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The US dollar is central to Argentina's plan to fix its broken economy. There's just one hitch.

Nov 22, 2023, 20:34 IST
Business Insider
A Javier Milei supporter at a pre-election rally in Buenos Aires.Tomas Cuesta/Getty Images
  • Argentina's new president Javier Milei wants to adopt the US dollar to tame sky-high inflation.
  • There's a major problem with his plan to revive the ailing South American economy.
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Right-wing economist Javier Milei won Argentina's presidential runoff Sunday – and that means the country could soon ditch the peso for the US dollar.

Adopting the greenback was one of his core policies, arguing the move would help tame sky-high inflation and bail out an economy that's about to slip into its sixth recession of the past decade.

But his grand plan could badly backfire – because the government probably doesn't have enough dollar reserves to replace the peso with the buck without triggering a money-supply shortage.

Here's what you need to know.

Milei's dollarization plan

Libertarian outsider Milei, who won 56% of the vote in Sunday's runoff, has said adopting the greenback would help rein in soaring prices. Inflation has been in triple digits for much of this year and hit 143% in October.

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Under the president-elect's plan, the government would scrap the peso and replace it with the dollar. Milei said last month that the Argentinian currency "can't be worth excrement" due to persistent price rises, with its value against the greenback plummeting about 99% this year.

Adopting the dollar would take control of monetary policy away from the Central Bank of Argentina and hand it to the US Federal Reserve. Milei believes that "Hail Mary" move would mend Argentina's broken economy, by breaking a cycle of policymakers printing more pesos so the country doesn't default on a $44 billion debt to the International Monetary Fund.

Read more: This is the world's next major election. The winner has to fix chronic hyperinflation and halt a 6th recession in 10 years.

Ecuador, El Savlador, and Panama already use the dollar and as a result have much lower inflation rates than Argentina.

However, those economies are much smaller than Argentina, which is a G20 member and the world's 22nd-largest country by nominal Gross Domestic Product (GDP), per the World Bank.

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Why adopting the buck could backfire

Milei's pledge to rein in inflation by replacing the peso with the dollar was "clearly a vote-getter," John Hopkins professor of applied economics Steve Hanke said on X Monday.

But while switching to the greenback might be popular with the general public, big business leaders are very much against the plan. Reuters polled 125 executives on the issue at a corporate summit in Mar del Plata last month – and only two said they supported full dollarization.

In September, three top Latin American economists also voiced their opposition to Milei's plan, according to Bloomberg.

"It makes absolutely no sense to go in this direction," said former Bank of Mexico governor Guillermo Ortiz, warning that dollarizing would do nothing to fix Argentina's "structural problems".

Argentina's new president wants to bin the peso and use the dollar instead.Nora Mazzini

An immediate and obvious hitch is that Argentina's government probably doesn't have enough dollars to be able to adopt the greenback without risking an economic crisis.

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Its central bank currently has a foreign exchange deficit of $7.5 billion, per Capital Economics, and limited options to boost its greenback holdings. Milei could ask the IMF for a dollar-denominated loan – but because Argentina is already the fund's biggest borrower, he's unlikely to get one.

Given its lack of reserves, the only way the government could dollarize would be to do so at a cut-price exchange rate. That could immediately trigger either a default or a recession, according to Oxford Economics' Lucila Bonilla.

"Dollarization would require an extremely depreciated exchange rate on conversion and would lead to a large devaluation of the deposits of Argentine savers, causing a severe recession that would likely spark social unrest," she told Business Insider in an interview ahead of the runoff.

Milei's grand vision for dollarization might have helped him upset the odds to win Sunday's election – but rather than saving Argentina's battered economy, it risks making things even worse.

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