Preceding his landslide victory in this November’s Argentinian presidential elections, Javier Milei promised drastic reforms, with his symbolic cutting of state spending being primary to his campaign. Dollarizing the economy was a central pledge, which the self-styled archo-capitalist presented as a cure for Argentinian hyperinflation. As Latin America’s third largest economy, the Argentine monetary crisis is felt by a severe devaluation of its peso currency caused by high inflation and a continuous loss in purchasing power. Most of the country’s debt, more specifically a third of its external debt, comes from around $40 billion owed to the IMF.
Argentinian inflation is out of control today, falling above 140%, the worst since the end of the hyperinflationary period in 1991. It has increased 54% since the outgoing president, Alberto Fernandez, came into office in 2019. Fernandez’s policies failed to provide an economic plan that would do more than temporarily address the crisis, relying on steps to limit economic pain or temporarily freezing prices. In an interview with the 2020 Financial Times, he was quoted saying that he “[doesn’t] believe in economic plans.” A former undersecretary of finance at the Economy Ministry, Miguel Kiguel, qualified the economy as in intensive care, with its main challenge being stagnation. Since the 2019 market crash, Argentina’s peso currency value has been persistently plummeting, with its exchange rate ratios continuously growing. Public debt represents 90% of the nation’s GDP, with fiscal deficit representing the remaining 10%, and almost half the population lives in poverty. Therefore, the Argentinian consensus to elect Milei is more complex than simply excusing his legitimacy through his inflammatory rhetoric – what many compare to Donald Trump’s campaign. Rather, its mass welcoming, including by the financial market, can be interpreted as an act of desperation by the populace. However, Milei boasts dangerous hypocrisy: although he defines himself as an anarcho-capitalist, he seeks to cut down on most social structures and spending – except for the military – indicating his right-wing rhetoric and insidious manipulation of his image to seize and advance a far-right agenda.
In terms of his financial ambitions, making the U.S. dollar the national currency is not an unpopular reaction to reduce inflation. Other countries have taken similar steps, such as El Salvador and Ecuador, although none paralleling the size of Argentina. By dollarizing, the country would give up the peso and have the U.S. dollar as its sole currency, resultantly handing over control of monetary policy to the U.S. Federal Reserve. Thereby, the nation would be forming a client-state relationship with the superpower.
Atlhough Milei has won the presidency, there is still much convincing to be done and obstacles to tackle before dollarization can take place. First, his Libertad Avanza party is barely the third largest political force in Congress – meaning that negotiations will certainly face a strong pushback from the Peronist coalition he defeated. If he seeks to get rid of the Central Bank and make the USD legal, Milei would have to change the Constitution and acquire approval from the Congress; a mission which seems either impossible or too long to fulfill given his two-year promise to complete this task. This has made many economists and politicians alike further skeptical that such a decision will be undertaken completely.
Additionally, this change would weaken the nation’s ability to manage domestic monetary policy. The interest rate policies would be left in the hands of the U.S. federal reserve, making Argentina’s economy more vulnerable to external shocks that involve the U.S. dollar. These shocks could range anywhere from sudden rises in prices for oil to shocks in availability of vital imports, which would make internal adjustments more painful and complicated.
Given Argentina’s current state of struggle, this policy may exacerbate an already weak economy, with no lender of last resort present without the Central Bank. Because the IMF has already lent over $43 billion through repeated bailouts to the country, much more than it has given to anyone else, this privilege is no longer available to the nation. Although these IMF programs have mostly rolled over debt and not implemented any reform, handing out more credit to Argentina would tarnish the Fund’s reputation further – and raise questions about why it would be aiding a middle-income country to this extent.
To execute this policy, Argentina would also need to have physical U.S. dollars in hand to replace its pesos; further hurting the already indebted nation, considering the bank’s lack of USD and its fragmented borrowing ability. Dollarizing would mean depriving Argentina’s central bank from being able to print money – a tactic that has often been used by governments to avoid defaulting on its debts. Still, this would not restrain Argentina’s excessive spending: policy still allows politicians to borrow too much, and the lack of Central Bank would mean that they would not be able to use inflation to keep the debt away. The conversion is ultimately very unfavourable to the peso, plausibly weakening the currency and subsequently increasing poverty. To put the extent of the crisis into perspective: in 2018, the rate was at 37.7 ARS per USD and in 2022 falls at 177.1 ARS per USD.
As aforementioned, Milei promised that this shock adjustment stabilization would take up to two years to properly bring down inflation. However, to dollarize at the given conversion rate Argentina would need a minimal amount of international reserves; as it stands today, the foreign exchange reserves are between $4.5 billion and $7 billion in debt. A path towards dollarization could benefit the economy as it would oblige the Argentinian government to stabilize its economy by killing hyperinflation and rebuilding foreign exchange reserves. Although analysts agree that dollarization would tame inflation, most doubt that Milei’s agenda can be realized given his divisive political and popular support. His tactic is also not seen as a long-term solution for Argentina’s financial troubles, rather they embody a quick fix.
Other than economically speaking, the country faces many troubles such as endemic corruption and low-levels of public trust. The divisiveness inside the country, known as la grieta, means that policies are constantly reversed by new administrations and that even Milei’s goals and the economic crisis itself have no clear future path.
Edited by Hanna Schmoelz
Azélie Lemoine is a 4th year McGill University student, pursuing a B.A. in International Development Studies and Political Science. As an editor for Catalyst, she is particularly interested in international human rights, diplomacy and immigration policies.