The Argentine Peso vs. the US Dollar
The Argentine peso, known as the worst-performing currency in emerging markets, could potentially be replaced by the dollar if Javier Milei, an Argentine economist vying for the presidency, emerges victorious in October. Milei has suggested that to address triple-digit inflation, Argentina should formally adopt the US dollar. Currently, Argentina’s central bank has set the benchmark interest rate at 97%. Economists are predicting a recession in 2023, which would be the third one within five years.
Milei’s Dollarization Proposal
Milei emphasised that the peso is rapidly losing its value, stating that “the peso melts like ice in the Sahara Desert,” as it has depreciated by half against the dollar over the past year. If Milei’s proposal is implemented, Argentina would become the largest economy to dollarise, with a GDP approximately five times that of Ecuador, the largest among the seven sovereign nations that have adopted the dollar. There is significant opposition within Argentina. Recent polls, each surveying around 1,000 Argentines, revealed that over 60% are against dollarisation. Economists urge the government to prioritise tackling budget deficits causing peso depreciation and inflation.
The Pros and Cons of Dollarization
There are differing opinions among economists regarding dollarisation. Some are against it because it would mean giving up control of monetary policy to the US Federal Reserve. This could be problematic because a strong dollar can lead to more imports and expensive exports. As a result, a balance of payments crisis may ensue.
Argentina faced economic turmoil in the late 1990s due to declining grain exports and ongoing budget deficits. In 2002, the peso’s value dropped significantly after President Eduardo Duhalde severed its link to the dollar. Economist Milei supports abolishing the central bank, while others advocate for reforms that can improve transparency and accountability. Critics suggest stabilizing the currency and rebuilding public confidence through consistent policy implementation and strengthened regulations.
