Milei’s proposal to dollarize Argentina’s economy has brought with it many controversies, within the nation and among economists globally
Argentina, a nation that historically suffered from constant economic turmoil, has begun a new pioneering journey under the leadership of Javier Milei. As he assumes office, Javier Milei is seeking a radical economic change, promising what he sees as a “shock treatment” to rescue the nation from its economic problems. Along with other proposals, one significant plan of Milei is to discard the Argentine peso entirely and replace it with the US dollar.
A Tumultuous Economy
In the early 20th century, Argentina stood among the wealthiest nations globally, surpassing economic powerhouses like Germany, France, and Spain. However, the subsequent decades witnessed a stark change, a reversal to be accurate, with economic decline and, more recently, caught in the loop of inflation.
The official inflation rate exceeded a staggering 124 percent year-over-year as of September, according to official figures. This economic uncertainty made the Argentinian people choose unconventional measures, such as hoarding essentials like food and household goods, fearing other sharp price hikes.
Milei is an admittedly libertarian leader with far-right leanings. He has entered the political arena with promises of a swift and drastic economic revival. The decision to replace the peso with the dollar is not just an economic move, but rather a fundamental change in the country’s monetary policy.
Dollarization: A Debated proposal
Milei’s proposal to dollarize Argentina’s economy has brought with it many controversies, within the nation and among economists globally. The plan involves scrapping the Argentinian peso and officially adopting the US dollar as the sole currency. But Argentina is not the first country to adopt the dollar. El Salvador, Ecuador, Zimbabwe, and Panama have previously embraced dollarization.
Dollarization offers stability by pegging a nation’s currency to the US dollar, a historically robust currency. While this can curb hyperinflation and provide economic stability, it also entails relinquishing control over an independent monetary policy. For Argentina, a move of this magnitude carries both potential benefits and risks.
Even before Milei’s proposal, the dollar was widely used in Argentina. Exchanging pesos for dollars allowed citizens to circumvent the rapid devaluation of the peso, providing a hedge against inflation. The recent devaluation of the peso, with $1 now equalling 800 pesos at the official rate, is expected to heighten the demand for US dollars.
The devaluation move by Argentina’s economy minister, Luis Caputo, seeks to narrow the gap between the official exchange rate and the black-market rate, where $1 currently equals approximately 1000 Argentinian pesos. This adjustment is anticipated to impact various facets of the economy, from everyday transactions to larger financial dealings.
Highs and Lows of Dollarization
Milei’s push for dollarization has garnered both support and opposition from economists and experts. Advocates argue that tying Argentina’s currency to the US dollar can provide stability, attract foreign investment, and foster economic growth.
However, dollarization could aggravate inflation, warn economists. They say that a shortage of foreign reserves might result in an unfavourable exchange rate. This will cause a sharp decline in real wages and place the burden on working-class citizens. The complexity of modern economies, the lessons from historical crises, and the possibility of heightening the existing crisis are raised by experts.
Challenges Ahead
Milei faces significant challenges in implementing dollarization. He lacks a majority in Argentina’s congress, raising doubts about his ability to push through such a transformative policy. The process of dollarization requires Argentine banks to hold substantial reserves of US dollars to assist in the conversion of pesos. There is widespread skepticism about Argentine banks having the necessary dollar reserves.
If the banks fall short, Argentina’s central bank would require substantial US dollars to lend them. The International Monetary Fund could potentially serve as a source, but Argentina is already the IMF’s largest debtor. They owe nearly $31.1 billion.
The global economy carefully watches the unraveling of new economic measures in Argentina. This decision could have far-reaching effects outside the geographical borders. Kristalina Georgieva, the managing director of the IMF has engaged in discussions with Milei, recognizing the decisive policy actions required to address Argentina’s economic challenges.