houses jumped from 400.50 pesos per unit to 820 pesos per dollar, a 50% devaluation of the Argentine currency, as expected by Caputo.
A jump that caused fuel prices to rise more than 30% in one day, and added to the steep increases seen in supermarkets since the new government took office.
It also triggered an immediate correction in several exchange rates, such as the one applied to credit card spending abroad, although the price of the US currency in the informal market and financial channels remained relatively stable.
The new official exchange rate is designed to encourage the inflow of foreign currency through exports in an attempt to rebuild the critical level of the Central Bank’s foreign exchange reserves.
However, the monetary authority has set a path of movement for the official price of 2% per month, well below the projected monthly inflation rate, so the exchange rate could quickly fall behind again.
Meanwhile, a higher tax will be imposed on imports, but importers will now have an easier time settling their debts abroad and will no longer have to submit to the system of operating permits that was previously in place.
In the meeting with bankers, the Central Bank confirmed that there will be no change in the interest rate on liquidity letters and that the rate on passive repos – both instruments placed between commercial banks – will be lowered, even though inflation is accelerating.