November 29, 2023
min read
Argentina and Dollarization: Milei’s Potential Next Steps
Javier Milei suggested that Argentina should ditch the peso, eliminate the country's central bank, & use US currency instead. Read more here on Argentina & dollarization.
Bill Henner
Argentines voted for new leadership with stated plans to overhaul the domestic economy, including eliminating the central bank and adopting the US dollar as the currency of Argentina.

Javier Milei got elected with promises to replace the Argentine peso with the US dollar.

Argentines voted for new leadership with stated plans to overhaul the domestic economy, including eliminating the central bank and adopting the US dollar as the currency of Argentina.

Javier Milei’s resounding victory in the recent presidential election (56% of the vote) was largely driven by his promises to restructure a weak economy. 40% of Argentina’s population lives in poverty and inflation is running over 150%. Argentines are hoping that the self-styled “anarcho-capitalist” will bring the changes that are needed to restore economic stability to a country that was once among the wealthiest nations in the world.

Milei’s central campaign promise was to replace the Argentine peso with the US dollar. We explored the implications of adopting the U.S. dollar in an article from September 2023. Part of the process of Milei’s “dollarization” would include the elimination of the Argentine central bank(BRCA). In his acceptance speech, Milei promised to rebuild the economy and bring freedom to long-suffering Argentines, but he did not mention dollarization, even though it had been a key element of his campaign. Economists have varying views on the feasibility of Milei’s planned economic changes. Most agree that dollarization would be difficult, if not impossible, given the current state of the Argentine economy.

Roadblocks to Argentina’s Dollarization

  • Devaluation of the peso: The Argentine peso (USDARS) has moved from 176 to 358 in 2023, for a loss of over 50% based on the “official price” of the peso. On the streets of Buenos Aires, black market pricing has the peso trading at over 1000 to the dollar. Before Argentina can consider a switch to the dollar, there must be a price established at which existing pesos can be converted into dollars. That implies a devaluation of the peso to bring the official price in line with the real market.
  • Political opposition: Milei’s pledge to eliminate the central bank means that Argentina will give up its ability to control interest rates and other elements of monetary policy. Argentina will cede this control to the central bank of the US, the Federal Reserve. Not surprisingly, many Argentines are wary of giving another country such power over their economy. Also, Milei does not have a majority in Congress, so implementing radical new policies may be prove difficult.
  • Argentina is broke: The country has no reserve of US dollars, so it would first need to acquire dollars to move forward with Milei’s vision. In 2023, Argentina signed a $45 billion agreement with the IMF to help restructure and delay its debt payments. At its most recent meeting, the IMF referred to Argentina’s “mismanagement” of that program, implying that a default was possible. Argentina would need to develop a workable plan to deal with its current debt before it could proceed with dollarization.

What’s Next for Milei & the Dollar

Milei’s election acceptance speech was notable in its lack of reference to dollarization. Some analysts are questioning his commitment to the plan, suggesting it was merely campaign rhetoric to garner the populist vote. The man Milei had charged with the implementation of the plan, Emilio Ocampo, announced that he would not be joining the administration. Milei is also faced with a Congress that is dominated by his political rivals. That doesn’t mean Milei has abandoned Argentina’s dollarization, but it is clear that any moves are likely to be incremental and take a lot of time. 

Argentina will need to convert all bank accounts and assets and liabilities of firms and government into dollars. That process would entail letting the peso float freely and removing capital controls. Some of the needed dollars could come from domestic holdings. It is estimated that Argentines have over $230 billion in physical dollars stashed in mattresses or other hiding places. That is over four times the current value of the entire Argentine peso money supply. Much of that money could return to a banking system that was perceived to be safe and stable.

Analysts agree that Argentina must implement austerity measures, whether it proceeds with dollarization or not. The current runaway inflation is being driven by a government that spends more than it collects, so any successful outcome means that the government must eliminate deficit spending.

If Argentina can develop a workable solution to its debt crisis and inflation, it could once again become an economic powerhouse. Optimistic investors have pushed the Argentine stock market up sharply since the election. Global markets will be watching closely to see how Milei proceeds in implementing his grand vision for the future of Argentina. He has called for a special session of Congress on his first day in office (December 11) where he will introduce reforms that he calls economic “shock therapy”. It appears that dollarization will not be an immediate focus, evidenced by the departure of Ocampo, the man who literally wrote the book on Argentina adopting the dollar. For now, dollarization is now a “medium-term” goal, rather than an immediate priority, and dollarization is not on the official agenda of Milei’s meetings this week in Washington with the International Monetary Fund and members of the Biden administration.

Argentina Dollarization Takeaways

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