Argentina’s Dollar Scarcity Shouldn’t Stop It from Dollarizing, Says Economist

• Argentina’s lack of greenbacks shouldn’t stop the country from ditching the peso and adopting the dollar, according to an economist with experience on the matter.
• Francisco Zalles, an economist who helped Ecuador dollarize in 2000, told Bloomberg that dollars would flow back into Argentina as soon as it makes the switch.
• Dollarization is a key issue in Argentina’s presidential race as frontrunner Javier Milei has touted the idea to help combat hyperinflation and economic turmoil.

The Benefits of Dollarization

According to Zalles, Milei’s plan to dollarize Argentina would have several benefits:

• Stability: Dollarization would provide stability to the country’s currency and help combat hyperinflation.
• Increased Confidence: Adopting the dollar would increase confidence in the economy, attracting foreign investment.
• Reduced Transaction Costs: Dollarization would eliminate exchange rate fluctuations and reduce transaction costs for businesses and individuals.

Concerns and Challenges

While dollarization may have its advantages, there are also concerns and challenges:

• Lack of Reserves: Argentina’s central bank currently holds a negative $10 billion in net international reserves, which could pose challenges during the transition.
• Monetary Policy Limitations: By adopting the dollar, Argentina would lose the ability to implement monetary policy solutions.
• Political Support: Dollarization would require political support, which may be a challenge for Milei due to his limited allies in Congress.

Lessons from Ecuador’s Dollarization

Zalles highlighted the lessons that Argentina can learn from Ecuador’s successful dollarization:

• Reserves: Ecuador had about $870 million in dollar reserves at the time of its transition, providing a cushion for the switch.
• Political Consensus: Ecuador had political consensus around dollarization, which facilitated the transition.
• International Support: Ecuador received support from the International Monetary Fund, something Argentina may not have access to.

The Road Ahead for Argentina

Zalles acknowledged that dollarization alone cannot fix Argentina’s economy. Additional measures would be required:

• Capital Controls: Capital controls would need to be lifted to attract foreign investment.
• Fiscal Discipline: Subsidies and state aid would need to be reduced to lower spending and bring the fiscal budget under control.

“The challenge for Argentina will be whether it’s able to cut deeply into the fiscal budget,” Zalles told Bloomberg. “If Milei does that, dollarization will be a good measure that will bring the deficit under control through growth.”