Milei’s election promise – dollars instead of pesos: is “the wig” being gambled away?

‘We are going to dollarize the economy. We will close the central bank. We will defeat the cancer of inflation,” the ultra-liberal right-wing populist promised in a TV debate before the elections. Now Milei has actually been elected and must fulfill his promises. Below are the main answers to his dollar plan.

What are the pros and cons of the dollar?
Argentina is currently struggling with inflation of more than 140 percent. To finance the budget deficit despite the currency devaluation, the government is constantly printing new money, which further fuels inflation.

This would no longer be possible with the dollar as official currency, Milei argues. Supporters say dollarization would give Argentines a currency with stable value.

However, the country would then no longer be able to respond to external shocks through monetary policy and could, for example, devalue the peso as its national currency to gain competitive advantages on the global market.

Is an introduction even possible?
To make the US dollar legal tender in Argentina, Congress would have to pass a law. However, Milei’s party La Libertad Avanza (Freedom Advances) does not have a majority of its own in either chamber.

For his project, the future president, who likes to be called “Wedge,” would have to get members of other parties on board. In addition, experts estimate that Argentina needs about $35 billion for currency reforms to replace circulating pesos.

However, the central bank currently only has small foreign exchange reserves and is largely cut off from the regular financial market due to high debt burdens and the poor economic situation.

What role does the dollar currently play in Argentina?
The dollar already plays an important role in the lives of many Argentinians. Because inflation would quickly erode peso savings, many Argentinians invest surplus pesos in dollars.

Inflation has reached a new high with the October figure. However, it has been consistently at least in the double digits for more than a decade.

What do experts say?
The introduction of the dollar in Argentina is controversial among experts. “Dollarization is desirable and feasible,” American economist Steve Hanke of Johns Hopkins University said at a recent conference in Buenos Aires. However, Claudio Caprarulo of consultancy Analytica warns of high social costs. “Dollarization worsens the problems instead of solving them,” he recently wrote on news platform X. He warned of falling wages, rising unemployment and less room for maneuver in monetary policy.

How was the introduction of the dollar in other countries?
There are already a number of examples of dollarization in the region. Amid a severe economic and financial crisis with high inflation and a sharp devaluation of the national currency Sucre, the Ecuadorian government introduced the US dollar as its official currency in 2000.

In fact, the Ecuadorian economy recovered in the following years. However, according to experts, this was not only due to the introduction of the dollar, but also to rising oil export revenues and higher remittances from emigrant Ecuadorians home.

A year later, the Central American country of El Salvador also adopted the US dollar as its official currency, although, unlike Ecuador, the country was in a fairly stable economic situation. After dollarization, interest rates fell, leading to cuts in the public and private sectors.

However, the previous national currency, the Colón, had been linked to the dollar for several years via a fixed exchange rate.