The Argentine president, Javier Milei, has once again put on the table the possibility of dollarizing his country's economy.
The issuance of its national currency would be stopped and US dollars would be adopted, in a process that is already a reality in Panama, Ecuador and El Salvador.
The economies of these countries could represent an example of the situation facing the southern country.
Milei warned this week that fulfilling his star campaign promise will take “some time.”
Still, the conditions for this to happen have continued to advance.
First, there came a devaluation of the peso of more than 50%.
Recently, in reaction to year-on-year inflation of 254.2%, bank deposits in pesos have decreased, lowering the value of the peso versus the dollar.
The cheaper the national currency, the easier a transition to the dollar would be.
This has some worried who expect a second devaluation.
“Dollarization, in its many variants, is crucial to understanding the Latin American macroeconomy, as well as that of many developing countries,” wrote economist and professor at the Torcuato di Tella University Eduardo Levy Yeyati in a study published in 2021. “Although “continues to be an option for some extremely small and open economies, official dollarization has strong contraindications, among them its permanent nature, as illustrated by the case of El Salvador, as well as the always latent debate on de-dollarization in Ecuador,” it reads. the text entitled
Financial dollarization and de-dollarization in the new millennium
.
Panama adopted this currency in 1904. It coincided with the announcement of the construction of the Panama Canal, which allowed ships to cross halfway across the continent and brought the country closer to the US economy.
Ecuador adopted it almost a century later, in 2000, in the face of the economic crisis that triggered its inflation to 95.5%.
A year later, El Salvador made the same decision to contain the risk of devaluation.
In the case of Argentina, data from the International Monetary Fund indicate that the average price index is 2,788, while dollarized countries have an index that does not reach 130.
However, when it comes to Gross Domestic Product (GDP) per capita, a broad measure of the income of its inhabitants, Panama and Argentina remain at the top of the four countries.
Currency exchange in Argentina faces different obstacles.
“Convertibility into another currency is generally only viable in places with some combination of the following,” explained JPMorgan strategist Michael Cembalest in a report published in January, “(a) high levels of productivity, flexibility and business dynamism to allow the economy absorbs internal and external shocks;
(b) lenders such as the European Central Bank and the European Commission;
and/or (c) significant commodity-related foreign exchange reserves to defend the monetary peg when necessary.
Argentina does not have any of these attributes.”
Furthermore, the wide population difference that exists between the four countries stands out, since the countries that have dollarized did not exceed 13 million inhabitants, while Argentina currently has more than 46 million.
Among these populations, unemployment is recorded in the following ways:
Regarding the debt that countries currently have, Argentina is not one of those that has the worst GDP-external debt ratio on the continent, a podium led by the United States and Canada.
“Dollarization would give way to de-dollarization in a fairly short period,” stated Cembalest.
“It will fail if implemented... Argentina would need significant foreign exchange reserves and much higher savings rates to even try.
But even if these objectives were met, dollarization would fail once implemented,” the specialist added.
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