Argentina Lifts Exchange Rate Cap in Bold Economic Strategy

Argentina has lifted the exchange rate cap under President Javier Milei, allowing a new floating exchange rate system. The change follows millions in loans from the IMF and could lead to peso devaluation and increased inflation. While some experts view this as a necessary move to strengthen reserves, others are concerned about its implications for economic stability and inflation risks.

On April 12, 2023, Argentine President Javier Milei announced a significant decision to lift the exchange rate cap, a move inspired by forthcoming loans from the International Monetary Fund (IMF) and other financial institutions. This decision could precipitate a rapid devaluation of the Argentine peso and contribute to inflationary pressures in an already complex global economic landscape. Starting next week, Argentines will experience eased restrictions on accessing foreign currency, marking the shift to a new floating exchange rate system, which will not be governed by central bank intervention as long as it remains beneath 1,400 pesos per dollar.

The backdrop to this decision includes increasing investor demand for foreign currency, as many experts deemed the official exchange rate outdated amid dwindling foreign reserves. The Central Bank has reportedly lost approximately 4.9 billion dollars in reserves in 2025, dwindling to 24.7 billion dollars. In a single day, the bank lost nearly 398 million dollars in efforts to stabilize the exchange rate. The current agreement with the IMF aims to rebuild those reserves, bolstered by commitments of loans amounting to 20 billion dollars from the IMF, 12 billion from the World Bank Group, and 10 billion from the Inter-American Development Bank.

As the government shifts towards a floating exchange rate regime reliant on foreign reserves, inflation remains a primary concern. The dollar was recently priced at 1,097.50 pesos per unit at Banco Nación, signaling potential corrections to the official exchange rate and an anticipated increase in the prices of goods and services, which could elevate inflation, calculated at 3.7% monthly in March. Expert Leonardo Piazza expressed cautious optimism, stating that while short-term inflation could surge, the long-term outcomes may stabilize the economy and draw investment.

Nevertheless, economist Pablo Tigani offered a contrasting view, describing the new scheme as “crazy”. He warned it would enable rampant currency flight and unrestricted imports, suggesting a sharp devaluation that would soon affect real economy prices. Concerns surrounding additional national debt remain significant, as Argentina’s gross external debt stood at 276 billion dollars at the end of 2024, with 41 billion dollars directly owed to the IMF, a figure expected to rise substantially in the near term.

In conclusion, President Javier Milei’s elimination of the exchange rate cap represents a pivotal yet contentious policy shift for Argentina, aimed at addressing economic challenges through foreign support. While the approach may enhance immediate foreign reserves and potentially attract investment, experts are divided on the implications for inflation and long-term economic stability. Thus, the situation warrants close observation as it unfolds.

Original Source: efe.com