Yes, Virginia, Dollarization is Viable
Some economists continue to insist that official dollarization is not viable in Argentina because there are not enough dollars. They are wrong.
For the original version in Spanish click here
In a recent article titled “Bimonetarism, Currency Competition, and How to Lower Inflation” (La Nación, January 25, 2025), economist Miguel Kiguel analyzes the limitations and prospects of the current government’s economic policy and offers some recommendations. Although he does not specifically address dollarization, when he mentions it, he makes, in my opinion, some errors that are worth clarifying.
According to Kiguel, the government, frustrated by its inability to dollarize due to a lack of dollars at the Central Bank, popularized the term “currency competition” thinking that giving people the option “to choose their preferred currency for transactions and savings would lead them to opt for the dollar. In this way, dollarization would happen on its own.” Later, referring again to dollarization, Kiguel states that “it sounds attractive and could be a last resort measure, but today it is unfeasible because there are no dollars to buy all the pesos in circulation.” He also emphasized what he considers some disadvantages of this monetary regime, particularly its “limitations in responding to unfavorable external shocks and the lack of a lender of last resort.”
Before evaluating these statements, some clarifications are in order. The first is semantic. Monetarism is an economic theory associated with Milton Friedman. “Bi-monetarism” suggests double monetarism. The correct term would be “bimonetariness” (bimonetariedad). As for the term “dollarization,” it has multiple meanings and always requires clarification. De facto or spontaneous dollarization is the adoption of the dollar by the public in place of the domestic currency (i.e., bimonetariness). As Kiguel rightly points out, this currency substitution –or de facto dollarization– is the legacy of decades of high, persistent, and volatile inflation. Official or de jure dollarization occurs when the government grants the dollar legal tender status (which does not necessarily require stripping the peso of that status). Argentina is de facto dollarized but not de jure. This inconsistency generates high transaction costs for the economy and reduces the effectiveness of monetary policy.
The second clarification is historical. Official dollarization, as we proposed it in 2023, was and is feasible, at least in legal and financial terms. Since I never had any discussion with President Milei on this matter, I cannot explain the reasons why he decided not to move forward (postpone?) this campaign promise. Perhaps, like Kiguel, he believed there weren’t enough dollars at the central bank to implement it. Or maybe he judged that the political conditions were not favorable to its success.
Kiguel incorrectly ties the feasibility of dollarization to the amount of net reserves reported by the Central Bank of Argentina (BCRA). His comment reminds me of one made by Ecuadorian economist Abelardo Pachano, former manager of the Central Bank of Ecuador (BCE), who, ten days before President Mahuad announced dollarization, emphatically declared it was unfeasible due to a lack of reserves at the central bank. “To dollarize, we would need to bring in 600 million dollars in cash to exchange for the sucres we Ecuadorians have in our pockets,” Pachano explained. “Who is going to give us those 600 million dollars? (...) I don’t see dollarization as logical, feasible, or advisable.”
Twelve months after the announcement of dollarization, international reserves at the BCE totaled 1.197 billion dollars, and not a single sucre remained in circulation. Also worth noting is that when the Convertibility regime was announced in Argentina in March 1991, net reserves, as defined by the IMF today, were negative (and included US$ dollar denominated government bonds known as Bonex). In other words, with Kiguel’s reasoning, neither Convertibility nor dollarization in Ecuador would have been ever implemented.
The reality is that with official dollarization, not only would the central bank cease to exist as we know it, but also international reserves (although it’s possible to preserve both, as Ecuador did). According to Kiguel’s logic, 80 billion dollars in liquid reserves are needed to implement official dollarization. This figure comes from dividing the private M3 in pesos by the CCL exchange rate. But according to the BCRA’s latest balance sheet, net reserves are negative, so, according to this theory, dollarization is impossible. For anyone even vaguely familiar with the experiences of Ecuador and El Salvador, this argument is easy to refute.
The first mistake is claiming that under dollarization, the entire M3 in pesos in private hands must be redeemed immediately. In essence this would imply a nationalization of bank deposits, as effected by Perón in April 1946. In reality, the only liability that potentially needs to be redeemed is the monetary circulation—i.e., the peso bills issued by the BCRA. Let’s put the numbers in perspective: as of December 7, 2023, the monetary circulation, converted at the CCL exchange rate, was equivalent to 6.6 billion dollars, a historic low equivalent to slightly over 1% of GDP, one month of average exports for the period 2022-2023, and 1.4 months of average 2023 tax revenue converted at the CCL rate. But 6.6 billion dollars weren’t needed at the announcement of dollarization, since under our proposal, converting issued pesos to dollars was voluntary and could take months or even years. As for bank money, there’s no need to redeem it either—just redenominate it in a new unit of account: the dollar. This isn’t so complicated, given that nearly a third of all deposits are already dollar denominated.
Only in the unlikely scenario of a massive deposit run would Kiguel’s argument hold any water. But the fractional reserve system exists in Argentina and every country in the world, and people don’t rush every morning to the bank to withdraw their deposits. Even more relevant to this discussion is that today in Argentina, holders of dollars in local banks don’t lose their sleep despite their deposits not being fully backed (almost 50% of deposits are held as reserves at the central bank, which supposedly no longer has any dollars!). If tomorrow all depositors decided to withdraw their dollars, banks would not be able to fulfill such demand. Why would their behavior change if the government granted legal tender status to the dollar? The only reason would be if the government gives away dollars or subsidizes their purchase—i.e., if it sets a conversion parity below the market exchange rate. We wouldn’t recommend following this path.
Another error is assuming that the dollars required for official dollarization are the liquid dollars held by the central bank (i.e., what’s known in jargon as net reserves). I never tire of repeating it: a credible dollarization is self-financing through an increase in monetization. This is exactly what happened in Ecuador.
Once the dollar is adopted as legal tender, the pesos in circulation become part of the public debt of a state that collects all its tax revenues in dollars. Reserves would no longer matter. If such debt isn’t exorbitant (and in a demonetized economy, it never is), there’s no reason for people to believe it won’t be redeemed. As I noted, on December 7, 2023, monetary circulation barely exceeded 1% of GDP. By January 30, 2025, this ratio had tripled but remained manageable.
As Keynes and Sargent have pointed out, the financial viability of official dollarization (or a convertibility regime with a fixed parity) depends less on the reserves held at the central bank and more on fiscal equilibrium. In other words, it will always be viable at a market exchange rate as long as the public believes the government will keep its accounts balanced—or better yet, achieve sustainable primary surpluses.
Contrary to Kiguel’s claims, in Argentina’s case—given its high de facto dollarization and a net international financial position US$75 billion—the feasibility of official dollarization hinges on maintaining a primary fiscal surplus, not the central bank’s gross or net reserves. Which doesn’t mean that reserves are irrelevant. It means they are less relevant that maintaining a primary fiscal surplus.
Another point worth emphasizing is that in Argentina, official dollarization doesn’t mean forcing people to use the dollar but allowing people to use the dollars they already hold to carry out any transaction. The value of those dollars is at least two or three times the value of all pesos issued by the BCRA and multiplied by the banks (aka M3). There are enough dollars in Argentina; the problem is that Argentines keep them out of the domestic banking system because they fear confiscations, corralitos, and other type of restrictions.
It’s a common mistake to assume that official dollarization implies an immediate cancellation of all the economy’s financial assets and liabilities—i.e., a liquidation scenario. In reality, it is akin to a “going concern” scenario. Once the dollar is adopted as legal tender, the economy would continue operating as before. Assets and liabilities need not be canceled; just converted into a new unit of account, the US dollar.
This is not an opinion but a fact, as shown by the experiences of Ecuador and El Salvador. As I’ve noted in several articles, in both countries that once the dollar was adopted as legal tender and its parity fixed with the domestic currency at a market rate, both currencies continued to circulate for a while. There was no early cancellation of liabilities, no massive capital flight, and no bank runs. On the contrary, the opposite happened, and interest rates fall.
Even if the government wanted to redeem all peso monetary circulation, it would be logistically impossible to accomplish this in the short term. In Ecuador, dollarization was announced on January 9, 2000. A month and a half later, Congress approved the law that established the institutional setting of the new regime. This law established that after June 30, all sucres in circulation not exchanged for dollars would be worthless. It is hard to imagine a more a powerful incentive for people to exchange their sucres for dollars as soon as possible. However, when the deadline arrived, only two-thirds of all sucres had been exchanged. To avoid a sharp monetary contraction, the government was forced to extend the deadline by another three months. In El Salvador, where a different dollarization format was adopted in which the local currency wasn’t eliminated, the exchange for dollars was voluntary and took nearly two years.
The economy is a circular flow. As long as economic activity doesn’t contract sharply after a dollarization announcement, it will continue generating financial assets and liabilities denominated in dollars, and taxes will be paid in dollars. There’s no reason for massive capital flight—the other “bogeyman” raised by dollarization detractors. Moreover, interest rates play a critical role in equilibrating the domestic money market.
Regarding the supposed disadvantages of official dollarization mentioned by Kiguel, some observations are warranted. First, in a demonetized economy with highly dollarized liabilities like Argentina’s, exchange rate policy has little capacity to cushion external shocks. The stock of dollar-denominated debt far exceeds the M3 in pesos. A devaluation increases the financial cost for the public and private sectors and can push many companies into bankruptcy, creating problems in the banking system. Instead of cushioning shocks, devaluation amplifies them. As for losing the lender of last resort, it’s a fiction as long as the state cannot borrow long-term in its own currency. Under these conditions, all the central bank can do is inflate the currency away. Highlighting the limitations of official dollarization relative to an unattainable regime in practice is a nirvana fallacy. Let’s return to reality.
Given his training and experience, one must assume that Kiguel is aware of all these points. He’s simply against official dollarization. Asserting categorically that it’s not viable is a very effective strategy to cancel the debate.
Contrary to what Kiguel and some economists claim, official dollarization was and is viable in Argentina. Today, it would require significantly more dollars than in December 2023, but the cost-benefit ratio still favors its implementation. Moreover, the government has built up a strong credibility on the fiscal front. Although dollarization can be implemented with restrictions on capital movement and a misaligned exchange rate, it is not the course of action that I would recommend. At the end of the day, the only limitation the government faces is political. But determining whether dollarization is politically viable isn’t an economist’s job. It is an evaluation that should be made by the president and his advisors.
Finally, with respect to Kiguel’s recommendation to reduce inflation—sustained fiscal balance and a credible monetary policy designed and implemented by an independent central bank—it’s like telling an obese person they need to eat less to lose weight. This is a truism. But there’s a reason it’s never been implemented in Argentina, where Congress is constitutionally obligated to do everything necessary to preserve the currency’s value, and the central bank is de jure relatively independent with its primary objective being monetary and financial stability, yet de facto has always been subject to political power.
No new laws or constitutional reforms would be needed to implement Kiguel’s recommendations. The problem, as Carlos Nino said, is that Argentina suffers from chronic institutional anomie, a situation in which instead of enforcing the law the government breaks it with impunity when it suits its short-term political needs. This is the legacy of decades of populism. Until we can cure ourselves of this disease, an independent central bank will remain a chimera.