Argentina’s Next Priority, After Setback on Inflation, Will Be the Need for Dollarization of Its Monetary System

Abandoning the country’s debased peso would enable the president to mitigate inflation, economists tell the Sun.

AP/Matilde Campodonico
President Milei on the balcony of the government house at Buenos Aires, December 10, 2023. AP/Matilde Campodonico

President Milei of Argentina, after months of steady economic progress, is facing a setback with inflation due to increase this month, up from the relatively low 4.2 percent increase in May over the previous month. 

“Inflation is going to make a pause in its decline,” Mr. Milei said during a television interview with TN, an Argentine network, indicating that inflation will increase this month.

“There will be political consequences; the monthly inflation rate is Milei’s preferred measure of success,” the director of the Wilson Center’s Latin America program, Benjamin Gedan, tells the Sun. “Milei is the inflation slayer, that’s his brand.”

Nonetheless, Mr. Milei defended his economic agenda and called his economic minister, Luis Caputo, “the best minister of the economy in history.” In his interview, Mr. Milei noted positive developments such as wage growth outpacing inflation.

“We are laying the foundations of great Argentina, so that in forty years they say ‘here was the turning point of Argentina, where it changed and began to be great again,’” Mr. Milei said.

During the interview, Mr. Milei also denied that the International Monetary Fund requested a new devaluation of the Argentine peso. In December, Milei immediately devalued the peso by 50 percent and the central bank has held a crawling peg since, devaluing the currency by 2 percent each month.

Inflation has steadily declined in the months since Mr. Milei took office, reaching a low of 4.2 percent in May, month over month, down from 25 percent last December. 

“The fall in inflation has been nothing short of a miracle,” Mr. Gedan says. “Just a few months ago, Argentines were living in fear of a hyperinflationary nightmare.”

The president blames the inflationary reversal on Argentina’s Congress delaying the approval of his omnibus reform bill, meant to advance Mr. Milei’s free-market agenda. The rise of inflation will be “to pay for what politicians did in the Chambers,” Mr. Milei said.

“The increase reflects the challenge of fixing so many economic problems at the same time,” Mr. Gedan says. “But Argentina is on the right path, slowing spending and resisting the temptation to print pesos to pay for deficits.”

Even as economic reform measures are passed, there remains a deeply-rooted managerial class, a senior economist at the American Institute for Economic Research, Peter Earle, tells the Sun. “A powerful undertow of stonewalling, obfuscation, and administrative sabotage is to be expected,” he adds.

The reversal of Argentina’s inflation trend may also be connected with dollarization — or lack thereof.

Mr. Milei campaigned on the promise to dollarize the economy and shut down the central bank. Since taking office, the president has failed to do so.

“Unfortunately, he has been bamboozled by the IMF and his advisors into believing that there are extensive preconditions that must be met before dollarization can occur,” a professor of applied economics at John Hopkins, Steve Hanke, tells the Sun. 

“The notion of preconditions, which the IMF trots out every time a country proposes dollarization, is bunk,” Mr. Hanke says. “Dollarization in Argentina is both feasible and desirable.”

Turning pesos into greenbacks offers an effective way to bring down rising prices, Mr. Earle says. “On the world stage the dollar has been essentially stable.”

Without dollarization, economists tell the Sun, Mr. Milei cannot sustain his reforms. The lack of currency stability leaves the economy unstable and investors uncertain in the future of Argentina. “While stability might not be everything, everything is nothing without stability,” Mr. Hanke says.

In emergencies, Argentina could just print more pesos through its central bank. “That can’t and won’t be an option with US dollars replacing pesos in Argentinian hands and bank accounts,” Mr. Earle adds.

If Mr. Milei decides to dollarize, Mr. Hanke says, it will benefit everyone in Argentina. “Inflation will be smashed immediately, interest rates will fall like a stone, and an economic boom will ensue.”

The New York Sun

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