• Wednesday, June 19, 2024
businessday logo


Broader perspectives on dollarisation: Argentina’s unfolding scenario

Saving in dollars implies a bleak economic outlook, says Coronation

This is the third consecutive article I am writing on dollarisation and admittedly the most challenging for me for two reasons: the avoidable mistake in the title of last week’s article, which read, “De-dollarisation the Nigerian economy,” but ought to have read, “De-dollarising the Nigerian economy,” which is regrettable; and the even more serious factual error in my definition of dollarisation as “an official monetary policy decision by an underdeveloped and weak economy to use the United States dollar (USD) side by side with its local currency; or sometimes exclusively, because of the economic benefits derivable therefrom.” Continuing, I asserted that “Dollarisation as an official policy is more common in small economies with a weak or small export sector or in which exports contribute very little to their gross domestic product (GDP) and whose GDP is invariably less than 50 billion USD.” These statements are largely correct, but they contain some over-generalisations for which I take full responsibility and offer an unreserved apology.

Read also: De-dollarisation the Nigerian economy

It is true that the GDP figures of many dollarized economies are small, even as small as about 2 million USD (the island of East Timor) and even less than 0.5 million USD for island countries like Micronesia, Palau, and Marshall Island, among a total of seven island countries and territories. It is also true that the GDP of the two officially dollarised economies of El Salvador and Zimbabwe is less than 50 billion USD. However, that of the South American country of Ecuador, which dollarized her economy 24 years ago, is estimated to be 121.6 billion USD by the IMF, and that of the Central American country of Panama, which dollarised in 1904, US$87.3 billion. Even a more instructive exception to the “less than 50 billion USD” benchmark is the unfolding scenario in Argentina, a country with an IMF 2024 GDP estimate of 604 billion USD, which recently dollarised its economy.

Q: “Dollarisation in Argentina means the USD replaces the peso as the legal tender. As a result, Argentina will no longer have control over its monetary policy.”

Argentina has been undergoing very serious economic and financial crises due to years of persistent economic mismanagement dating back decades, even to the years of Juan Domingo Peron (President 1946–1955) and 1973–1974. President Peron was a military officer, a fascist, and a populist politician with a strong alliance with the labour movement. He embarked on a vast welfare scheme, promoted economic isolationism, protected the economy from foreign competition, and shut down international trade. Peronist politicians held sway in Argentina for sixteen of the last twenty years, promoting welfarism, a huge electricity subsidy, printing the national currency, the peso, to finance huge budget deficits, and accumulating huge foreign debts. The country experienced what could be described as Argentina’s equivalent of the Great Depression in 2001–2002: a severe decline in the GDP, followed by a sovereign debt default, bank runs, and serious social unrest. Argentina had a foreign debt portfolio of 286 billion USD by December 2023, and it is the largest borrower from the IMF with an outstanding debt of 42.9 billion USD as of December 2023. The inflation rate was triple digits, hitting 143 percent in October 2023, only better than Venezuela and Lebanon.

The result of the foregoing was that Argentinians abandoned the peso and instead preferred to save, buy, and sell in US dollars. This was the background to the October 2023 general elections that brought radical libertarian politician and lawmaker Javier Milei to power. He had the overarching campaign manifesto to officially dollarize the Argentinian economy, set aside the peso, and sack the central bank.

Dollarisation in Argentina means the USD replaces the peso as the legal tender. As a result, Argentina will no longer have control over its monetary policy. It cannot print its legal tender at will any more, meaning it can no longer control the money supply in response to macroeconomic headwinds like shocks and fluctuations in the economy.

Reasons for official dollarisation in Argentina include the following: First, the economy was already de facto dollarized. The USD was already the currency the people preferred to save and trade in as a hedge against inflation. Secondly, it is the currency in which the country’s foreign debt is denominated, thereby enabling Argentina to pay its foreign debt in its officially adopted legal tender, thus eliminating the foreign exchange mismatch. Thirdly, dollarisation will enable Argentina to arrest inflation. With the limited supply of dollars, the inflation rate will crash to a single digit. Fourthly, foreign direct investment (FDI) and foreign portfolio investment (FPI) will begin to flow in. Fifthly, dollarization will impose stringent fiscal discipline upon the Argentinean government, as it cannot print dollars locally and cannot spend what it does not have. However, Argentinian exports will become more expensive, priced in dollars and the country will lose its export competitiveness, at least, in the short to medium term.

What lessons for Nigeria? A review of the antecedents to the Argentine economic crisis reveals a parallel with our recent romance with populist economic policies under the Buhari Administration: massive fuel subsidies, huge budget deficits, financed by massive printing of the naira, and unprecedented foreign debt accumulation. Thus, the seeds of our present economic woes were sown in the last ten years.

Thank God, we do not have to go the way of official dollarisation. But the cost of economic reforms is not cheap, as we can see from our current experience. The good news is that the economy is beginning the slow process of cooling down, with April inflation figures showing only a marginal increase in headline inflation. With the beginning of local refining of petrol by the Dangote refinery in June, the pressure on the naira will begin to ease.