Argentina’s newly elected president thinks dollarization will help his inflation-plagued economy
Fiscal shock therapy... That’s what President-elect Javier Milei is prescribing to cure the economy of Argentina, where inflation rates are soaring over 140% and prices almost doubled last year. The peso’s losing value fast, and after decades of runaway inflation, Argentines have lost hope in their leaders’ ability to stabilize the economy. Cue: after his inauguration on Sunday, Milei plans to call in Congress to review an XL package of fiscal reforms.
Big promises: The self-described “anarcho-capitalist” said he’ll dissolve Argentina’s central bank (its Fed) and switch the Argentine peso to US dollars — aka “dollarization.”
Backburner: Milei, who recently appointed a moderate finance minister, likely won’t implement his spiciest reforms on Day 1. But he insists they’re still on his GCal.
No pesos, no problems?… Argentina has the third-largest economy in Latin America and the 22nd biggest in the world, with major exports like oil, agricultural products, and lithium (used in EVs). Besides the US, just four sovereign countries are dollarized: Ecuador, El Salvador, Panama, and Timor-Leste. Dollarization helped steady their economies, but they’re a lot smaller than Argentina. In the country of nearly 46M people, sudden economic measures could spook citizens (think: bank runs) and rattle global markets.
Costly: Argentina’s size means it would need in the neighborhood of $30B to swap pesos for bucks — and it won’t find that under the cushions (it would likely need a loan).
Speaking of… Argentina is the IMF’s largest debtor and has missed targets on its $44B lOU. Milei’s gov’t is expected to need to borrow more, but it’s TBD if it can.
Every fix has its catch… Dissolving its central bank and switching to USD means Argentina would lose the ability to pull economic levers like printing money and controlling rates, leaving it to the US Fed. Since America’s central bank prioritizes America’s economy, monetary policy could be misaligned, and Argentina’s recessions could actually worsen. But if Milei’s reforms succeed, they could become a playbook for other countries flirting with hyperinflation. And as the greenback softens, Argentina’s dollarization could help bolster the dollar’s status as the world’s reserve currency.