Argentina devalues the peso by 54% as it kicks off radical economic reform plan

• Argentina devalued its peso by 54% on Tuesday, sending the official rate to 800 per US dollar.
• President Javier Milei has committed to radical policy shocks to get the economy on better footing.

Argentina President Javier Milei is starting to deliver on his commitment to radical economic changes.

The administration devalued the currency by 54%, with Economy Minister Luis Caputo announcing Tuesday that the peso's official exchange rate would weaken from 366.5 per dollar to 800 pesos per dollar.

It's a step for Argentina to break its "addiction" to fiscal deficits, Caputo said.

Moving forward, the central bank will target ongoing weakening of 2% per month, while Milei's government will pull back on spending equal to about 2.9% of GDP, according to Bloomberg. Those will include reductions in pension plans and social security, as well as subsidies.

Milei has warned of a brutal few months ahead for Argentines amid new radical economic measures. The country is currently facing triple-digit inflation, and prices are still expected to jump an additional 20%-40% in the months ahead.

Meanwhile, the International Monetary Fund applauded Argentina's new initiatives, saying they will help stabilize the economy and allow for more private-sector-led growth.

"These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime," the IMF said in a statement Tuesday.

But while Milei campaigned on ditching the peso completely and adopting the dollar as Argentina's currency, his naming of more conventional officials to key economic policy jobs raised doubts about some of his most radical plans.

Nobel laureate economist Paul Krugman, for his part, said on Tuesday Argentina can't escape its massive inflation dilemma with a simple switch from the peso to the dollar.

"I don't pretend to understand what's currently happening in Argentine politics," the economist said in an column for the New York Times. "But the fact that many people apparently believed that dollarization would solve Argentina's problems was just the latest example of the enduring power of magical monetary thinking."