Argentine Senate Backs Milei’s Reform Bill Amid Protests

Despite significant alterations, Argentina’s Senate has approved President Javier Milei’s critical reform bill and fiscal package. This marks a crucial win for Milei’s pro-market agenda, but not without sparking fierce protests and debate about the country’s economic future.

Argentina’s Senate has handed libertarian President Javier Milei a significant victory by approving his critical reform bill and a twin fiscal package, albeit with significant alterations. This win, despite the challenges, underscores the importance of Milei’s pro-market agenda and its potential impact on the country’s future.

Late on Wednesday, the Senate approved Milei’s “Bases” law by a razor-thin margin. This is a significant boost for his austerity and pro-market program, spurring markets and improving state finances but hitting the broader economy hard. In the early hours of Thursday, it also approved a separate fiscal package in general terms but rejected specific portions on taxes and property.

While the bills will go back to the lower house of deputies to ratify the changes, the Senate backing is critical for Milei, an ebullient economist and former pundit who took office in December pledging to overhaul the embattled country’s economy. It signaled his ability to win over conservative and centrist allies despite his libertarian party only having a small minority of seats in Congress. This approval came amid violent and fiery protests against the bill outside the legislature.

“It is symbolic to have shown that such a minority force in both chambers can achieve the approval of such an important law,” cabinet chief Guillermo Francos said in a statement. The Senate approval boosted Argentina’s international dollar bonds on Thursday after investors breathed a sigh of relief that the sprawling bill that includes articles on privatizations to incentives for investment had not been rejected.

The government had to negotiate hard-to-win support, agree to changes to the investment incentive plans, and remove state entities such as the national airline and postal service from a list of firms to be privatized. These were just some of the challenges faced by the government in implementing Milei’s reform bill and fiscal package. Now, six months into his right-wing presidency, how is Milei’s shock therapy working for both the country’s government and economy?

Economic Shock Therapy and Its Consequences

“The changes our country needs are drastic,” Milei declared upon his election. “There is no room for gradualism.” And he certainly acted swiftly. In his initial package of measures, he devalued Argentina’s currency, the peso, by 50%, drastically reduced state subsidies for fuel, and halved the number of government ministries.

The quick reduction in public spending has helped Argentina swing from a fiscal deficit – the difference between the government’s spending and income – of 2tn pesos ($120bn) in December last year to a surplus of 264.9bn pesos in April. Argentina also reported a surplus in January, February, and March, marking the first time it had achieved this monthly target since 2012.

However, Milei, who describes himself as a libertarian, has made cutting inflation his main priority, telling the BBC last year that it was “the most regressive tax that most afflicts people.” Inflation has slowed – in April, the month-on-month rate fell to 8.8%, the first time since October that it was not in double figures. This inflation measure is closely followed in countries like Argentina, which have long had high inflation.

Yet the more globally recognized annual inflation rate hit 289.4% in April. To put that into perspective, in the UK, the annual rate is currently just 2.3%. Although official growth figures are not yet available for the period since Milei took office on 10 December, there is evidence that Argentina’s economy has contracted sharply, with consumer spending dropping off in the first three months of this year.

Meanwhile, other promises Milei made while campaigning, such as replacing the peso with the US dollar and abolishing the central bank, have been put on hold. The challenge for President Milei is that his La Libertad Avanza coalition (in English – Freedom Advances) does not hold a majority in the Argentine Congress, making it difficult to reach cross-party agreements.

Milei wants Congress to grant him the power to privatize more than two dozen state-owned companies, including the state airline, the railways, the postal service, and the national water supplier. His initial “omnibus” bill, containing the privatization plans and hundreds of other economic measures, failed to pass a second reading in February. A streamlined version, resubmitted to Congress in April, cleared the lower house but has yet to be approved by the Senate.

The president also faces strong opposition from trade unions, who have taken to the streets in protest, saying that workers’ rights will suffer from the wholesale deregulation of the economy. Juan Cruz Díaz, managing director of Argentina-based geopolitical risk consultancy Cefeidas Group, says Milei’s economic policies in office are as radical as those promised during the campaign, just somewhat delayed.

“His administration has been forced to slow down these reforms, given the political and social roadblocks it has faced,” says Díaz. He adds that specific factors causing the president to tread cautiously are “the deterioration of people’s purchasing power and the fear of increased social unrest.” This comes as there has been no let-up in the number of people living in poverty, which has risen from about a quarter of the population in 2017 to more than half now.

However, the International Monetary Fund, which has lent more money to Argentina than to any other country over the decades, gave the government high marks in May, saying that its performance was “better than expected” and that its economic program was “firmly back on track.”

As to whether President Milei can get more policies agreed by parliament, Díaz says that while some sectors of the opposition are open to dialogue with the government, left-leaning parties are completely opposed to his agenda. These include the Peronist faction controlled by ex-President Cristina Fernández de Kirchner.

“In this context, the government’s ability to negotiate and build consensus is being tested daily, a test that Milei himself often hinders with certain outbursts and unnecessary confrontational statements,” says Díaz. Many Argentines see Milei’s ebullient personality as more of a hindrance than a help.

In its latest survey, the Zuban Córdoba political consultancy firm found that 54% of respondents thought the president was paying more attention to his international political image than solving Argentina’s problems. That perception has undoubtedly been bolstered by Argentina’s current diplomatic row with Spain, which led Madrid to recall its ambassador to Buenos Aires.

Historical Context and Future Prospects

Kimberley Sperrfechter, emerging markets economist at research group Capital Economics, says President Milei’s central problem is overcoming “years and years of economic mismanagement” in Argentina. One key factor is that the government has been spending way beyond its means for decades. “And that deficit has been financed by the central bank printing money to finance the government spending.” This printing helped cause the country’s soaring inflation.

Argentina, the world’s eighth-largest country, has declined for over a century. Its downfall serves as a cautionary tale of how the wealth of a nation can be frittered away. Before World War One, it ranked as one of the world’s ten most prosperous countries. However, a subsequent slow economic contraction was substantially accelerated by the populist policies and overspending of President Juan Perón, who was in power from 1946 to 1955.

There were some short-lived free-market reforms in the 1990s under President Carlos Menem, who privatized many of the firms that Perón had nationalized and made serious attempts to restore faith in the Argentine currency. But things took a sharp turn for the worse at the end of 2001 when the country suffered a catastrophic economic meltdown and a massive $102bn debt default.

Argentina had essentially locked itself into a currency regime that gave it no flexibility by fixing the peso at par with the dollar. That, coupled with the government’s chronic overspending, exposed it to the ups and downs of the US economy and left it powerless when a run on Argentina’s banks ensued in 2001. In the two decades following that crisis, the country has been chiefly governed by left-wing protectionists, who muddled through without tackling Argentina’s deep-rooted problems.

Now, with a right-wing libertarian administration in power, the country is attempting to chart a new course – and that means getting the government’s finances on a sound footing. Consensus Economics says the administration focuses on Argentina’s vast agricultural exports of grain, soya, meat, and wine to help Milei’s government achieve this.

“Policymakers are pinning their hopes on agricultural exports bringing in badly needed foreign currency as they hope to build up the central bank’s depleted foreign exchange reserves and, in turn, boost the state’s financial credibility,” says Consensus.

Yet Sperrfechter thinks the Argentine economy is at a “tipping point” now, and Milei cannot rely on public support despite his election victory. “It’s not that people were convinced by his policies, it was more of a protest vote,” she says. “Things could not continue the way they had been.”

Also read: Argentina to Start Corn Exports to China in July 2024

Sperrfechter feels that despite the peso’s devaluation, the currency continues to be overvalued, possibly by as much as 30%. The exchange rate is still being managed instead of being fully free to rise or fall, she says, and this is holding back growth and harming competitiveness.

“With Argentina, you never really know, but I think the shine is coming off,” Sperrfechter says. “The optimism will fade, and the economy will struggle.”

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