Economic status of Argentina
- Argentina is battling soaring inflation, with prices rising by around 150% over the last year.
- It is also struggling with low cash reserves, high government debt, while 40% of the population is living below the poverty line.
- Since 2019, Argentina has kept its currency artificially strong by strictly controlling the movement of the currency.
- That helped drive demand for the US dollar on the informal currency market, which saw the peso trading at a much lower rate than the official level.
- The International Monetary Fund (IMF) had originally wanted a “100%” devaluation of the country’s embattled peso currency to speed up payouts from the country’s $44 billion IMF program.
Argentina devaluation
- The official exchange rate will go to 800 pesos to the dollar, up from 391.
- The move was part of “shock” measures to tackle triple-digit inflation and cut spending.
What is Devaluation?
- In the foreign exchange market when the exchange rate of a domestic currency is cut down by its government against any foreign currency, it is called devaluation.
- This is done to balance trade by reducing the cost of exports and making imports less attractive.
Devaluation can be achieved by
- Lowering the gold equivalency of a currency
- Lowering the value of a currency relative to another currency
- Setting a lower exchange rate for the national currency in relation to a foreign currency
Note: Demonetization is the process of removing a currency unit’s legal tender status.
Depreciation
- The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
- Depreciation, i.e. a decrease in an asset’s value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time.
- Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time.
Recent trend
- Venezuela (– 99.6%), where hyperinflation sank the bolivar’s value and prompted the government to introduce a new denomination of its currency in October 2021.
- Lebanon, which has faced a financial meltdown since October 2019, decided last year to re-peg its currency to the US dollar (from L£1,507 to L£15,000) for the first time in 25 years. This effectively resulted in a 90% depreciation of the Lebanese pound.
- The year 2023 has already seen three debt-laden countries — Egypt, Pakistan and Lebanon — drop their exchange rates to unlock International Monetary Fund assistance.