“Under Milei, inflation has dropped massively. The poverty rate has gone down. Public spending has plummeted, and budget surpluses have appeared. Housing supply in Buenos Aires has totally turned around following the repeal of rent control laws.
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But “the policy of managing the currency has become a trap,” adds The Economist. “Even after he partially floated the peso in April alongside an IMF [International Monetary Fund] bailout, he has sought to maintain its level artificially high. Defending the exchange rate has cost Argentina billions of dollars in scarce foreign-currency reserves and has pushed interest rates sky-high, creating a drag on growth. Jobs, rather than inflation, are what now worry voters the most.”
Milei had to get a credit swap from the U.S., to the tune of $20 billion (which he must pay back, though the terms of the deal have not been made clear to the public). He secured a similarly massive IMF bailout back in April. He keeps needing emergency credit lines to keep the peso strong, but it’s not clear that this policy is totally working. It makes sense why he would pursue it in the first place: Prices have historically spiraled out of control, and the central bank is not trusted by the people. In order for some of Milei’s less-popular social safety net cuts to be palatable, the people needed to feel like there was some legitimate stability and predictability in their monetary system, lest they revert to favoring Peronism.
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“Under the exchange rate system that Milei implemented earlier this year, the peso floats freely within a band,” writes Lorenzo Bernaldo de Quirós for the Cato Institute. “When a government tries to maintain a fixed but adjustable exchange rate, it creates perverse incentives. If markets perceive that the currency is overvalued, expectations of devaluation are created, prompting speculators and citizens themselves to take their capital out of the country to avoid losses. To defend the exchange rate, the central bank must use its international reserves, but these are finite.” Reserves are limited; speculators can easily take advantage.”