Milei wants Argentines to dollarise the economy for him

Javier Milei seems to have abandoned his vision of a sudden, official dollarisation of Argentina’s economy. The politician, who suggested blowing up the Central Bank’s peso-printing machines during last year’s presidential campaign, no longer talks about that. Instead, he wants his countrymen to do the job for him. Dollar by dollar, peso by peso.

The current approach — dubbed “endogenous dollarisation” — entails curtailing the supply of pesos, forcing Argentines to use their dollars to pay for everyday expenses. Over time, that’s supposed to increase the amount of dollars in circulation and reduce reliance on the peso, which has lost 62 percent of its value since Milei took office.

“We aim to re-monetise the economy, both in pesos and dollars,” Economy Minister Luis Caputo said in a September 20 speech. “We want people to use their dollars because that reactivates the economy, generates more revenue and allows us to lower taxes.”

Supermarkets, manufacturers and even bars have started accepting dollar payments, while banks and financial technology firms are developing payment methods using the US currency. “Dollarisation is already underway,” says Emiliano Merenda, an executive at brokerage Win Securities. “The government is dollarising the economy without most people realising it. Every step it takes is aimed at getting dollars into the formal economy.”

Dollarisation without dollars

A key reason the government is doing what it’s doing is it doesn’t have access to dollars. Argentina has preciously few foreign reserves to spend, and its country risk stands at 1,284 basis points as measured by JPMorgan’s EMBIG Argentina Sovereign Index. That’s a far cry from other countries in the region, such as Brazil at 211 basis points, or Colombia, at 317 basis points.

Ten months into office, Milei is maintaining foreign exchange restrictions known in Spanish as the ‘cepo.’ They prohibit the purchase of foreign currencies by individuals and force exporters to sell their dollars to the central bank, which then hands them over to importers.

Milei doesn’t plan on lifting those restrictions any time soon. Instead, he is betting on a tax amnesty. The initiative, which industry insiders estimate has generated US$10 billion of inflows so far, nudges Argentines to return as much as US$100,000 per person to the formal economy by October 31 to avoid penalties.

Baby steps

Companies are already taking steps to dollarise. Diarco, a wholesale retailer, in August announced it would accept dollar payments at a rate that’s 40 percent higher than the official exchange rate. Other supermarket chains, including wholesaler Vital and Dinosaurio Group, have followed suit.

Patagonia Flooring, a manufacturer of floors and decking, said it accepts even dollars with stains or writing on it, according to a sign in one of its Buenos Aires stores.

Cabaña Don Theo, a meat-packing business in Esteban Echeverría near Buenos Aires, last month started taking dollar payments. “It’s a strategy to encourage consumption,” said Fernando Majeras, the owner of the company.

Fintech firms are also joining in. One of them, Cocos Capital, last week launched a virtual wallet that allows consumers to use dollars in their account to make purchases in pesos.

Greenbacks on the move

As a result, the amount of dollars is starting to grow. Dollar savings held in Argentine bank accounts — at US$28.8 billion — have gone up 82 percent so far this year, growing at a rate of more than US$1 billion a day, according to government data. Still, they only amount to about 31.5 percent of the total, up from 25 percent at the end of last year. Dollar loans have doubled in volume, but continue to account for just 15 percent of the total.

For economists, there’s still a long way to go. “Yes, the economy is dollarising endogenously, but very slowly,” Francisco Zalles, who specialises in this area, said in an interview.

Zalles is part of a group of economists from Ecuador, which replaced its currency with the dollar back in 2000, that pushed Milei to transition more quickly, and officially, to the dollar. “Why put the Argentine economy through this pain?”

Some economists suggest taking cues from other countries with two currencies, such as Uruguay and Peru. “These countries have competing currencies and reduced their economy’s dependence on dollars,” said Marina Dal Poggeto, executive director at consulting firm EcoGo in Buenos Aires.

Back to banks

Argentines owned a whopping US$277 billion in untaxed funds during the first quarter, roughly 10 times more than the pesos in circulation, according to official statistics.

Some of that money is moving to banks. Banks have opened around 200,000 dollar-denominated accounts in recent months, according to people with direct knowledge.

Argentina’s Central Bank in recent days permitted banks to issue debit cards in dollars, trying to steer proceeds of the tax amnesty into consumption and the economy more broadly.

(Im)possible mission?

But, strict regulation prohibits banks from lending dollars to people who don’t have income in foreign currencies. Banks are forced to keep dollar reserves, leading them to hold on to two out of every three dollars in their deposits.

Bankers plan to ask Caputo to lower those requirements to increase lending activity using the US currency, according to people familiar with the matter.

Doubts persist

Despite the recent progress, some businesses remain doubtful. At Diarco, dollar payments don’t make up large volumes yet, said Laureano García, the chain’s marketing director. “I don’t think the habit of paying in pesos will change substantially in the short term,” he said.

It will be hard to convince people to stop “using pesos and keeping dollars,” said Ariel Sbdar, the CEO of Cocos Capital. Fernando Majeras, the meat packer, agrees. “I don’t think Argentina will dollarise,” he said.