Quiver Quantitative - Javier Milei, a political outsider expected to win Argentina's upcoming presidential elections, is proposing a radical solution to address the country's soaring inflation and economic challenges: dollarization. Backed by his adviser, Emilio Ocampo, a former Wall Street investment banker, the plan seeks to replace the devalued peso to counter the inflation that's currently at 113%. Ocampo, having authored a book on dollarization, suggests that Argentina’s severe economic conditions necessitate such drastic measures, even if it means the administration would relinquish significant monetary control.
Ocampo's proposed model for dollarization is inspired by El Salvador's voluntary approach, allowing citizens the choice between using pesos or dollars. The exchange rate would be set based on the peso's standing in unofficial markets, with current rates translating the nation's monetary base to roughly $9.3 billion. The system demands the removal of existing foreign exchange restrictions and the adjustment of utility prices, even though such moves could be contentious given Argentina's significant poverty rates.
The central bank's traditional role would be fundamentally altered under Ocampo's vision. A new entity, the Monetary Stabilization Fund, would be established overseas in jurisdictions like Switzerland or Luxembourg. This fund would manage the country's reserves, issuing asset-backed commercial paper to address the $26 billion in debt instruments possessed by commercial banks. Its main assets would be debts the government owes to the central bank and pension funds from Anses. Ocampo believes that within four to five years, this structure could lead to an unprecedented cancellation of Argentina's debt without a default.
Dollarization remains a cornerstone of Milei's economic strategy for Argentina, which is on the brink of its sixth recession in a decade. While smaller nations like Ecuador have found some success in adopting the US dollar, the transition remains intricate, especially for an economy as large and complex as Argentina's. The decision to dollarize would inevitably come with its set of challenges and risks, but for advocates like Milei and Ocampo, it offers a potential pathway out of persistent economic turbulence.
This article was originally published on Quiver Quantitative