Argentina’s presidential candidate Javier Milei has advocated adopting the US dollar as the nation’s currency. To further this agenda, Milei has initiated discussions with foreign investment funds to secure dollar loans to bolster the country’s reserves.
Milei further expressed the view that people should be able to utilize the dollars they have saved under their mattresses. He emphasized this during an event and added that bolstering dollar reserves would improve Argentina’s solvency before transitioning away from the peso.
Argentina is looking to revive the crippling economy
The discussion regarding Argentina adopting the US dollar as its primary currency has gained momentum, particularly due to the peso’s sharp depreciation, which has exacerbated hyperinflation and debt issues in the country. The dollar has appreciated by approximately 240% against the peso since the end of 2021, and annual inflation in Argentina is currently at 113%.
Milei, along with economists like Steve Hanke, a professor of applied economics at Johns Hopkins University, has been advocating for using the dollar to break free from the “death spiral” that is crippling the Argentine economy.
However, even if Milei were to secure victory and overcome public resistance to dollarization, there would be essential groundwork to cover. The central bank must accumulate sufficient dollar reserves not only to buy up all the currency in circulation but also to offer a reliable buffer to banks in the event of a potential surge in withdrawals.
According to local analysts, net foreign reserves are estimated to range from negative $6.5 billion to as low as negative $9.9 billion. That is approximately $50 billion short of what might be required for a successful dollarization transition. It’s worth noting that the Central Bank of Argentina does not disclose its net foreign reserves, only its total reserves, which encompass various illiquid assets. The country might seek to raise funds from foreign investors through bond market activities while potentially adjusting the official exchange rate to bridge this gap. Even with these measures, a widespread bank run could potentially unravel the shift to the dollar.
Some experts, like Robin Brooks, the chief economist at the Institute of International Finance, have voiced opposition to the idea of dollarization. Milei also mentioned that he would seek additional dollars from the International Monetary Fund, considering the country’s substantial debt burden.
Notably, one major drawback of dollarization is the relinquishment of an independent monetary policy. Nations that adopt the US dollar cannot manipulate interest rates to regulate the money supply in response to changing economic circumstances. This responsibility essentially falls under the purview of the US Federal Reserve, which sets rates based on the requirements of the US economy. At times, this may lead to misaligned priorities.
Argentina’s Buenos Aires City inflation rises
The steep price hikes and the peso’s devaluation have led to monthly inflation entering the double digits in Buenos Aires. Housing, water, electricity, gas, and other fuels saw the most significant rise, contributing significantly to the overall increase. Food and non-alcoholic beverages also experienced notable increases, particularly in categories like meat, bread, cereals, and vegetables.
The report also highlights the challenges faced by the restaurant and hotel industry, with a notable price increase of 8.3% in prepared food. However, the decline in hotel accommodation rates for tourists provided some relief. These figures underscore the pressing need for effective economic measures and policies to stabilize the situation and curb inflation.
The sharp increases in healthcare and transport costs highlight the broad impact of inflation on essential services and daily life in Buenos Aires. The peso’s devaluation following the August 13 PASO primaries has further exacerbated the situation.
The warning from Focus Economics about Argentina potentially facing the highest inflation rate in the world next year is deeply concerning. If inflation reaches the projected 130 percent in 2024, it will pose severe challenges to the country’s economy and the well-being of its citizens. This projection surpasses even that of Venezuela, a country already grappling with hyperinflation.
Meanwhile, Argentina’s general economy is projected to contract by over 2% in 2023. In contrast, the Fed is pursuing a tight monetary policy to combat inflation. Additionally, dollarization does not enforce fiscal discipline on government leaders; it simply removes the option of avoiding default by printing more money. Due to these factors, many economists argue that if a country can muster the discipline needed to avoid default, it would be better off retaining its currency and a flexible exchange rate and pursuing a credible policy of inflation-targeting through the central bank.
