Prof. Dr. Mehmet Karaçuka

Argentina has long been characterized by economic fluctuations, high inflation, and chronic budget deficits, painting an unstable picture. Once one of the richest economies at the beginning of the 20th century, the country has since experienced a significant decline due to political uncertainties and misguided economic policies. Today, Argentina is often compared to Turkey, with both countries facing similar challenges regarding inflation, currency fluctuations, and the need for economic reform.

The 2023 elections marked a turning point for Argentina. The country, long governed by Peronist governments, elected Javier Milei, who promised radical reforms. Identifying himself as an “anarcho-capitalist,” Milei advocates for a free-market economy and aims to minimize the state’s role in the economy. Upon taking office, he began implementing bold economic reforms, the effects of which were soon evident.

One of his primary goals was to control the high inflation that Argentina has been battling for years. In 2023, annual inflation reached extreme levels at 289%, with monthly inflation hitting 25.5%. However, thanks to Milei’s tight fiscal policies, monthly inflation dropped to 2.5%. Although annual inflation remains high, its downward trend compared to previous years is a positive development.

Milei also implemented strict austerity measures to close the budget deficit, significantly reducing government spending. The number of public sector employees was drastically cut, subsidies were eliminated, and a disciplined fiscal management approach was adopted. As a result, Argentina managed to achieve a budget surplus in the first eight months of 2024, a significant achievement for a country known for chronic budget deficits.

Moreover, despite cuts in public spending, Argentina’s economy grew by 3.9% in the third quarter of 2024, with expectations of about 5% growth for 2025. International financial institutions like the IMF had not predicted this growth, making these results a market surprise. With economic improvement, Argentina’s government bonds also rose, with the risk premium over U.S. Treasury bonds dropping by 4.4% to 677 basis points, down from 2,000 when Milei took office.

While these reforms are significant, one of Milei’s major goals is to completely eliminate currency controls by 2026. Argentina has been under capital controls for nine out of the last thirteen years, which has been a significant barrier for both local and foreign investors. These controls aim to prevent excessive devaluation of the peso and capital flight by imposing various restrictions on dollar purchases, particularly on companies transferring profits abroad. However, these controls also hinder financial system development and attract foreign investment.

Milei is negotiating with the IMF to remove these controls. Throughout 2024, the government limited the peso’s depreciation to 2% per month, which was recently reduced to 1%. This led to a real appreciation of the peso by over 40%. Both the IMF and Milei agree on the necessity of a controlled transition, with reforms being prepared for this purpose. A gradual approach is targeted due to the significant risks involved in suddenly lifting these controls, which might lead to a rapid devaluation of the peso and erase gains in controlling inflation, especially given the limited foreign exchange reserves of the Central Bank.

The mid-term elections in October 2025 are seen as a critical juncture for Milei’s economic plans. Still in the minority in Congress, Milei needs to gain more support to continue his reforms. Therefore, before the elections, focusing on maintaining economic stability rather than pursuing more radical reforms is understandable. The steps taken regarding capital and currency controls post-election will be a test of the sincerity of Milei’s economic policies. If the reform process is not managed well, Argentina could face another crisis; however, with the right strategy, a new era of economic stability could begin for the country.