One of Javier Milei’s key campaign lines is back on the agenda: the dollarisation of Argentina’s economy.
The debate has been relaunched by current events: Last week, former economy minister Martín Guzmán re-appeared with statements stating that the libertarian leader’s plan is already underway; a report by JP Morgan assured that such a strategy “would fail” in Argentina, even if the greenbacks were there; Ecuador, where dollarisation may have facilitated money-laundering operations by criminal groups, has been plunged into narco-violence.
Economists consulted by Perfil have offered their take on the issue, clarifying the steps prior to dollarisation and the path being followed by the government.
According to one of JP Morgan’s main economists, dollarisation, if implemented in Argentina, would fail because there are at least two key conditions the country lacks: “A significant reserve of foreign currency and much higher savings rates.”
Even if the necessary dollars were obtained, it would not achieve the expected successes, said the influential investment bank.
The findings come from a new report. The document was revealed a few days after the reappearance of Guzmán, who assured in an interview that “dollarisation has already started.”
His argument rests on the government’s issuance of the “Bonds for the Reconstruction of a Free Argentina” (Bopreal), launched by the Central Bank for importers, which helped Argentina “go from liabilities in pesos to dollars,” said the former economy minister.
Not all economists are in agreement with this position.
“I don’t believe the government is making headway with dollarisation. At least not in its most extreme form, the physical replacement of pesos with dollars,” economist Luis Secco told Perfil.
“In the changes proposed for the Civil and Commerce Code, the use of foreign currency is encouraged, which is a first step to enable the competition of currencies – the weak form of dollarisation,” he added.
Secco stressed the length of such a project. “It’s impossible to progress in a more decisive way in any of the forms of dollarisation with restrictions or a gap,” he added.
The idea of dollarisation was ever-present during Milei’s presidential campaign, but the president seems to have cooled on the idea in the early days of his term in office. Economy Minister Luis Caputo says switching to the greenback is the “arrival point.”
“It is possible that Milei has not abandoned the objective of dollarisation, but he seems to have acknowledged that it's not possible in the short term, concluded Secco.
For economist Matías Wasserman, even though conceptually “dollarisation involves the replacement with dollars of all pesos existing in the economy in various forms (banknotes, bank accounts, interest-bearing liabilities of the Central Bank),” Argentina’s government has been taking specific steps that seem to be heading in that direction.
According to Wasserman, the most conclusive evidence in that respect are “the auctioning off of securities from the Sustainability Guarantee Fund, the statement of state-run companies subject to privatisation, the liquefactions of Central Bank liabilities and the authorisation of contracts in foreign currency.”
Fr from being ruled out, dollarisation seems to be the destination desired by the economic cabinet more than ever, stressed the economist.
According to the report by JP Morgan, Argentina does not have, at the very least, enough reserves to enable the move, and hence the conversion would be made at such a high exchange rate that it would lead to extremely low incomes for the population
“In that respect, in the short term there could only be a hyperinflation further liquefying existing pesos,” Wasserman noted.
Whatever the scenario, if ultimately implemented, the economist said that “losing the tools of a monetary and foreign exchange policy has extremely high costs in social and economic terms.”
“Proof of that may be viewed in the experience during the dollar-peso parity, with increased unemployment and foreign debt, while destitution grew and industrial capacity was lost,” he added.
For some, elements of dollarisation are already on display. Economist and journalist Enrique Szewach added that “the Argentine economy is a de facto bi-monetary economy, where the peso is the currency for everyday transactions and the dollar is the saving currency, which destroys the value of the peso generated by successive governments.”
For that reason, he said “it’s striking that former minister Guzmán would ‘accuse’ this government of wanting a de facto dollarisation, when his disastrous monetary policy was the main cause of the acceleration of just that over the last few years.”
For Szewach, “the measures of the current government are based on the diagnosis that there are too many pesos circulating," and since not many dollars can be obtained, “pesos must be liquefied.”
This process, he stated, “is taking place with devaluation, the readjustment of relative prices which accelerate the inflation rate and a very negative interest rate which encourages people to stop saving in pesos and start saving in dollars, thus pressuring the gap.”
In addition, “if the Civil and Commerce Code were to be reformed and the [tax amnesty] whitewash were voted, there would be more dollars in the financial system and the local capital market, thus creating the conditions to ‘legalise’ the bi-monetary policy.”
The issue of dollarisation is more substantive, Szewach explained. “Dollarising processes in other countries previously had a banking and/or hyperinflationary crisis which liquefied the local currency and sharply increased the value of the dollar, thus allowing for dollarisation with the reserves their central banks had.”
The economist hopes this doesn’t happen in Argentina. “Not only because of what it means to further worsen the inflationary crisis, with this poverty, these real salaries and these pensions, but also because, with a long-term outlook, dollarisation is not good with business partners whose legal tenders float against the dollar,” summarised Szewach.
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