Explainer: What does Argentina’s ‘shock therapy’ economic package involve?

Buenos Aires – Argentina’s government under libertarian President Javier Milei has unveiled a “shock therapy” economic plan, a radical and most likely painful blueprint to stabilise the South American

country’s economy, which faces its worst crisis in decades.

The plan included a devaluation of the peso currency by more than 50 per cent, which took effect on Dec 13, as well as wide-ranging measures for cutting state spending. The austerity moves have been cheered by markets but will most likely hurt Argentines.

Here are some of the measures laid out by Economy Minister Luis Caputo, who seeks to tame a fiscal deficit he put at 5.5 per cent of gross domestic product, inflation heading towards 200 per cent and a mountain of debt well over US$100 billion (S$133 billion) with creditors and bond holders.

Peso devaluation, tax adjustments

Argentina set the official exchange rate at 800 pesos per US dollar versus 366 on Dec 12, helping to close a gap with parallel markets that have flourished since strict capital controls were imposed in 2019 and where dollars trade for more than 1,000 pesos.

The move aims to encourage producers and exporters, and will come alongside temporary tax increases on some exports and imports. Mr Caputo, however, pledged to remove some taxes once the current “emergency” situation is resolved.

He also pledged to streamline and simplify the approval process for Argentina’s current imports system, known as Sira.

Smaller state, no public works tenders

Under Mr Milei’s administration, the state will shrink its total workforce by about a third, cutting the number of ministries in half to nine and reducing secretariats to 54 from 106.

“There is no money,” Mr Milei said in his inaugural speech, as he pledged to create a leaner government structure.

State labour contracts of less than a year will not be renewed, in a measure to block family members from the previous government from retaining privileges, Mr Caputo said.

The government will not hold new tenders for public works and will cancel developments not yet begun, a bid to shift the load of infrastructure projects to the private sector.

Money available for discretionary transfers to provinces will be reduced to the minimum, Mr Caputo added.

Less subsidies, targeted social spending

Mr Caputo vowed to target energy subsidies, which cost the government US$12 billion in 2022, but to strengthen targeted social programmes directly handled by the government to ensure help goes to those who need it.

“We are going to reduce energy and transportation subsidies. Today the state artificially maintains very low prices in energy and transportation rates through subsidies,” Mr Caputo said.

Government subsidies for media companies will be suspended, as they are a non-essential expense, the minister noted.

Argentina’s universal child allowance plan will be doubled and a food card programme by the government will be increased by 50 per cent.

“We are without doubt facing the worst legacy in our history, a country where Argentines are increasingly poorer,” Mr Caputo said. “We are going to be worse off for a few months than before, particularly in terms of inflation.” REUTERS