Could dollarisation save Argentina?

Some economists are advising that Argentina could greatly enhance its economic position if it were to retire the peso officially and replace it with the U.S. dollar. Argentina has recently lurched further and further into fiscal insolvency.

Argentina has for 10 years maintained convertibility of its peso with the dollar on a one-to-one basis. But investors are deeply worried that it may abandon that anchor.

The dollarization policy has already been tried in Ecuador – with stunning results:

Over 10 months in 1999 – prior to dollarisation – Ecuador's sucre lost about two-thirds of its value against the dollar and its economy shrank 7.3 percent that year.

After replacing the sucre with the dollar in 2000, the overnight interbank interest rate immediately fell to 20 percent from 200 percent – and by September 2001 it averaged 2.6 percent.

Ecuador's economy grew 2.3 percent last year and is expected to grow 4 percent this year and next – making it one of the few bright spots in Latin America.

Inflation was 91 percent last year, as prices caught up to the depreciation of the currency the year before – and it is now converging toward a low, U.S. level.

Interestingly, Ecuador dollarised despite the misgivings of the International Monetary Fund and other "experts." IMF Managing Director Michael Camdessus has remarked, "Dollarisation was not, I must be frank, the kind of policy we would have recommended at this stage to Ecuador."

Source: Dora de Ampuero, Ecuador Bounced Back With the Dollar. Argentina Could Too, Wall Street Journal, November 2, 2001.

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FMF Policy Bulletin\13 November 2001