Will Dollarizarion of Argentinian Financial System Prop Up its Ailing Currency?

On October 22, 2023, Argentina will vote to elect its next president. As in the U.S., the head of state is elected every four years. However, this election is more similar to the United States; Javier Milei, the candidate of the far-right Liberal Party and currently the favorite in national polls, proposes dollarizing the Argentine economy and abolishing the Central Bank of Argentina – International Journalists and Economists around the world claim these ideas were inspired by former U.S. President Donald Trump.

Dollarization, described as “the process by which a country decides to use two currencies – the local currency and a generally stronger, more established currency, such as the U.S. dollar”. The dollarization process can occur partially or completely. Milei calls Argentina's financial system to relink to become entirely dollar-based to stabilize an economy that has endured years of turmoil and financial instability. This comes in stark contrast with another Latin American nation, El Salvador, where its president Nayib Bukele recently praised its “Bitcoinization” (Bitcoin (BTC) was declared legal tender in that country since September 7th, 2021) and said that Bitcoin Is Driving the 'Rebirth of Our Country'.

Meanwhile, rampant inflation has been wreaking havoc on Argentina's currency (USDARS) for years, making it continuously and sharply depreciating against USD. The dollar soared nearly 100% this year alone to around 350 pesos in the interbank market, with even triple-digit interest rates unable to support local bids.

In this respect, just a couple of weeks ago, the country's central bank raised its key interest rate to a jaw-dropping 133%, intensifying a seemingly hopeless battle against rising consumer prices, which last month were up nearly 140%. Under the current circumstances, the currency’s extravaganza in Argentine has no end in sigh.