Crisis-stricken Argentina must dollarize and get rid of the central bank, veteran economist says

Argentina is in the grip of a profound financial disaster, and one veteran economist believes half of the answer is for President Javier Milei to ship on his marketing campaign promise to dollarize the economic system and abolish the central financial institution.

Latin America’s third-largest economic system is at present struggling to deal with the world’s quickest rising costs, which is hammering the buying energy of Argentinians.

Data printed Tuesday by the nation’s statistical workplace showed that Argentina’s 12-month inflation charge via February rose to 276.2%, reaffirming Argentina’s place as having the world’s worst inflation.

Argentina’s authorities on Monday launched a large peso debt swap in a bid to assist stabilize the crisis-stricken economic system and probably pave the means for Milei to carry forex controls.

Steve Hanke, professor of utilized economics at Johns Hopkins University, described the transfer as a “kick the can down the road type of operation.”

“They don’t need to buy any time, if they dollarized the economy and got rid of the central bank – something that Milei promised during his campaign, the thing would be fixed. And it is feasible to do that, and I think it is totally desirable,” Hanke informed CNBC’s “Squawk Box Asia” on Thursday.

Hanke stated that in 1999 he had drafted a regulation at the request of former President Carlos Menem that may have dollarized Argentina’s economic system. The economist has beforehand stated he’d been in shut contact with Milei’s technical crew and described himself as an “informal advisor” on points comparable to dollarization.

“We wouldn’t be talking about this, and they wouldn’t have defaulted over and over again if they would have dollarized way back in 1999. But at any rate, it looks like Milei has put the dollarization thing on the shelf and I think that will end Milei. This is a fatal mistake,” Hanke stated.

“They are never going to get out of the soup by fooling around with this financial engineering, kicking the can down the road and trying to put in place what really is just a plain vanilla standard IMF [International Monetary Fund] program. These programs just don’t work [and] they have a history of not working,” he added.

A spokesperson for Argentina’s embassy in London was not instantly obtainable to remark when contacted by CNBC.

Milei, who was just lately accused of hypocrisy over a salary scandal, has struggled to realize the vital assist from lawmakers to enact his sweeping financial invoice.

The libertarian economist, who was sworn in as president late last year and has typically been in comparison with former U.S. President Donald Trump, has insisted there isn’t a various to his proposed “shock therapy” if the authorities is to resolve the nation’s financial woes.

Advocates of dollarizing Argentina’s economic system say the swap might assist the nation tame skyrocketing inflation and convey an finish to its boom-and-bust cycle. Critics, nevertheless, say the transfer would strip the nation of its nationwide sovereignty and dent Argentina’s capability to affect the economic system via strikes comparable to rate of interest modifications.

Ecuador and Panama are two notable examples of international locations which have beforehand dollarized their economies, however no nation of Argentina’s dimension has beforehand shifted to the U.S. dollar.

“To dollarize, you don’t need to have net foreign reserves that are positive,” Hanke stated. “You have to have gross foreign reserves that are greater than the value of the peso notes and coins outstanding and I know all about this. This isn’t a theory I’m talking about, I’m not in a classroom. I did this in Ecuador,” he continued.

“In Ecuador, we dollarized it in 2000, 2001 and they had negative net reserves but they did have gross foreign exchange reserves greater than the sucre notes and coins that they had to swap out and we did it.”

Hanke stated Argentina had “massive amounts” of U.S. greenback money as a result of the nation is already “de facto dollarized.”

Asked about the U.S. curiosity of dollarizing Argentina’s economic system, Hanke replied: “I think the U.S. interest is to have a stable Argentina. A big, powerful South American country that’s stable. Stability might not be everything, but everything is nothing without stability. That’s what the U.S. should be looking forward to and by the way you don’t have to get the permission of the U.S. government to do this.”