Latin American Dollarisation Precursors

Argentine President-elect Javier Milei aims to adopt the U.S. dollar and eliminate the central bank to combat soaring inflation, a key issue in the country’s deep economic crisis.

Latin American Shift Towards Dollarisation

Several Latin American nations have pursued official or unofficial dollarisation to achieve economic and financial stability beyond their local currencies’ capabilities. This move represents an attempt to address longstanding inflationary challenges.

Ecuador’s Dollarisation Journey

In March 2000, Ecuador took the bold step of adopting the U.S. dollar to mitigate a severe banking crisis that resulted in $5 billion in losses and left numerous individuals bankrupt. The subsequent price hikes threatened to spiral into runaway hyperinflation.

The transformation from the sucre to the dollar followed a bank holiday and a temporary freeze on half of all deposits. These emergency measures appeared to yield positive results, with inflation levels rapidly decreasing, occasionally even converging toward periods of deflation. The country is projected to record a modest 3.1% annual inflation in 2023.

El Salvador’s Experience

On January 1, 2001, El Salvador officially embraced the U.S. dollar as its national currency. The government, under then-President Francisco Flores, argued that this transition would enhance the country’s appeal to foreign investors and traders, reduce the risk of devaluation, and enable local banks to offer improved credit terms. However, independent economist Cesar Villalona noted adverse effects stemming from dollarisation.

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Venezuela’s Informal Dollarisation

Venezuela’s adoption of the U.S. dollar has been more informal, with U.S. currency, often perceived as a symbol of “American imperialism,” paradoxically becoming the most circulated currency in the country. This trend, as highlighted by economists, reflects the challenges and complexities of informal dollarisation.

In countries like Peru and Uruguay, the U.S. dollar is utilized for specific consumer transactions and services, including cash withdrawals from ATMs and account openings, despite the official currency for government transactions remaining the local currency.

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