Dollar instead of peso: Milei’s controversial plan for Argentina
Argentina’s future president wants to turn things around in South America’s second-largest economy. An important instrument: dollarization. Can a new currency solve the country’s problems?
The newly elected Argentine President Javier Milei wants to prescribe a radical cure for the crisis-stricken country. In addition to a massive cut in social spending and the abolition of the central bank, the introduction of the US dollar is a legal requirement Means of payment are the cornerstones of his economic policy program.
“We will dollarize the economy. We will close the central bank. We will defeat the cancer of inflation,” the ultra-liberal populist promised in a TV debate before the election.
What are the advantages and disadvantages of introducing the dollar?
Argentina currently suffers from an inflation rate of over 140 percent. In order to finance the budget deficit despite the devaluation of the currency, the government is constantly printing new money, which further fuels inflation. This would no longer be possible with the dollar as the official means of payment, argues Milei. According to supporters, dollarization would give Argentinians a currency with stable value. However, the country would then no longer be able to respond to external shocks through monetary policy and, for example, could devalue the peso as the national currency in order to gain competitive advantages on the global market.
What would a dollar introduction look like in Argentina?
In order to make the US dollar legal tender in Argentina, Congress would have to pass a law. However, Milei’s party La Libertad Avanza (Freedom Advances) does not have its own majority in either chamber. For his project, the future president would have to get representatives from other parties on board. In addition, experts estimate that Argentina would need around $35 billion for currency reform to replace the circulating pesos. However, the central bank currently only has small foreign exchange reserves and is largely cut off from the regular financial market due to high levels of debt and the dire economic situation.
What role does the dollar currently play in Argentina?
The dollar already plays an important role in the lives of many Argentines. Because inflation would quickly erode peso savings, many Argentines invest any excess pesos in dollars. No other country in the world outside the USA has as many dollar bills in circulation as Argentina. It is estimated that Argentinians have $200 billion in cash. That’s 10 percent of all dollar bills in circulation worldwide – and 20 percent of all dollars outside the United States.
What do experts say about Milei’s dollarization plans?
The introduction of the dollar in Argentina is controversial among experts. “Dollarization is desirable and feasible,” said US economist Steve Hanke of Johns Hopkins University at a recent conference in Buenos Aires. Claudio Caprarulo from the consulting firm Analytica, however, warns of high social costs. “Dollarization is exacerbating the problems instead of solving them,” he recently wrote on the news platform X, formerly Twitter. He warned of falling wages, rising unemployment and less room for maneuver in monetary policy.
How did the dollar introduction work in other countries?
There are already a number of examples of dollarization in the region. In the midst of a severe economic and financial crisis with high inflation and a sharp devaluation of the national currency Sucre, the Ecuadorian government introduced the US dollar as official currency in 2000. In fact, the Ecuadorian economy recovered in the following years. According to experts, however, this was not only due to the adoption of the dollar, but also to increasing income from oil exports and higher remittances from emigrated Ecuadorians back home.
A year later, the Central American country of El Salvador also adopted the US dollar as its official means of payment – although, in contrast to Ecuador, it was in a fairly stable economic situation. After dollarization, interest rates fell, leading to savings in the public and private sectors. However, the previous national currency, Colón, had already been pegged to the dollar via a fixed exchange rate for several years.