Economy

Milei’s Reforms: Challenges and Progress

President Milei’s radical reforms—including dollarization and smaller government—face significant legislative hurdles and challenges in Argentina.

Image credit: Shutterstock / lev radin

Javier Milei’s victory as Argentina’s president marked a significant shift from the Peronist-dominated politics of previous decades.

But the reforms promised by the country’s first libertarian leader face many obstacles, largely due to his party’s minority status in Congress.

Legislative Hurdles and the Ley de Bases

Milei’s ambitious reform agenda has encountered resistance in Congress, where his party holds a minority.

The centerpiece of his reform efforts is the Ley de Bases, an omnibus bill with around 250 articles proposing wide-ranging administrative, economic, financial, labor, fiscal, and social security reforms.

This bill aims to grant the executive branch broad legislative powers temporarily.

Key measures in the Ley de Bases include the privatization of several state-controlled companies, such as Aerolineas Argentinas, Banco Nación Argentina, and YPF.

Additionally, it proposes the privatization of railroads, postal services, and water services.

The bill also seeks to increase the executive’s power to dismiss state employees, cut subsidies, and eliminate various government entities to reduce public spending.

Despite passing through the Chamber of Deputies, the bill faces significant opposition in the Senate.

If the Senate rejects these measures and sends them back to the lower house, it would be a setback for Milei, who had hoped for approval by May 25.

Fiscal Reforms and IMF Agreement

Milei has also focused on fiscal reform, supported by a recent agreement with the International Monetary Fund (IMF). The IMF approved a revision of Argentina’s USD 44 billion program, granting the country access to almost USD800 million.

This approval signifies the IMF’s endorsement of Milei’s policies, which aim to go beyond the IMF’s proposed austerity measures.

The fiscal reform package includes measures to combat money laundering, provide a moratorium for taxpayers to settle debts with the tax authority, and reintroduce an income tax on lower-income workers.

This last measure reverses the previous government’s efforts to alleviate the tax burden on lower-income workers. The fiscal reform package has passed the Chamber of Deputies and is now under Senate review.

Inflation remains a critical issue, with rates nearing 300% in early 2024, while GDP growth is expected to be 2.8% this year.

The May Pact

A crucial element for stabilizing Milei’s government is the May Pact, or May 25 Pact.

This agreement, set to be signed on May 25, involves provincial governors, lawmakers, and various political and economic stakeholders. It includes ten key points on fiscal policy, pensions, and foreign relations.

The pact’s primary objectives include protecting private property, establishing a fiscal balance agreement, implementing tax reforms, approving labor reforms to promote formal employment, and pursuing international trade agreements to reintegrate Argentina into the global market.

Currently, at least 15 of Argentina’s 23 provincial governors are expected to sign the pact, indicating significant regional support for Milei.

Dollarization and the Free Exchange Market

Dollarization was a prominent campaign promise of Milei’s, intended to replace the Argentine peso with the US dollar to combat hyperinflation and stabilize the economy.

However, political and economic challenges have forced Milei to postpone these plans. He has cited opposition parties’ potential impeachment threats as a major barrier to immediate dollarization.

Additionally, the cost of dollarization, estimated at USD40 billion, is beyond Argentina’s current financial capacity. This amount would be needed to exchange all pesos in circulation for dollars at the current exchange rate.

Given these obstacles, dollarization has become a medium-term objective. In the meantime, Milei is pushing for a free exchange market, allowing transactions in dollars and pesos without current exchange restrictions.

This measure also aims to attract foreign investment and increase the dollar supply in the Argentine economy.

Milei’s reform agenda, though ambitious, faces significant political and economic hurdles. His ability to navigate these complexities will be crucial for realizing his vision for Argentina.

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