In a reaffirmation of his campaign promises, Argentina's President-elect Javier Milei on Friday declared the closure of the nation's central bank a "non-negotiable" aspect of his administration. The move, aligning with his libertarian principles, has set the stage for sweeping changes in Argentina's economic policy and governance.
As Milei prepares to take office on December 10 after defeating his opponent Sergio Massa, his commitment to shutting down the Central Bank of the Argentine Republic (BRCA) and dollarizing the economy signals a dramatic shift from traditional economic policies. His controversial approach is igniting debates among economists about the future of Argentina's financial stability and sovereignty.
Milei, a 53-year-old economist and a political outsider, is steering Argentina toward uncharted territory, experts say. His plan to replace the Argentine peso with the U.S. dollar is a direct response to the country's crippling hyperinflation, which has surpassed 142 percent.
The president-elect argues that the only solution to Argentina's economic turmoil is a complete overhaul of the monetary system, including the dissolution of the Central Bank—a move he sees as essential to preventing the reckless printing of money by politicians.
Dubbed "Argentina's Trump" for his unorthodox methods and populist appeal, Milei's ascent to the presidency is a reflection of public discontent with traditional political structures. His proposals for drastic cuts in government spending and the privatization of state entities like YPF, the state oil company, have resonated with a populace weary of economic instability and governmental inefficiency.
However, the execution of such a radical plan is fraught with challenges. Economists warn that the process of dollarization is complex and dependent on significant dollar reserves, which Argentina currently lacks. Experts say that reliance on U.S. monetary policy, following the abandonment of local currency, would strip Argentina of crucial economic tools and potentially lead to a reduction in real wages and purchasing power among Argentinians.
Newsweek has reached out to Argentina's Ministry of Economy via email for comment.
Jean-François Ponsot, a Full Professor of Economics at Université Grenoble Alpes, highlighted the pitfalls of Milei's strategy in an opinion piece issued Thursday in LeMonde. According to Ponsot, while dollarization might break hyperinflation, it does not guarantee an end to high inflation, as it fails to address other underlying economic issues.
Moreover, Ponsot said that relying solely on the U.S. Federal Reserve for monetary policy and losing the ability to control fiscal policy through a central bank could severely restrict Argentina's economic growth and independence.
The experience of countries like Ecuador, which adopted dollarization in 2000, offers a cautionary tale. Despite initial stabilization, the economist said that Ecuador has faced increased foreign debt and continued economic challenges, indicating that dollarization is not a panacea for economic woes.
Ponsot also noted that Milei's intention to close the Central Bank contradicts the lessons learned from other dollarized economies. In these countries, the central bank, despite its limited role, continues to regulate the payment system, manage local coin circulation, and ensure financial stability.
The complete dissolution of the central bank, as proposed by Milei, could potentially disrupt the financial system and erode public trust in banking institutions, Ponsot said.
Argentina is bracing for transformative changes. His radical economic proposals, while appealing to many as a solution to the country's prolonged financial struggles, carry significant risks and uncertainties, the economist warned.
Newsweek has also reached out to Ponsot via email for comment.
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Aj Fabino is a Newsweek reporter based in Chicago. His focus is reporting on Economy & Finance. Aj joined Newsweek ... Read more
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