Javier Milei’s Shock Therapy: Reshaping Argentina’s Monetary Policy
On 10 December 2023, Javier Milei assumed office as Argentina’s 59th president and immediately began implementing shock therapy—a set of sudden and drastic economic reforms aimed at stabilizing the country’s long-troubled economy. These policies led to Argentina’s first fiscal surplus (0.3% of GDP) in 2024, the first in two decades. However, his aggressive monetary measures, including spending cuts, peso devaluation, and interest rate adjustments, have significantly impacted the central bank’s operations and the broader economy.
Eliminating Monetary Financing and Reducing Excess Pesos
One of Argentina’s key monetary challenges has been excess money supply, largely driven by the government’s reliance on monetary financing—borrowing directly from the Central Bank of Argentina (BCRA) to cover fiscal deficits. This practice fuelled inflation and put downward pressure on the peso.
With the fiscal surplus achieved in 2024, the Milei administration eliminated monetary financing, a major contributor to inflation. However, the BCRA still holds a large stock of interest-bearing liabilities issued in previous years to absorb excess pesos in circulation. Before Milei took office, the monetary base and net interest-bearing liabilities accounted for 37.7% of total BCRA assets, nearly 50% of the central bank’s balance sheet.
Peso Devaluation and Its Impact on Central Bank Debt
A major move under Milei’s economic reforms was the sharp 50% devaluation of the peso, which occurred three days after he assumed office. The BCRA devalued the peso from 1 USD = 391 pesos to 1 USD = 833 pesos, bringing the official exchange rate closer to the informal market rate.
This devaluation significantly impacted the central bank’s balance sheet by easing its debt burden, as it reduced the monetary base and lowered interest-bearing liabilities. While this move corrected Argentina’s overvalued exchange rate, it also increased the cost of imports and triggered a short-term inflationary spike.
Lowering Interest Rates to Reduce Debt Issuance
Following the peso devaluation, the BCRA rapidly cut interest rates, bringing them down to 50% per year. Since inflation remains higher than interest rates, this resulted in negative real interest rates, lowering the cost of servicing central bank debt.
Between December 2023 and April 2024, BCRA securities dropped from $64.3 billion to $40.6 billion. While this reduction eases the central bank’s debt burden, it also raises the risk of renewed inflation, requiring careful policy adjustments to maintain economic stability.
Accumulating Foreign Currency Reserves
A critical objective for Argentina’s monetary policy is building up foreign exchange reserves to support its currency and financial system. By April 2024, gross foreign reserves had increased to $29.2 billion. However, Argentina’s net international reserves (NIR) remain negative, meaning the country still owes more in foreign currency than it holds. To fully stabilize the financial system, the government must continue accumulating reserves while managing external debt obligations.
BOPREAL Bonds and Dollar-Denominated Liabilities
A key challenge for Milei’s administration has been addressing the debt owed to importers, which surged in 2023 when the BCRA stopped selling foreign currency due to declining reserves. To resolve this, the BCRA introduced BOPREAL bonds, a financial instrument designed to repay importers over time as reserves increase.
However, this strategy could increase Argentina’s foreign currency obligations in the long run by delaying immediate payments to bondholders. Additionally, 61% of the BCRA’s total assets consist of government bonds denominated in pesos, highlighting the country’s heavy reliance on domestic debt.
Conclusion: The Future of Argentina’s Monetary Policy
To prevent excessive exchange rate volatility, the BCRA has introduced a “crawling peg” system, allowing the peso to depreciate by 2% per month for a more gradual market adjustment. While these policies help maintain monetary stability, they also limit foreign investment and economic flexibility in the short term.
Argentina’s success in the coming years will depend on balancing economic stability with long-term growth. Milei’s radical reforms have set the country on a new path, but the journey to sustained economic recovery remains long and uncertain. For the first time in decades, Argentina is making deep changes to address its economic struggles—but much work remains on the road to success.