Argentina: stop crying for me

Argentina

Whether President Javier Milei can successfully transform Argentina’s economy is the crucial question for the country itself, for the IMF as its main creditor and for foreign investors who have been hit with a series of Argentinian defaults in recent years.

Four types of economy

Simon Kuznets, who won the Nobel prize in economics in 1971, said there are four types of economies — developed, undeveloped, Japan and Argentina. The two main features that put Argentina in its special category are high inflation and weak growth but they are superimposed on structural weaknesses of the economy.

Argentina’s problems are 99% self-inflicted, according to Federico Sturzenegger, Minister of Deregulation and State Transformation (in comments at the IMF Spring Meeting 2025).  To stop that self-harm the Milei government aims for a more stable economic environment with three main elements. First, improved public finances. Having inherited a government fiscal deficit of 5% of GDP, the budget was balanced in Milei’s first month in office. The aim is never to have a budget deficit again.  Second, deregulation. Regulation is seen as anti-entrepreneurial. Regulation is something which large firms can deal with; small firms find it much more difficult. It raises barriers to entry so it is anti-growth. And it is pro corruption. Third, control of inflation.

High inflation

Argentina has a history of high inflation and, indeed, hyperinflation - which is generally taken as a rate of price increases above 50% per month. Argentina’s peak inflation rate was well above that rate in July 1989, at 197% according to the Hanke-Kruz hyperinflation table (https://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-krus-hyperinflation-table.pdf .)

At that rate, prices double every 19.4 days. President Milei’s top priority was cutting the inflation rate and it has already declined from 25.5% month-on-month in December 2023 to 1.6% in June 2025. But the introduction of a 10,000 peso banknote (worth about US$11) gives the impression of a country still in hyperinflation. And, indeed, memories of hyperinflation typically linger for a long time. Breaking an inflationary psychology is not easy.

High inflation has meant that the Argentinian peso has generally weakened against the US dollar over time but the depreciation is currently limited to 2% per month. This has meant the real value of the peso has appreciated recently (that is, its decline in value has been smaller than the inflation rate), hampering export competitiveness.

Dollarisation

Milei’s original plan for inflation control was dollarisation of the economy and abolition of the central bank. That plan has now been replaced with one which envisages “endogenous dollarisation”:  restricting the supply of pesos (which would become a “museum piece”) and thereby encouraging a shift to the dollar. The peso was pegged to the dollar for more than ten years (from April 1991 to January 2002) before that peg was abandoned, with dollar bank loans and deposits forcibly converted into pesos. That suggests only full dollarisation would eliminate currency risk. But there is no guarantee that such a move, if taken, would be permanent. Zimbabwe, for example, reintroduced its domestic currency after ten years of dollarisation. Dollarisation may not last.

Hit to GDP growth from reforms

In order to improve growth prospects Milei plans to roll back the size of the state. Initially, as is typically the case with such reforms, there was an adverse impact on growth. GDP decline by 1.7% in 2024. This followed a long period of decline relative to other Latin American economies and the rest of the world.

The World bank in its 2024 report https://tinyurl.com/yjrm27bj commented that the country was the seventh wealthiest nation in the world in 1918. Economic success was driven by an open economy and progressive immigration policies. Weakening economic performance in the last century caused its income to fall below high-income country levels, resulting in Argentina being demoted to middle income status in the 1960s. Persistent economic instability and inefficient policies have hindered development, with the country’s annual GDP growth rate averaging only 1.8% over the past half century, well below the Latin American average of 3.2%.

Argentina is rich in natural resources. Realising its potential has, of course, been Argentina’s perennial problem.

IMF programmes

Argentina entered its 23^rd IMF programme in April 2025 and currently owes the IMF around $40bn. The history of the loans is not encouraging. Each time a loan has been approved, the macro problems have not been resolved. This time may be different.