In a shocking move, Argentina’s newly elected President Javier Milei announced yesterday that he plans to replace the peso with the US Dollar and shut down the central bank. This is part of his radical agenda to end inflation, restore fiscal discipline and attract foreign investment.
The risk of dollarization is a phenomenon that occurs when a country’s currency loses its value and people start to use a foreign currency, usually the US dollar, as a medium of exchange, store of value and unit of account. This can have serious consequences for the country’s economic stability, monetary policy and financial sovereignty.
Milei, a libertarian economist and outspoken critic of the previous government, won the presidential election last month with 52% of the vote, defeating the incumbent Alberto Fernández. He campaigned on a platform of free markets, low taxes, minimal regulation and sound money. He also promised to dismantle the welfare state, privatize state-owned enterprises and renegotiate the country’s debt with the International Monetary Fund.
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In his first speech as president, Milei said that the peso has lost more than 90% of its value in the last decade, making it one of the most unstable and worthless currencies in the world. He blamed the central bank for printing money recklessly and fueling inflation, which reached 50% last year. He argued that adopting the US Dollar as the official currency would eliminate inflation, stabilize prices and restore confidence in the economy.
He also said that he would shut down the central bank, which he called “a parasitic institution that only serves to finance the political class and their cronies”. He said that he would transfer its functions to the Treasury and create a currency board that would ensure a fixed exchange rate between the Dollar and the peso. He claimed that this would make monetary policy transparent and accountable and prevent any future manipulation of the currency.
Milei’s announcement was met with mixed reactions from different sectors of society. Some praised him for taking bold and decisive action to solve the country’s chronic economic problems. Others criticized him for imposing a radical and risky experiment that could have unforeseen consequences. Some expressed concern about the loss of monetary sovereignty and the dependence on a foreign power. Others questioned the legality and feasibility of his plan, which would require constitutional amendments and congressional approval.
Dollarization can happen for various reasons, such as high inflation, currency depreciation, political instability, lack of confidence in the domestic currency, or trade integration with countries that use the dollar. Some countries may choose to adopt the dollar officially, such as Ecuador, El Salvador and Panama, while others may experience partial or unofficial dollarization, such as Argentina, Bolivia and Zimbabwe.
The main advantages of dollarization are that it can reduce inflation, lower transaction costs, increase trade and investment, and enhance credibility and discipline. However, these benefits come at a high price. The main disadvantages of dollarization are that it eliminates the exchange rate flexibility, limits the monetary policy autonomy, reduces the seigniorage revenue, exposes the country to external shocks, and undermines the national identity and sovereignty.
Therefore, dollarization is not a simple or easy solution for countries facing economic challenges. It involves complex trade-offs and risks that need to be carefully assessed and managed. Countries that opt for dollarization should also implement structural reforms to improve their fiscal policy, financial system, institutional quality and competitiveness. Countries that want to avoid or reverse dollarization should pursue sound macroeconomic policies to restore confidence in their currency and strengthen their resilience to shocks.
Milei said that he was aware of the challenges and risks involved in his plan, but that he was confident that it would succeed. He said that he had studied the examples of other countries that had dollarized their economies, such as Ecuador, Panama and El Salvador, and that he had learned from their mistakes and successes. He said that he would implement his plan gradually and carefully, with the help of international experts and institutions. He also said that he would consult with the public and seek consensus with other political forces.
Milei’s plan is expected to face strong opposition from his political rivals, trade unions, social movements and some sectors of the business community. It is also likely to generate uncertainty and volatility in the financial markets, as investors and savers adjust to the new monetary regime. However, Milei said that he was ready to face any challenge and overcome any obstacle. He said that he was determined to make Argentina “the most prosperous and free country in Latin America”.