Like Ecuador, a new Argentina government could drop the peso and adopt the U.S. dollar
Argentina on Monday unveiled new emergency measures to fight its 109% inflation rate and support the ailing peso amid rapidly dwindling foreign currency reserves and growing fears of a devaluation.
But the more the government tries to prop up the peso with currency controls and to tame rising prices with massive interest rate hikes, the more it’ll bleed Benjamins when it most needs them. A blunt instrument would be to devalue the peso, which in one fell swoop would kill inflation but also wipe out the value of people’s savings.
So, why not just ditch the national currency and replace it with the US dollar? This is often referred to as a “zombie” economic idea because it gets revived in times of economic uncertainty. Right now it’s being pushed by Javier Milei, a libertarian populist who’s leading the polls ahead of the presidential election in October.
The problem is that even if the current government wanted to do this, which it does not, it really can’t dollarize the economy because of the fact it doesn’t have enough dollars. But Milei doesn’t says he will find a way.
The idea of adopting the dollar is not new, and other countries have dropped their national currency as a result of raging inflation. In 2000, with its inflation rate running at over 80%, Ecuador dropped its national currency, the Sucre, and adopted the dollar. Since then, some politicians have advocated returning to a sovereign currency but with public approval of the dollar running above 90%, no serious attempts have been made for a reversion. In 2022, Ecuador registered the second-lowest inflation rate in the Americas and so far in 2023, the rate has remained near 3%.
One thing is certain with Argentina, it’s that the economy can always get worse. Anther certainty is, when the economy is in shambles, there will be a new government after the next election.