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Argentina devalues its currency by 54%, following Nigeria’s lead

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On Tuesday, Argentina’s newly sworn-in president, Javier Milei, declared a 54 percent devaluation of the peso, the country’s domestic currency, marking a significant first move among a set of sweeping reforms aimed at addressing the nation’s severe macroeconomic challenges.

Milei is akin to Nigeria’s President Bola Ahmed Tinubu, who vowed swift macroeconomic changes to tackling a multi-exchange rate system and removing fuel subsidies.

Milei’s initial reforms aim to bolster investor trust in the South American country.

He sees aggressive devaluation as crucial to bridging the wide gap between official and street currency rates, a disparity that is one of the largest in the world.

Prior to his inauguration, Argentina’s peso traded at 350 pesos to a US dollar, while the black market sold for 1000 pesos to a US dollar, a situation that mirrors Nigeria’s volatile FX market.

Milei, an “anarcho-capitalist” figure, asserts Argentina’s economy needs immediate, radical solutions rather than “gradualism.”

His plans involve cutting spending and shuttering the central bank, which are deemed extreme and nearly implausible by many in the country.

The Economy Ministry hinted at forthcoming central bank measures today to tackle rising interest rates, debt, and monetary policy, aligning with the president’s goals.

Unfortunately, Nigeria’s similar move to collapse multiple exchange windows led to the naira plummeting by over 70 percent since the announcement, resulting in an underwhelming outcome.

“The objective is simply to avoid catastrophe and get the economy back on track,” Caputo said in a recorded speech.

He emphasised the urgency of addressing the country’s substantial fiscal deficit, estimating it at 5.5 percent of GDP. He highlighted that Argentina has grappled with a fiscal deficit for 113 out of the past 123 years, attributing this persistent issue as the root cause of its economic challenges.

“We’re here to solve this problem at its root,” he said. “For this, we need to solve our addiction to a fiscal deficit.”

As reported by Reuters, the South American nation, a significant producer of grains, contends with inflation approaching 150 percent, dwindling central bank reserves, and a staggering two-fifths of its population living in poverty.

Additionally, it grapples with a precarious $44 billion loan arrangement with the International Monetary Fund.

“I welcome the decisive measures,” IMF chief Kristalina Georgieva said, calling them “an important step towards restoring stability and rebuilding the country’s economic potential.”

The IMF praised the steps as “bold,” mentioning they would aid in stabilizing the economy and laying the groundwork for more lasting growth driven by the private sector. This comes after recent policy setbacks highlighted by the IMF.

On Tuesday, the country’s foreign exchange and grain markets were at a standstill as traders awaited the new government’s economic strategy. Banks had foreseen a substantial devaluation, with some adjusting their FX rate to 700.

P&G severed relationship with Nigeria and Argentina

Last week, Procter & Gamble, a major American company, revealed plans to exit Argentina and Nigeria due to tough business conditions linked to currency issues. P&G anticipates incurring charges between $1 billion and $1.5 billion after tax for restructuring its operations in both countries because of challenging macroeconomic situations.

Additionally, P&G attributed these significant charges to the impact of a stronger dollar on their operations in Argentina and Nigeria.

“It’s very difficult for us as a U.S. dollar-denominated company to create value in these markets,” Schulten said.

P&G announced plans to sell off its fabric and home care businesses in Argentina and transform Nigeria into a market focused solely on imports.

The company expects total charges of $2 billion to $2.5 billion after tax, scheduled to be accounted for in the fiscal years 2024 and 2025.

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