Argentina President-elect decides to go for dollarization to tame inflation

The newly elected Argentinian President Javier Milei, a right-wing populist, has promised to make the US dollar as legal tender in his country, replacing the country’s national currency peso, a process known as dollarization, wherein a country replaces its national currency with the currency of another nation as its legal tender.

At present, Argentina is suffering from very high inflation of 140%, due to high budget deficits. High interest rate, growing unemployment and declining economic growth, standard of living, are other economic issue troubling the country.

Argentina faced a similar situation in the 90s too. At that time, it entered into a Currency Board Arrangement (CBA) with the US dollar, where it rigidly pegged the exchange value of its currency to the US dollar (1 peso equal to 1 US dollar), to assure foreign investors and tame hyperinflation.

These measures worked well till the year 1999, when its largest trading partner and economic rival, Brazil, devalued its currency and also allowed it to float freely.

Dollarisation works best between countries which are geographically contiguous and previously integrated through trade and other arrangements.