Why Argentina Needs to Ditch Its Peso and Pursue Dollarization "Ya Mismo"

Argentina's economic state has been in disarray for quite some time. In 2003, the Argentinian peso (ARS) was valued at about 3 pesos to the U.S. dollar (USD). The peso has undergone such devaluation that it the ratio is 361 ARS:1 USD. In other words, the Argentinian peso is worth about 99 percent less now than it was two decades ago. It is expected to devalue another 70 percent in the next year. Last month, Reuters reported that inflation in Argentina has hit 143 percent. It has gotten to the point where about 40 percent of Argentinians live in poverty. And here I thought that the inflation in the United States hit my wallet! I can only imagine what Argentinians have endured in the past couple of decades. 

This economic pain would help explain why Argentina elected its first libertarian president. In November 2023, 55.7 percent of Argentinians voted in Javier Milei into office. This is the highest percent of votes that an Argentinian presidential candidate has received since Argentina has been a democracy. The Argentinian people have had enough with failed Peronism and are open to a change to improve their economic situation. One of Milei's most notable policy reforms is dollarization, which is the adaptation of the dollar as the country's currency. Below, I will address some of the common arguments used by critics of dollarization. 

Dollarization means giving up seignorage. If Argentina adopts the dollar, that would mean the Argentinean central bank (el Banco Central de la Républica de Argentina, or BCRA) giving its ability to generate profit from creating money, i.e., seignorage. Shortly after coming back from my vacation to Ecuador in 2021, I addressed this point while analyzing the Ecuadorean case study on dollarization. In spite of relinquishing seignorage along with lender of last resort status and being more able to handle external shocks, dollarization ended up being an improvement over Ecuador's hyperinflation in the late 1990s. 

Plus, if Argentina were to relinquish its seignorage, it would mean losing an estimated 0.6 to 0.8 percent of GDP, according to Argentinean economist Emilio Ocampo. Yes, it means the BCRA would lose some revenue. However, for a country with a 2022 GDP of $632.77B, a price of $3.8-$5.1B is a small price to pay for greater economic stability and avoiding hyperinflation. 

Argentina would not be able to handle external shocks without seignorage. First and foremost, Argentina is already at a grave disadvantage with the hyperinflation and devaluation of the peso that has increased poverty in Argentina. Giving up seignorage seems like a reasonable tradeoff. Second, the three Latin American countries that have formally dollarized (Ecuador, El Salvador, and Panama) entered the 2008 financial crisis and the COVID pandemic with lower interest rates than their Latin American counterparts. Plus, the dollarized countries have been able to maintain lower rates of unemployment. 

Even if there were something quite exigent, these countries could still approach the International Monetary Fund (IMF). This argument also ignores the Panamanian case study. Panama integrated its banks into the global markets after a series of liberalization measures. As a result, its changes in the money supply are based on an interplay of local factors and the global credit markets, and not at the whims of the U.S. Federal Reserve. 

Where will the dollars come from? This is one of the main questions that dollarization critics ask. The criticism here is that there are not enough available dollars in Argentina to make the transition to dollarization. As of October, the BCRA had a currency-reserve deficit of $7.5 billion. There is concern if the BCRA cannot cover the difference because it could mean further devaluation of the peso and subsequent economic downturn. However, there are reasons to not be concerned:

1. If Milei shows a sincere commitment to dollarization, creditors will be inclined to lend the difference.  
2. As the Ecuadorean and El Salvadoran case studies show, Argentina would not need to have the difference covered overnight. As a matter of fact, Ecuador and El Salvador were able to dollarize in a way that not only avoided bank runs, but resulted in an increase of bank deposits in dollars. 
3. The Argentinean economy is already dollarized in an informal sense. As of the end of 2022, Argentineans held $246 billion of U.S. dollars in foreign bank accounts, safe deposit boxes, and undeclared cash. This is greater than the $50 billion in Argentinean pesos that exists in the Argentinean M3 money supply. As such, the fiscal cost of dollarization would be low. 
4. There is the matter of the liquidity note (LELIQ, or letras de liquidez) time bomb. In its current state, it would be an obstacle. However, swapping the BCRA's assets for bonds in a foreign jurisdiction would diffuse the bomb. 

Dollarization is not a silver bullet. This seems like a red herring because proponents of dollarization are not making that claim. After examining the Ecuadorean case study in 2021, I realized that dollarization was not going to solve Ecuador's woes. Dollarization does not fix intractable budget deficits. Rather, dollarization was a necessary first step to improve economic conditions. For Ecuador, Argentina, or any country considering dollarization, they would need to realize that dollarization needs to come with other fiscal and macroeconomic reforms.  

The reality of the matter is that the burden falls on the critics of dollarization to prove that the BCRA can stabilize the economy without giving legal tender to hard currency. The critics of dollarization cannot provide a solid alternative to dollarization. As Argentina's history shows, exchange rate pegs or currency boards have not fared well for Argentina. Decades of BCRA negligence and intransigence show that the Argentinean central bank lacks the discipline to do so, which makes dollarization a more attractive monetary regime. In effect, the Argentinean economy already does not have a lender of last resort on the national level. Even if you are to invoke the IMF as a lender of last resort, guess which currency the IMF uses in its lending? U.S. dollars. 

Dollarization is not going to motivate Argentinean politicians to embrace fiscal prudence or austerity. At least with dollarization, having monetary policy and fiscal policy as two separate forms of policy can minimize the damage that Argentinean fiscal policy can wreak on the Argentinean people. It means that the BCRA cannot print pesos to spend more money than it receives in taxes. To finance deficit, it would have to borrow instead of printing. Dollarization would tame inflation and price volatility. It would mean that the citizens of Argentina would not have monetary policy grind them into poverty. Ultimately, it is hope for economic prosperity in Argentina.