Argentina’s Peso

Why in news?

• Argentina’s currency, the peso, has lost approximately 50% of its value this year and 25% in August, 2019.

What is happening with Argentina’s economy?

• President of Argentina has asked the International Monetary Fund (IMF) to accelerate the disbursement of a $50 billion loan.
• The loan money could be used for servicing debt and intervening in currency markets.
• The IMF had already disbursed a tranche of $15 billion in June.
• Most of Argentina’s debt is dollar denominated.
• The growing weakness of the peso against the dollar has been a cause for concern to markets.

What was the response in this regard?

• Argentina’s central bank announced that it was increasing the quantum of reserves banks would have to hold.
• The central bank hiked interest rates to 60%, to rein in inflation and increase investor confidence in its currency.
• The administration announced emergency austerity measures.
• One such measure is temporary increase in export taxes on certain raw and processed agricultural goods.
• Over 30% of exports in 2016 were represented by soy meal, soya bean and corn.
•  Also in the works are a 27% cut in capital spending and closing down and consolidation of ministries.
• The administration has also said it will have a balanced budget next year and a budget surplus of 1% by 2020.
• The target is more ambitious than the 1.3% budget deficit target set by the IMF as part of the bailout agreement.

What are the factors that led to this situation?

• Argentina is no stranger to financial crises.
• Years of populist policies from 2007 to 2015 under former President Kichner’s rule coupled with controls on the exchange have unsettled the economy.
• These measures created an economy with a persistent fiscal and current account deficits and high inflation.
• The U.S.’s interest rate hikes and an appreciating dollar are the reasons that exacerbated the troubles of Argentina.

Source: The Hindu