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Forget de-dollarisation – Argentina, Zimbabwe are siamese twins



JUST like the Zimbabwe dollar which is receiving end-of-life-care, the Argentinian peso has joined its twin and dollarisation in Argentina is now imminent.

Over the past year, the peso has lost half its value against the US dollar, which makes imports more expensive. Meanwhile, benchmark interest rates sit at 97% compared to Zimbabwe’s 150%.

Adopting the US dollar as the national currency would mark a radical departure from Argentina’s and other countries’ efforts toward de-dollarisation. The South American country has largely focused on using other currencies for international trade and reserves.

In April, Argentina said it would start buying the bulk of its Chinese imports in yuan instead of dollars. And in January, Brazil and Argentina said they were preparing to launch a joint currency. Despite those efforts, Argentine consumers are already using US dollars in day-to-day transactions and as a form of savings.

This is also the case in Zimbabwe. Currency cannot be forced on individuals. In Argentina, just like in Zimbabwe, all attempts to control inflation have failed. The austral momentarily replaced the peso in the mid-1980s, and the peso was pegged to the dollar in the 1990s for several years. But hyperinflation, debt crisis, and currency crisis persisted as government spending resulted in chronic fiscal deficits. This is the same path Zimbabwe followed.

Other countries, such as Ecuador, already use the US dollar as their national currency, some of which adopted it in the wake of economic crisis. If Argentina follows suit, it would be the largest economy to formerly dollarise.

Argentina, just like Zimbabwe, is in electoral mode and the frontrunner in Argentina’s presidential election has proposed replacing the peso with the dollar. Javier Milei, an economist and libertarian congressman, is vying to win the presidency in October and has pitched adopting the dollar as a solution to sky-high inflation, which hit 109% in May. The same can be said for Zimbabwe, with senior opposition CCC politician Tendai Biti vividly known for his support of dollarisation.

Just like in Zimbabwe, foreign exchange restrictions and the daily loss in value of the peso have turned the US dollar into an obsession in Argentina, with newspapers and television stations monitoring exchange rates minute by minute. Street money changers sort bills feverishly, and tiktokers and youtubers post videos on how to bleach dollar bills to keep them clean and crisp. In both countries, everyone puts their savings into dollars, real estate transactions are conducted in the US currency. Even rentals and smaller transactions demand the coveted greenbacks. Argentina and Zimbabwe are indeed siamese twins.

With elections around the corner, Javier Milei who is rising in the polls over other conservative factions like the ruling Peronist party has called for “burning down” the central bank and “taking a chainsaw” to public spending. It is yet to be seen if Zimbabwe’s leading opposition presidential candidate, Nelson Chamisa, will also call for “burning down the RBZ’’ and “taking a chainsaw” to public spending.

However, dollarisation is not the solution to economic crisis in these countries. Dollarisation would cause a complete evaporation of wages and pensions. It is honest enough to say that dollarisation is a “very radical and desperate measure,” proposed by “fanatics who think that it is best to blow everything up.”

Popular in Argentina, Milei has been making the rounds on television touting three radical economic measures: the elimination of the central bank, the privatisation of state-owned enterprises, and a fiscal adjustment that would trim the gross domestic product by 13 points. Milei believes that a dollarisation process that adheres to the parallel market exchange rate is feasible if all the central bank’s assets and liabilities are liquidated.

Though it is a short-term solution to bring stability, dollarisation is a delirium that would end up turning the nation into a dependency of another country that defines your monetary policy. Just have a look at how the US Federal Reserve uses interest rate hikes to curb inflation and address banking crises.  With dollarisation, the country would be left with no exchange rate policy and a very limited fiscal policy option. And forget about any industrial development programmes.

Argentina is nearly unanimous in believing that dollarisation is not feasible, but the ongoing discussion proves its effectiveness for the far-right’s political ambitions. In early May, Cristina Kirchner spoke at a rally where she announced her plans for the next elections. Instead, the vice-president gave the crowd a historical review of the convertibility crisis. Without saying his name, Kirchner attacked Milei’s dollarisation ideas. “Everyone is talking about something that failed 20 years ago,” she said. “How are these politicians going to convince anyone that they can control the economic powers and solve all of Argentina’s problems? Enough of these fantasies!”

But the fantasy has undoubtedly left an impression on the Argentine people. The dollar is part of their daily lives, whether it is the official foreign exchange market, the parallel market on the streets, or the dollarisation of transactions in real estate and used electronics. Saving in dollars is common and reflects how many Argentines have the capacity to save.

“We should not be re-inventing the wheel,” said Libman, who is developing proposals with Fundar to lead the country out of this dual currency situation and reestablish the peso. “It may take decades, but some of our neighbours achieved it. To have an orderly macro-economy with low and stable inflation, we should not finance national budgets by putting more money into circulation all the time. We should not abuse this instrument. That’s something Argentina hasn’t tried yet.”

Back home, the current currency crisis is an institutional and behavioural problem. It will be the centre of all political discussions. Whether we push for dollarisation, “burning down” the central bank and “taking a chainsaw” to public spending, it is something that we will only witness post 23 August 2023.

About the writer: Kaduwo is a researcher and economist. Contact: [email protected], WhatsApp +263773376128

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