2023-11-20 13:15:29
The new Argentine president, Javier Milei, elected on Sunday November 19, has as an economic program the dollarization of the country’s economy, namely the replacement of the peso with the American currency. A measure which aims to put an end to the high price inflation in the country.
If the country contains 20% of dollars outside the United States, according to a calculation by Argentine economist Nicolas Gadano, based on central bank data in 2021, most greenbacks are sleeping under the pillows of Argentinians. They have been wary of banks since the restrictions put in place following the first dollarization of the economy from 1991 to 2002.
Three Latin American countries have already dollarized their economies. Panama, Ecuador and El Salvador have thus given up printing their own currency and made the greenback the legal tender usable in all transactions on their territory.
Panama: pioneer of dollarization
As soon as it gained independence, Panama dollarized its economy. In 1904, he replaced the Colombian peso with the balboa, named after the explorer Vasco Nunez de Balboa, and established this currency at parity with the American dollar. Thus, the Central Bank of Panama does not issue notes. US dollars are used as paper currency. However, it issues its own coins of 1, 5,10, 25 and 50 cents, which have the same weight, size and composition as the American coins.
Panamanian or American coins can be used interchangeably, and merchants give change with both. This system, called “currency board”, allows two currencies to circulate, with a fixed exchange rate.
If Panama has renounced its monetary sovereignty, dollarization has provided its economy with rare stability in the region.
Ecuador: ending inflation
Following a widespread collapse of its currency in 1999, Ecuador experienced a serious economic crisis, marked by a recession and a worsening of the public deficit and its external debt. In 2000, it abandoned sugar, its national currency for 179 years, named in honor of General Antonio José de Sucre, hero of the country’s independence. He adopted the dollar and established a fixed rate of 25,000 sugars per dollar.
The Andean country opts for the stability of the greenback in order to attract foreign investment and control its deficit. Dollarization helps curb galloping inflation (around 100% in 2000).
El Salvador: integration into globalization
In the process, El Salvador followed in Ecuador’s footsteps and adopted the dollar in 2001. The American currency coexists with the local colon, at the fixed rate of 8.75 colons for a greenback.
Although experiencing a more favorable economic context, El Salvador chooses to integrate further into globalization and to move closer to the American economy. At the same time, it is lowering its customs duties towards Mexico.
Here again, dollarization aims to attract foreign investment, curb inflation and lower interest rates, in order to influence the purchasing power of Salvadorans. Twenty years later, the economy of this small country of 6.2 million inhabitants remains stable, but the public debt is very high.
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