Business & Economy

Dollar influence on Latin American economy

America Desk, Sept. 19 (EFE) – Argentine far-right candidate Javier Milei’s proposal to dollarize Argentina has once again brought the dollarization debate to Latin America.

Countries like Panama, El Salvador, and Ecuador have adopted the US currency for years, and others like Cuba and Venezuela have solid underground markets.

In Argentina, Milei, the candidate of La Libertad Avanza, took first place (29.86%) in the primaries on August 13 under the banner of dollarization, eliminating the central bank and taking a “chainsaw” to public spending,

However, despite triple-digit inflation, macroeconomists speak of “insurmountable obstacles” because Argentina lacks the necessary dollars to save the monetary base and support bank deposits.

Moreover, the proposals involve “absurd increases” in public debt for a country whose securities are quoted at 30% of parity.

Dollarized Countries

The first dollarized country in Latin America was Panama, where the use of the dollar dates back to 1904, one year after it gained independence from Colombia as a result of the construction of the Panama Canal by the US.

However, the currency had already been in circulation for almost half a century thanks to the influx of travelers due to the so-called “gold rush.”

According to the National Center for Competitiveness (CNC), a non-profit public-private organization, the measure had its advantages because it allowed “one of the lowest inflation rates in the region and a competitive supply of credit.

It also favored commercial stimulation and a stable economy without a central bank or a state that could intervene in the price of money.

The CNC claims that the downside is it limits the possibility of stimulating exports through devaluations. However, “the benefits far outweigh the costs,” according to the organization.

Dollars and Balboas coexist strangely: it is known that the national currency is equal to one dollar, but it is only seen in one-unit coins with a limited monetary supply.

Panama was followed by Ecuador almost a century later, when it adopted the dollar as its sole legal currency in 2000, abandoning the heavily devalued sucre after an unexpected and traumatic decision taken by then-president Jamil Mahuad (1998-2000) as a way out of an economic crisis.

The dollar allowed the Ecuadorian economy to achieve monetary and financial stability, going from an average annual inflation of 36.4% in 1980-1998 to 4.5% in 2001-2019, according to data from the Central Bank of Ecuador (BCE).

“When politicians cannot adequately manage the currency, citizens begin to de facto dollarize the country, especially in countries with weak institutions,” says Ecuadorian economist Alberto Acosta-Burneo.

“Politicians monetize the deficit. They aggressively print banknotes to finance fiscal imbalances. At the end of the day, they pass the bill to the citizens through the inflation tax,” he adds.

However, according to him, Ecuador needs to go one step further and abolish the central bank to prevent it from issuing money by expanding its fiscal balances through placing bonds, an accounting arrangement that can create a liquidity crisis.

Dollars are also legal in El Salvador, along with the colón, since January 1, 2001, whose exchange rate was set at 8.75 units to the dollar until it disappeared when the banking system converted all accounts into dollars, and the Salvadoran colon was withdrawn.

According to economist Ricardo Castañeda, dollarization “was undoubtedly a political measure rather than an economic one, since there were no technical elements to support the decision.”

However, for El Salvador and Honduras, the “greatest advantage” of dollarization “after such a long time” is that it has allowed inflation to be “not so high,” but “it has been a brake on the country’s economic growth because there are fewer tools to influence the economy,” he adds.

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