Javier Milei’s central idea, which has made him the apparent favorite to be elected president of Argentina, is to dollarize the country’s economy. That requires a plan to dissolve the central bank, eliminate the peso and adopt the US dollar. as legal tender, in order to apparently suppress the uncontrolled inflation that has kept the Argentine economy prisoner for years.
A previous attempt along the same route failed 24 years ago when President Menem’s dollarization plan did not advance due to an economic crisis.
Independent analysts, economists and opposition figures consulted by Americas Quarterly expressed doubts, noting that The central bank has virtually no dollars in its coffers today. A past attempt along the same path failed 24 years ago when President Carlos Menem’s dollarization plan did not advance due to an economic crisis and a run on the peso that caused the collapse of a fixed exchange rate regime.
The current reality makes the matter more complex. Argentina already has problems paying a loan of USD $57 billion to the International Monetary Fund (IMF) agreed in 2018 and renegotiated in 2022. This makes a new aid package to support dollarization very unlikely. And ultimately, they warn that dollarization alone will not resolve the fundamental fiscal imbalances that have led the country to declare itself in default on nine occasions, including three in the last two decades.
“I think (dollarization) is not feasible in the short term,” Alejandro Werner, former director of the IMF’s Western Hemisphere Department, told Americas Quarterly. “Argentina does not have the dollars necessary to dollarize its economy and does not have access to the financial market to obtain dollars. The only thing this would do is inject more Argentine securities into the hands of the international private sector, directly or indirectly, which would further decrease their value.”
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Milei and his top advisors firmly insist otherwise. Emilio Ocampo, the economist in charge of the dollarization plan, maintains that neither reserves in the central bank nor an international loan of billions would be needed to promote the new system. In a radio interview in mid-August he said that Argentines have more than USD $200 billion in savings and other deposits abroad and elsewhere. “When that money enters circulation to pay taxes, the Treasury will automatically have currency available to move forward with the process,” Ocampo said.
According to Ocampo’s calculations, exchanging all pesos in circulation and money in banks at the current exchange rate would require around USD $60 billion, and some time to implement. As an expert on the markets thanks to a 20-year career on Wall Street, Ocampo highlights two stages for this process: In the first, only USD $30 billion would be exchanged in the hands of the public. The other half, currently invested in Leliqs, the central bank’s short-term bonds, would move on to a second stage, which would take about four years.
“We estimate that in 16 months, all pesos will be exchanged for dollars. Yes“It will be a gradual process, as happened in Ecuador, which took nine months”, he added. Bank deposits and loans would also be converted to foreign currency at the same time.
Last week, Milei said that The conversion of pesos to dollars will be done at the exchange rate determined by the market. The prediction generated wide doubts. Sergio Massa, Minister of Economy and presidential candidate for Unión por la Patria, said the next day that dollarization would imply a 100% devaluation of the peso.
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Speaking on a television program, Massa warned that Milei’s dollarization plan would mean that “public universities would no longer be free; Train tickets would cost 1,100 pesos and the bus ticket would be 650 pesos.”. These prices are significantly higher than what Argentines currently pay. According to the Buenos Aires Herald, the minimum fare in Argentina is 25 pesos for trains and 52 pesos for buses in the Buenos Aires metropolitan area.
Marina Dal Poggetto, director of Eco Go Consultores based in Buenos Aires, recognizes that dollarization could help stabilize the economy due to its rigid nature. But during a global crisis, dollarization could make it exceptionally difficult to absorb the blows. “The rigid anchor does not allow you to adapt to flexible currencies when sudden stops occur and there are changes in monetary policies in the United States, for example. “Argentina suffered during the Brazilian crisis in 1999,” Dal Poggetto told Americas Quarterly. He worries that the initial costs of dollarization will lead to massive borrowing to exchange the stock of central bank bonds held by the country’s commercial banks.
The inflation dilemma
Experts agree that Milei’s dollarization proposal has gained ground in Argentina due to the overwhelming demand for macroeconomic stability after more than a decade of double-digit inflation and self-inflicted wounds from economic policies.
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Argentina’s annual inflation fell to 113.4% in July from 115% in June. That was the highest level since 1991. According to some projections, the exchange rate is scheduled to fall another 70% in the coming months. Argentina’s presidential elections will be held on October 22 and it is very possible that there will be a second round, which would be on November 19.
Even if dollarize the USD $632 billion economy (GDP 2022) could quickly help reduce your inflation, it is a very expensive process, said Martín Castellano, head of research for Latin America at the International Institute of Finance in Washington.
A dollarized economy will lack the flexibility to adapt to shocks, especially in a more interconnected global economy. which features ample floating exchange rates under inflation control regimes. Furthermore, the asymmetry with the United States economic cycle could lead to a procyclical policy, according to Castellano. In contrast, the macroeconomic and policy imbalances it creates remain, given that there is the option of avoiding fiscal discipline by exhausting all possible sources of financing, including the sale of assets and pension funds.
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“The argument that the regime would force policymakers to make the economy more flexible through labor market and other reforms while becoming fiscally austere simply has not been corroborated”, argues Castellano. He added that dollarization has made countries vulnerable to external shocks and puts them on a path of low growth amid sustained overvaluation of the real exchange rate.
Defying expectations, Milei believes the process will not be complicated. “Because inflation, everywhere and always, It is a monetary phenomenon generated by an excessive amount of money in circulation. We want to dollarize with the basic scheme, and we can do it. And it’s easy? Super easy,” he told Spain’s El País in July.
Regional inspiration
Argentina’s inflation rate averaged 189.99% from 1944 to this year, reaching an all-time high of 20,262% in March 1990.
Argentina finds inspiration in Ecuador, Panama and El Salvador, three nations that have adopted dollarization with mixed results and that left behind a past of high inflation for a more stable monetary system. These countries have had the lowest levels of inflation in the region over the last 20 years. In contrast, according to data compiled by Trading Economics, Argentina’s inflation rate averaged 189.99% from 1944 to this year, reaching an all-time high of 20,262% in March 1990.
Alejandro Werner points out that Argentina’s instability comes from fiscal imbalances and that dollarization will not solve those problems. “In Argentina it is a fallacy. Ecuador is dollarized and has very serious fiscal problems, which is why it does not have access to financial markets and Ecuador’s bonds are traded in a similar way to those of Argentina, as an economy in crisis. Therefore, to think that by putting on this corset society understands that you must do the rest, I think it is a fallacy,” he argues. “From an economic point of view, in terms of Argentina’s size, diversification and sophistication, dollarization is clearly not an optimal exchange rate regime,” Werner added.
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Echoing similar skepticism, Mark Sobel, US president of the Official Monetary and Financial Forum (OMFIF), wrote in an August article on the Forum that unconventional policy “is not the answer” for Argentina. Dollarizing the economy is “a potentially dangerous and dead-end strategy. “It could sow the seeds of a major contraction and collapse while diverting attention from the hard work of fixing the economy,” he said on behalf of the think tank based in London focused on global policies and investments.
Regardless of who occupies the presidential Casa Rosada next, there is no doubt which is the most pressing problem to solve. “We don’t know if it is convertibility, if it is dollarization, if it is the adoption of another currency,” said Gonzalo Tanoira, president of San Miguel, a fruit and vegetable company, in a recent WhatsApp conversation in which they discussed the ideas by Milei. “There are many alternatives; “The problem is being able to seriously debate which is the most viable,” he added.
LEANDRO GABIN
AMERICAS QUARTERLY
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