Argentina’s president wants to adopt the U.S. dollar. Can he?

Argentina’s brash new far-right, avowedly libertarian president, Javier Milei, began his first term in office this week with a warning: prepare for an economic shock treatment.

Among a raft of drastic campaign promises pitched as tough medicine to bring the spiraling economy into line, one promise in particular has gained close attention in the United States: a plan to scrap the Argentine peso entirely and replace it with the U.S. dollar.

As Milei works to bring his drastic vision to fruition, the next few months will reveal the limits of his agenda in practice. A member of his inner circle told Reuters that he might need a year to push the policy through, as he looks for ways to work with or around the legislature.

[Argentina sharply devalues its currency and cuts subsidies as part of shock economic measures]

Argentina’s economy suffered a long decline

In the early 20th century, Argentina was one of the richest countries — wealthier, by some measures, than Germany, France or Spain. But for decades it has been in economic decline, and has in recent years struggled with rapid inflation. While inflation is a major concern in many countries, including at a rate above 3% in the United States, Argentina’s year-over-year inflation exceeded 124% as of September, according to official figures.

In practice for Argentines, that has meant stockpiling food and households goods — because prices would probably be much higher the next time they went to the store. One Argentine told The Washington Post last year that he had enough shampoo for a year and a half. Another said she had at one point stockpiled 48 cans of tuna. The rapid inflation also means putting money away is fruitless, with inflation outpacing interest rates.

More than 40% of Argentines live in poverty, according to government figures this year.

Dollars are already in wide use in Argentina

The Argentine peso is the official currency in Argentina. But the U.S. dollar is widely coveted and used there as a way around the rapidly decreasing value of the peso. Exchanging pesos for U.S. dollars allows Argentines’ money to hold its value for longer — for spending or for saving.

Under the official exchange rate, $1 is about 355 Argentine pesos. On the black market, however, the U.S. dollar is much more valuable — worth about 1,000 Argentine pesos. Months ago, $1 was equal to 600 pesos, and before the coronavirus pandemic, it was worth 80 pesos.

No one is sure how many U.S. bank notes already reside in Argentina — the figure could be as high as 10% of notes in circulation, by one estimate. Argentines often make important purchases in dollar for fear of holding large sums of liquid pesos.

Argentina would be the largest economy to switch to the dollar

Argentina is not the first country to consider dollarizing as a way to alleviate economic turmoil. Aside from the United States, there are a handful of countries and territories around the world that use the U.S. dollar as their official currency. The largest economy to do so is Ecuador, which dollarized in 2000.

Other countries that have adopted the U.S. dollar include El Salvador — which also made bitcoin legal tender — Panama and Zimbabwe. Smaller territories, such as the British Virgin Islands, also use the U.S. dollar.

In practice, the policy has shown benefits, pegging the fate of a country’s currency to that of a historically more stable one. But it also represents a full renunciation of an autonomous monetary policy centered on local conditions, however divergent from those in the United States. Milei might not care: He has said he wants to get rid of the central bank, regardless.

Dollarization comes with drawbacks

Milei’s plan to dollarize Argentina is controversial among Argentines — and economists. A statement signed by dozens of economists warned that dollarizing Argentina’s economy risks worsening inflation. They argued that the shortage of foreign reserves would mean a poor exchange rate for Argentines when the currency is converted, leading to a decline in real wages, “putting the burden of adjustment on working people.”

Milei’s economic proposals, including dollarization, “overlook the complexities of modern economies, ignore lessons from historical crises, and open the door for accentuating already severe inequalities,” the economists wrote. Milei dismissed the statement, saying on X the economists were “failed” and that they were condemning his solution to a “monetary scam.”

“(C)hanging your currency rarely has magical effects,” economist Paul Krugman wrote in his New York Times column Tuesday.

Some high-profile economists have defended Milei’s plan. Steve Hanke, a professor of applied economics at Johns Hopkins University and an economist in the Reagan administration, said criticisms of dollarizing Argentina were “absolute rubbish.” Hanke said on CNBC that he was in close contact with Milei’s team, acting as an unofficial adviser. Dollarizing Argentina is “the right idea,” he said. “You’ve got to dollarize.”

Milei faces an uphill battle

Although dollarization was a pillar of his campaign, Milei, a political outsider and extreme libertarian, may lack the political power to enact such a plan, as he lacks a majority in Argentina’s Congress.

To dollarize, Argentina’s banks would need enough U.S. dollars on hand for withdrawals after the pesos in Argentines’ bank accounts become U.S. dollars. “I don’t think that the Argentine banks have that those kinds of dollar reserves,” said Evan Kraft, a senior professorial lecturer at American University in Washington. If the banks don’t have enough dollars, Argentina’s central bank would need enough dollars to lend to the banks, Kraft said, adding that he didn’t believe Argentina’s central bank had enough to do that.

That would leave Argentina turning to organizations like the International Monetary Fund (IMF), Kraft said. But Argentina is already the International Monetary Fund’s biggest debtor, owing the fund some $31.1 billion as of this month. Obtaining large amounts of U.S. dollars from the IMF or other organizations would be a “major task” for Argentina, Kraft said. Hanke, on CNBC, rebutted criticisms that acquiring enough physical currency would be an insurmountable problem, citing the large amounts of dollars that are already in Argentina.

Kristalina Georgieva, the managing director of the IMF, said she spoke last month with Milei about “the decisive policy actions needed” to address the Argentine economy’s “significant challenges.”

The IMF is “committed to support efforts to durably reduce inflation, improve public finances, & raise private-sector-led growth,” she wrote in a post on X, formerly known as Twitter.

In response to a request for comment, the IMF pointed to Georgieva’s tweet. The U.S. Treasury Department declined to comment on whether it has been in contact with Milei’s team regarding potential dollarization.