Argentina’s President Javier Milei has lifted the exchange rate cap, enabling a floating exchange rate to address ongoing economic challenges. Backed by loans from the IMF and other financial institutions, this strategy aims to restore stability but raises concerns about inflation and the devaluation of the peso. Economists present varied opinions on the long-term implications of this bold move.
Argentina’s President Javier Milei has taken a significant step by lifting the exchange rate cap, a move that follows recent financial support from the International Monetary Fund (IMF) and other loans. This change may lead to a swift devaluation of the Argentine peso, raising concerns about inflation. As of next week, most restrictions on accessing foreign currency will be eliminated, introducing a new floating exchange rate that will operate without central bank intervention as long as it stays below 1,400 pesos per dollar.
The expectations of a devaluation had escalated due to increased demand for foreign currency, as analysts deemed the official exchange rate outdated while the central bank’s foreign reserves dwindled. The central bank reported a staggering loss of nearly 4.9 billion dollars in gross reserves this year, resting at 24.7 billion dollars. Notably, private consultants believe that net reserves could be as low as negative 9.5 billion dollars. Last Friday, the central bank recorded a loss of 398 million dollars while trying to manage exchange rate pressures.
The agreement with the IMF is poised to stabilize Argentina’s reserves, as the country will receive a total of 20 billion dollars in IMF loans, complemented by 12 billion dollars from the World Bank Group and 10 billion from the Inter-American Development Bank. This influx is crucial for the planned floating exchange rate regime, which allows the currency to fluctuate without central bank interference. Given that the dollar rate at the state-owned Banco Nación closed at 1,097.50 pesos, an adjustment in the official exchange rate will likely trigger a corresponding increase in the prices of goods and services.
However, this new strategy raises alarm about inflation, which reached a staggering rate of 3.7% in March. According to economist Leonardo Piazza, although the plan could ultimately normalize the economy and attract investments, immediate inflationary shocks are highly probable. He suggested increasing social assistance for the most vulnerable populations in light of rising food prices.
Contrastingly, economist Pablo Tigani described the new exchange rate strategy as “crazy,” arguing that it would liberate currency flight and enable imports of unnecessary goods, resulting in a dramatic devaluation that would impact real economy pricing. He expressed concerns about the sustainability of the new measures, factoring in Argentina’s gross external debt of 276 billion dollars, of which approximately 41 billion is owed to the IMF.
In conclusion, Argentina’s decision to lift the exchange rate cap under President Javier Milei is a decisive action influenced by international financial support. While this bold move aims to stabilize the economy through a floating currency rate, it carries significant risks, including inflation and potential public discontent. Experts express mixed sentiments on the long-term viability of this strategy, highlighting the delicate balance between necessary reforms and economic stability. The immediate effects on inflation and the economic landscape should be closely monitored.
Original Source: efe.com
