2023-09-21 16:02:01
The proposal of the Argentine far-right candidate Javier Milei to make the dollar the official currency of Argentina has once again brought a debate to Latin America.
This is a region where countries such as Panama, El Salvador and Ecuador have been adopting the dollar as their official currency for years, and others, such as Cuba and Venezuela, have a strong underground market.
With the banner of dollarization – although he does not want to implement it in the short term -, eliminating the Central Bank and applying a “chainsaw” to public spending, the La Libertad Avanza candidate obtained first place in the primaries on August 13, 2023.
However, despite inflation above three digits, macroeconomists speak of “insurmountable obstacles” to this path.
This is because Argentina lacks the dollars necessary to rescue the monetary base and support bank deposits.
Improving these factors implies “absurd increases” in public debt, for a country whose securities are quoted at 30% of their parity.
The dollarized
The dollarization of Latin America began in Panama, where the use of the currency dates back more than a century. It occurred a year after the country became independent from Colombia, and as a consequence of the construction of the Panama Canal by the United States.
Although, the currency had already been in circulation for almost another half century, due to the influx of travelers due to the so-called ‘gold rush’.
The bet had its advantages. In the opinion of the National Competitiveness Center (CNC), it made possible “one of the lowest inflation rates in the region and a competitive supply of credits.”
Added to this is commercial stimulation and the recipe for a stable economy, without a central bank or a State that can intervene to set the price of money.
That has some advantages: competitive interests, access to credit and banking services from developed economies. But it also limits the possibility of stimulating exports through devaluations.
However, “the benefits far outweigh the costs,” maintains the CNC, a non-profit public-private organization.
Dollars and balboas learned to coexist in a strange way: it is known that the national currency is equivalent to one dollar, but it is only known in coins of one unit and with a limited monetary supply.
Panama was followed by Ecuador, which appropriated the dollar as its sole legal currency in 2000 and abandoned the heavily devalued sucre. At the time, it was a traumatic and unexpected decision, taken by then-president Jamil Mahuad (1998-2000) as a way out of a pressing crisis.
The dollar allowed the Ecuadorian economy to achieve monetary and financial stability, going from having an average annual inflation of 36.4% in the period 1980-1998 to 4.5% in the period 2001-2019, according to data from the Bank. Central.
“When politicians are incapable of properly managing the currency, citizens begin to dollarize the country de facto, especially in those with weak institutions, where politicians monetize the deficit, that is, they aggressively print banknotes to finance fiscal imbalances. That, at the end of the day, is passing the bill to citizens via the inflation tax,” comments economist Alberto Acosta-Burneo.
But Ecuador, according to Acosta-Burneo, needs to go one step further and eliminate the Central Bank, to prevent it from issuing money through the expansion of its fiscal balances with the placement of bonds, an accounting arrangement that can generate a crisis of liquidity.
The dollar is also legal in El Salvador, where it began to circulate on January 1, 2001, along with the Salvadoran colón. Its exchange rate was fixed at USD 8.75 for each colon, until it ended up disappearing. The banking system converted all accounts to dollars and the Salvadoran colón was withdrawn.
According to economist Ricardo Castaneda, dollarization “was undoubtedly more of a political measure than an economic one, because there were no technical elements to support the decision.”
He adds that for El Salvador and Honduras the “greatest benefit” of dollarization “after so long” is that it has allowed inflation “to not be so high,” but it has “been a brake on the country’s own economic growth because there is fewer tools to influence the economy.”
Dollar, the lifesaver
Dollars circulate in Cuba progressively both in the informal market – more varied and extensive than the official one – and in the formal one.
In the formal sector, the State collects foreign currency in tourism and through a network of special stores. Government measures to counter it have proven ineffective.
Some of the reasons for the popularization of the US currency in Cuba are:
Strong inflation.
Dependence on imports, 80% of what the country consumes comes from abroad, according to the United Nations (UN).
Depreciation of the Cuban peso (from 24 pesos per USD 1 in 2021 to 240 currently).
Hundreds of thousands of Cubans who are emigrating.
These are reasons similar to those of Venezuela, where the dollar has been used to pay and set prices since 2019. This after the country experienced hyperinflation of 130,060% in 2018.
Also, after the worsening of an electrical crisis that collapsed, on multiple occasions, electronic means of payment, the only way to make a transaction in bolivars, the local currency, due to the shortage of cash.
This unofficial dollarization that the Government sees as an “escape valve” has made “transactions and commercial operations much easier,” says Ecoanalítica senior economist Jesús Palacios.
He adds that the dollar has also allowed the emergence of services such as home deliveries and taxis, although it is not yet allowed to open bank accounts to make transfers or request loans in the currency.
However, the Venezuelan Government seeks to keep dollarization under control and encourage operations in bolivars. Therefore, it has applied measures, such as charging a tax on payments in foreign currency, which reduced the number of transactions made in dollars by 70%. in 2021; to 50%, in 2023.
Parallel models
In Peru, the dollar has coexisted with the sun for decades: you can buy foreign currency at any exchange house, acquire real estate in dollars or open bank accounts, fixed-term deposits or request loans in that currency as well.
For its part, the Central Reserve Bank of Peru (BCRP) has carried out spot sales operations (with the exchange rate at the time) on negotiation tables for USD 1 million and has auctioned sales exchange swaps and BCRP CDRs (certificates of resettable tanks).
It is a parallel model, where the dollar coexists with the official currency, as happens in Uruguay. In that country, the peso continues to be the official currency and the most used for daily transactions, despite the fact that some shop window prices – especially for appliances, vehicles or properties – are listed in dollars.
The dollar has also monopolized deposits and Uruguay already has, according to the risk rating agency Moody’s, the highest level of deposit dollarization in Latin America, with 74%.
In neighboring Paraguay, although the guaraní is the official currency, in agreement with a large part of the actors in the world economy, the dollar is the reference currency for international transactions and its free sale is allowed in official houses and banks.
Economist Jorge Garicoche explains that deposits in the financial and banking system of Paraguay show a ratio of around 60% in guaraníes and 40% in dollars, although in a global trend, promoted by the Federal Reserve (Fed) to contain the inflation in the United States, there is a depreciation of the local currency.
Although economists like Acosta-Burneo do not believe that the entire region will end up dollarized, they see coexistence with local currencies as possible if the example of Peru is followed, which “has had very good management of the currency (sol), with a fairly solid and an independent Central Bank.”
#Latin #American #countries #progressively #adopt #dollar #Nación