BUENOS AIRES, Argentina (AP) – President Javier Milei announced on Friday that he will be removing the majority of his stringent capital and currency controls next week. This decision represents a significant advancement in the libertarian initiative aimed at stabilizing the Argentine economy after years of unchecked spending.
The IMF Executive Committee revealed late on Friday a $20 billion relief package aimed at revitalizing Argentina’s critically low foreign currency reserves over the next four years. The fund commended President Milei’s rigorous austerity measures and fiscal policies, noting that the program is addressing “the remaining macroeconomic vulnerabilities” while advocating for “integrating impressive early interests.”
“In this context, authorities are entering a new phase of their stabilization strategy,” said IMF Managing Director Kristalina Georgieva, emphasizing Argentina’s commitment to enhance its efforts on reducing expenditures and economic deregulation, along with implementing new foreign currency exchange policies.
Shortly after, Milei, flanked by ministers, spoke to the nation via television.
“Today, we are breaking the cycle of disillusionment and starting to move forward for the first time,” he stated. “We have conclusively eliminated the exchange rate controls affecting the Argentine economy.”
Regulatory Complexity
Capital management, referred to here as “CEPO” or “Clamp.” is a regulatory web designed to stabilize the peso at official rates and prevent capital flight from Argentina.
Restrictions imposed by previous administrations in 2019 curtailed access to dollars for both individuals and businesses, and Milei has resisted foreign investment to achieve his aim of transforming the heavily regulated Argentine economy into a free-market system.
This restriction has made it nearly impossible for ordinary Argentines to purchase dollars, creating a black market that most citizens utilize to exchange depreciated pesos, albeit illegally. The removal of these controls will be effective on Monday.
The bank announced it would receive its initial $12 billion from the IMF on Tuesday, reflecting the fund’s confidence in Milei’s radical reforms.
“This program is unprecedented in its support of economic plans that are already yielding results,” said Milei.
Floating the Argentine Peso
The new policy also includes decoupling the Argentine peso from the dollar peg. Instead of a volatile free float, Argentina will allow pesos to trade within designated currency bands set between 1,000 and 1,400 pesos per dollar. The band is set to expand by 1% every month, according to the bank.
This marks a shift from Milei’s existing policy of allowing the peso to weaken by 1% against the dollar each month.
The existing pegs have faced backlash from investors concerned that the central bank will deplete reserves to support the peso. In recent weeks, they have had to spend $2.5 billion to maintain official exchange rates.
When announcing the end of exchange controls, Economy Minister Luis Caputo stated that it was “not a devaluation.”
“Honestly, I cannot predict where the dollar will stabilize,” he remarked.
Milei’s administration has aimed to sidestep the politically sensitive official devaluation of the peso, which risks triggering even higher inflation. Controlling price increases — a key campaign promise — has helped his administration maintain approval levels despite harsh cuts in national spending, which could incite social unrest.
However, it is evident that the peso must undergo some depreciation. Economists speculate it may align closer to the black market rate. On Friday, that rate stood at 1,375 P compared to the official rate of 1,097 P.
Marcelo J. García, director of the Americas at New York-based geopolitical risk consultancy Horizon Engage, anticipates an initial devaluation of approximately 20-25%.
“The major question is regarding inflation in the second quarter of the year. A shock is very likely,” stated Leonardo Piazza, chief economist at Argentine consulting firm LP Consulting.
Argentina’s Ongoing Debt Challenges
Since Milei assumed office in December 2023, the former leftist Peronist government accumulated a massive budget deficit, resulting in soaring inflation and a chronically devalued peso.
By eliminating subsidies and price controls, laying off tens of thousands of state employees, and ceasing reliance on central bank money printing to fund government expenses, Argentina has achieved its first fiscal surplus in nearly 20 years. This reform has largely stabilized its macroeconomic imbalances, although the impact on the populace has been severe.
Nevertheless, signs of a sustainable recovery remain limited amid the economic upheaval. Analysts assert that long-term revival necessitates lifting capital controls, accumulating currency reserves, and gaining access to international capital markets.
Consequently, foreign investors are taking a cautious approach, hesitant to inject funds into a nation notorious for defaulting on its obligations.
Argentina currently stands as the largest debtor to the IMF, with outstanding debts totaling approximately $43 billion. This new $20 billion loan marks the 23rd bailout in the country’s tumultuous history.
“The Money Tsunami”
Milei has resisted investor pressure to lift capital controls for the past year, arguing that the economic landscape needed correction. He now asserts that the time is right.
Following the initial $12 billion injection from the IMF, another $2 billion is slated to assist Argentina’s central bank over the next two months, according to the fund.
International entities have also contributed, with the Inter-American Development Bank pledging $10 billion over the forthcoming three years.
“This level of reserves allows us to back all existing pesos in our economy and ensures financial security for our citizens,” says Milei. “These are the foundations for sustainable, long-term growth.”
This high-risk strategy of dismantling “CEPO” could precipitate long-held demand for US dollars, potentially leading to a rush as businesses attempt to transfer retained profits abroad.
“It could trigger a tsunami of money,” warned Christopher Ecclestone, strategist at investment bank Hallgarten & Company. “It’s entirely unpredictable how this will unfold.”
The central bank indicated it will maintain certain regulations concerning overseas card transactions and businesses while easing restrictions on the general public. For instance, starting in 2025, multinationals will be allowed to repatriate revenue. However, to repatriate their currently locked funds, they must exchange their debts for dollar-controlled securities.
This move is designed to mitigate capital flight, which is crucial for Milei’s ultimate goal of reducing inflation ahead of the midterm elections in October, vital for his libertarian party’s expansion in the minuscule Congress minority.
“This announcement is bolder than anticipated. The government is taking a significant leap of faith by lifting the CEPO,” García noted.
Timing is also crucial, as analysts highlight the local market’s uncertainty stemming from US President Donald Trump’s tariffs. Recently, Argentine stocks and bonds have experienced sharp declines.
Simultaneously, the widening gap between Argentine exchange rates has increased by over 20% in recent weeks, as traders express anxiety about potential peso devaluation under Argentina’s IMF agreements. This gap serves as a critical indicator of governmental trust and may fuel inflation, which has already surged to its highest level in seven months by March.
On Friday, the Argentine National Institute of Statistics reported that consumer prices rose by 3.7% last month, a rise from 2.4% in February, primarily driven by soaring food prices.
Milei remained unwavering. “Inflation will be under control,” he promised.
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Associated Press writer Almudena Calatrava contributed to this report.
Source: apnews.com