Some major sectors of Argentina’s economy —like real estate— work almost exclusively in US dollars. Argentines also prefer to save in the U.S. currency and outside the banking system — according to the National Institute for Statistics and Census (INDEC) they hold approximately US$261.4 billion of foreign currency “under the mattress”.
The US dollar, for Argentines, is a coveted currency — perceived as the only surefire way of protecting their economy.
Vice President Cristina Fernández de Kirchner usually calls Argentina’s economy “bi-monetary” — meaning it de facto works with two currencies. This is not particularly surprising in a country where inflation is rampant and whose official currency, the peso, hardly functions as a store of value as it has suffered multiple devaluations.
In this context, ideas like libertarian presidential candidate Javier Milei’s “dollarization” proposal —abolishing the peso to use the US currency— may seem attractive, but economists say will not solve the most pressing problems in the country, like inflation, and will create more of their own.
Namely, eliminating the country’s monetary policy would mean that Argentina —with its current financing problems— could not finance its own deficit with monetary emission, meaning it would have to increase the tax burden and/or reduce spending. Policies that require monetary expansion — such as those government applied during the COVID-19 pandemic— would be impossible.
Fundar, one of the think tanks that analyzed Milei’s proposal, created an alternative and opposite plan — “de-dollarizing” the economy, that is, strengthening the peso and escaping what they call “the bi-monetary trap.”
“We’re not making anything up,” Director of Fundar’s Economic Department Guido Zack told the Herald. “Other countries like Chile, Bolivia, Peru, Brazil, and Uruguay have de-dollarized their economy.”
Fundar developed a roadmap to achieve de-dollarization, which consisted of several priorities — including stabilizing the economy, policies encouraging saving in pesos, and active government intervention.
Steadying the ship
The first one, of course, is stabilizing the economy. “Lowering inflation is a necessary condition,” Zack said.
Zack thinks that attempts to lower inflation have not been successful because they don’t take into account the full scope of the problem.
“Inflation is a multicausal issue and you have to attack every cause at the same time,” he told the Herald. “Any partial approach is setting itself up for failure.”
“In the last 10 years, we only had partial approaches — there was an income coordination policy without macroeconomic consistency, or we tried to generate macroeconomic consistency without coordinating income.”
Fundar recommends a set of macroeconomic measures to deindex the economy — that is, to stop adjusting payments by means of the inflation index. They also propose fiscal and external sustainability.
The accumulation of international reserves, generated by exports and foreign investment, is another macroeconomic policy that contributes to stabilization and de-dollarization since it protects the economy from devaluations.
Zack said that some of the conditions the country needs to stabilize the country and to strengthen its currency (like reserve accumulation) are the same ones the country would need to dollarize. “But I’d rather do the first thing,” Zack said.
Moreover, Fundar said that if dollarization were to take place today, Argentine people’s savings would be slashed. The think tank calculated that, with the value of the Central Bank’s reserves in March, the conversion rate would be at AR$ 7,070 per dollar.
Saving in pesos to save the peso
“You have to encourage people to save in the local currency. In the last 30 years, anybody who betted on the peso lost to the US dollar,” said Zack.“We insist that can’t happen anymore. That process must be interrupted.”
Since trust in the banking system is key, Zack says this does not mean forced conversion of people’s dollar savings to pesos, something which has been previously done.
Instead, Zack said that it is necessary to “make interest rates positive” to beat inflation, thus making it worthwhile to save in pesos. But the expected return on assets in pesos needs to be bigger than the equivalent of the same assets in foreign currency.
Today, Argentina’s exchange rate is heavily regulated by the Central Bank — Fundar’s report suggests introducing “some form of volatility into the exchange rate dynamics,” for example, allowing the currency to float within certain margins, but intervene in the event of abrupt changes in the exchange rate.
According to the report, a “greater degree of exchange rate flexibility has been effective in combating financial dollarization.” However, Argentina’s recent experience suggests that the conditions for immediately embracing such a system are not yet in place.
“This is not only because of high inflation levels, but also because our mentality is still highly dollarized.” Hence, stabilization remains the most important factor.
Regulations and government intervention
Finally, the report suggests the implementation of a regulatory framework, coordination policies, and active government intervention in the financial sector.
For instance, it suggests that the government establish resolutions that make it mandatory for business sectors to list prices in the local currency —real estate listings, for example, are in US dollars— and to create payment mechanisms that favor the peso.
The international reserve scarcity has also forced the government to impose several restrictions that create multiple exchange rates. Zack thinks unification is necessary but calls for an exchange rate split for the transition since capital controls cannot be lifted immediately without causing a spike in inflation — as was the case in 2016.
“Our proposal is, at least for a while, having a higher US dollar for finances and services and a lower commercial dollar,” he said.
Zack thinks these points are only feasible if there is an agreement between the political parties in Argentina since de-dollarization is a gradual process that will take more than one presidential term.
“If there is a general perception that these measures will be reversed at any given time, even if they are correct, they won’t have any effect.”
That seems particularly hard in a year of elections in which candidates are proposing to abolish the national currency or to eliminate every capital control as soon as they take office.