Argentina’s Plan to Adopt the US Dollar Faces Major Hurdles

Introduction

Argentina's new president, Javier Milei, has proposed adopting the US dollar as a solution to the country's high inflation rates. However, economists warn that the Argentinian government does not have enough dollar reserves to replace the peso. This article explores the potential challenges and risks associated with Milei's dollarization plan.

Milei's Dollarization Plan

Javier Milei, a right-wing economist and outsider, won Argentina's presidential runoff with 56% of the vote. One of his core policies is to replace the peso with the US dollar. Milei argues that this move would help control soaring inflation, which reached 143% in October. The president-elect believes that adopting the dollar would shift control of monetary policy from the Central Bank of Argentina to the US Federal Reserve. This drastic measure aims to address the country's recurring recessions and its $44 billion debt to the International Monetary Fund.

Potential Backfire

While Milei's plan to rein in inflation may resonate with the general public, it faces opposition from big business leaders. A Reuters poll of 125 executives conducted at a corporate summit revealed that only two supported full dollarization. Additionally, three prominent Latin American economists voiced their concerns about Milei's proposal. Former Bank of Mexico governor Guillermo Ortiz believes that dollarization won't address Argentina's underlying structural problems.

One immediate challenge is the lack of dollar reserves held by Argentina's government. The central bank currently faces a foreign exchange deficit of $7.5 billion, with limited options to increase its dollar holdings. Milei could request a dollar-denominated loan from the IMF, but given Argentina's status as the fund's largest borrower, approval is unlikely. Without sufficient reserves, the government would have to adopt the dollar at a discounted exchange rate, risking a default or recession.

Oxford Economics' Lucila Bonilla warns that dollarization at a depreciated exchange rate would devalue the savings of Argentine citizens, potentially leading to social unrest and a severe recession. Despite his grand vision for dollarization, Milei's plan could exacerbate Argentina's economic challenges rather than resolve them.

Conclusion

Argentina's plan to adopt the US dollar as a strategy to combat inflation and revive the economy faces significant hurdles. The government's lack of dollar reserves and potential economic repercussions pose serious risks. While Milei's proposal may have won him the presidency, its implementation could worsen Argentina's already fragile economic situation. The success of this plan relies heavily on finding viable solutions to these challenges.

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By: gglover@insider.com (George Glover)
Title: Argentina’s Plan to Adopt the US Dollar Faces Major Hurdles
Sourced From: www.businessinsider.com/dollarization-us-dollar-peso-argentina-javier-milei-inflation-recession-economy-2023-11
Published Date: Wed, 22 Nov 2023 13:06:51 +0000