On November 19, Argentina’s citizens elected libertarian Javier Milei their new president. He won with a platform to significantly slash the size of government and to abolish the peso in Argentina to use the US dollar for day-to-day commerce instead. This policy is called ‘dollarization’. With all factors involved the question arises, will Argentina Dollarize or will it just be another forgotten campaign promise?
Some countries that have experienced hyperinflation have chosen to dollarize to stabilize their economy while they make the structural changes to allow them to regain control of their own currency. This is very controversial and might even be against Argentina’s constitution. Eliminating your own currency and depending on the decisions of another country’s government for much of your fiscal policy seems pretty extreme, which is why it is only considered when a country is in serious trouble.
Argentina has experienced 140% inflation this year and the peso has lost 90% of its value in the last 4 years. The inflation is not as bad as Venezuela or Zimbabwe experienced during their bout of hyperinflation, but it seems unsustainable for workers or investors to be happy when their money drops in value week to week. It also leads to a thriving black market. Today it is well understood that international visitors will bring dollars and exchange them for pesos at the ‘unofficial’ exchange rate (about 2x the bank rate) and then pay for their hotel in pesos -billed at the ‘official’ rate.
Countries such as Zimbabwe, Ecuador, Panama and El Salvador have experimented with some sort of dollarization. For Argentinians, dollarization will be painful as the exchange rate would likely be near the unofficial rate (so even less valuable). But if this draconian measure is accepted, Argentina might be able to borrow money from international banks like the IMF or World Bank and begin attracting investment. Argentina has great people, and a wealth of natural resources within its borders. If it can get through this tough period and regain its economic strength, we could see a new version of Argentinian peso in a few years. If they can’t or don’t dollarize, we might see Argentinian peso in denominations that contain many, many zeros.