Argentina needs a recession, not dollarization, to tackle the peso crash, an economist says

• A peso crash has fueled calls for Argentina to adopt the dollar as its currency – but such a move could end badly, an economist warns.
• "Argentina needs fiscal spending cuts and a recession to fix this," Robin Brooks said, referring to the peso's plunge.

Argentina needs a recession - not dollarization - to fix its crumbling currency, according to an economist.

For a while now, the South American nation has been part of a recent international movement to reduce reliance on the dollar for trade and investments – but more recently, a peso crash has prompted calls for the country to actually adopt the greenback as its local currency.

Argentina's leading president candidate, Javier Milei, has urged the country to ditch the peso for the dollar to combat triple-digit inflation. Some market experts have also expressed similar sentiments – with top economist Steve Hanke calling for Argentina to mothball its central bank and dollarize.

But not everyone agrees.

"The Peso is in free fall because Argentina lives beyond its means. Look at imports (red), which are near their historical peak. Argentina needs fiscal spending cuts and a recession to fix this. How to do this in a fair way is what this election should be about. Not dollarization," Robin Brooks, chief economist at the Institute of International Finance, said in a post on X.

"Argentina is flirting with dollarization, which is a peg to US Dollar by another name. That's odd timing given how many pegs have blown up since 2019, including Nigeria (-52%), Egypt (-48%), Pakistan (-47%), Sri Lanka (-44%, pictured) and Ukraine (-36%). This is no time for pegs," he said in a later post.

The Argentine peso tumbled 20% against the dollar last week largely thanks to a drastic shortage of the US dollar, and concerns about the country's high inflation and debt. That led the country's central bank to hike its benchmark interest rate by 21 percentage points to 118% in a bid to calm markets.

Argentina's annual inflation came in at 113.4% in July, according to government data released on Tuesday. The rate remains close to June's peak of 115.6%, which was the highest level since 1991.

The country's external debt surged to 45% of its GDP at the end of 2022, or $277 billion, according to CEIC data.