In the landscape of emerging economies, where nations strive to diminish their dependency on the US dollar, Argentina stands as a potential anomaly. The front-runner for the country’s presidential elections has mooted an unconventional idea: replace the Argentine peso entirely with the US dollar.
Economist and libertarian congressman, Javier Milei, is hoping to secure the presidency with this audacious proposal. His argument? Adopting the greenback could be the panacea for Argentina’s soaring inflation, which reached a whopping 109% in May.
With a vivid metaphor, Milei asserts that the “peso melts like ice in the Sahara Desert,” capturing the currency’s rapid depreciation. The peso has plunged, losing half its value against the dollar over the past year, leading to pricier imports. Meanwhile, the country grapples with a staggering benchmark interest rate of 97%.
This drastic switch to the dollar would mark a stark departure from Argentina’s current efforts and global trends towards de-dollarization. Until recently, the nation was shifting to use other currencies for international trade and reserves, like purchasing the bulk of its Chinese imports in yuan and exploring a joint currency with Brazil.
Yet, in an intriguing twist, it seems Argentine consumers have preempted this move. They have already been using US dollars in everyday transactions and as a form of savings. As Emilio Ocampo, a former Wall Street investment banker who originated the dollarization concept Milei is proposing, explained, Argentina is already “de facto dollarized.”
Argentina has grappled with hyperinflation, debt crises, and currency issues for years, with repeated attempts to control inflation falling short. The country even temporarily replaced the peso with the austral in the mid-1980s and pegged the peso to the US dollar in the 1990s. Nonetheless, excessive government spending led to chronic fiscal deficits.
Other nations like Ecuador have already swapped their national currency for the dollar, particularly following economic crises. However, if Argentina follows this path, it would become the largest economy to do so.
This daring proposal, however, faces significant opposition. Recent polls indicate that around 60% of Argentines resist adopting the dollar, and critics worry it would grant excessive monetary power to the US Federal Reserve. Concerns also linger about a potential impact on Argentina’s balance of payments if imports surge and exports plunge.
Despite Milei’s ambitions, even if he triumphs in the election, it remains uncertain whether his coalition could secure enough seats to bring his dollarization plan to fruition.
Yet, Ocampo remains convinced that Argentina may be left with no choice but to dollarize. As he sees it, this could be the only viable path to stabilize prices. For investors and entrepreneurs keeping an eye on Argentina, this potential economic sea change is sure to pique their interest. Whether it offers a solution or merely presents new challenges, only time will tell.