Argentina debates dollarization

Argentina Economy

Javier Milei, the presidential candidate for the upcoming elections in Argentina, has presented a dollarization plan to fix the country’s economy if he is elected. The proposal, which has supporters and detractors, would aim to solve the historical devaluation of the Argentine peso and the year-on-year inflation of more than 100% that Argentina registered in March.

Argentine economists and the population debate dollarization as a possible solution to the problems of devaluation and inflation that the country currently suffers. The proposal, presented by Javier Milei, one of the strongest contenders in the presidential elections next October according to several surveys, includes the abandonment of the Argentine peso as a fiduciary currency, and the conversion of all deposits and reserves of central and private banks to US dollars.

According to Milei, this would be one of the most feasible solutions to the innumerable problems facing the national economy. 

“If you want to put an end to the monetary issue scam to cover the treasury and end inflation, since Argentine politicians are thieves, the only way is to close the Central Bank and, at the beginning [of my government], dollarize [the economy]”.

Although Milei has not determined the exchange rate at which his plan would convert pesos to dollars, for him the social cost would be zero, since dollarization would put an end to inflation, which is hitting Argentine citizens hard.

Cost and effects of the proposed change to dollars

Milei’s plan, which is not new, is estimated to cost the country $40 billion. The Argentine peso has lost more than 15% of its value in less than ten days against the US dollar, something that has fueled Milei’s campaign. This in a country that has traditionally used the dollar as a savings option, even more so after the so-called “corralito” was introduced, a measure that restricted the number of dollars that Argentines could withdraw from private banks back in 2001.

One of the effects of the new measure, if applied, would be the abandonment of the establishment of a national monetary policy. This is criticized by several analysts, who affirm that the measure would tie these policies to what the Federal Reserve of the United States dictates, which may or may not be beneficial for the Argentine economy.

Others, such as former Finance Minister Domingo Cavallo, believe that dollarization will be an option to “stabilize” the country in 2024 or 2025, before carrying out a series of reforms to lessen the effect of this measure on salaries, pensions and other assets.