The former Minister of Finance of El Salvador, Manuel Hindsstated that the government of Javier Milei Dollarization should not be delayed any longer since, among other benefits, it will crucially reduce the interest rate paid by companies and individuals.
In a paper called “Would dollars escape from a dollarized Argentina”, this economic consultant and member of the Institute of Applied Economics at Johns Hopkins University, defended his country’s experience and considered that the Argentine government should imitate it without delay.
The Minister of Finance of El Salvador (1995-1999) was in charge of dollarization in 2000, which the Central American country implemented in 2001.
In the report, he highlighted that “many Argentine economists seem to believe, or say they believe, that if the country becomes dollarized, the people will leave the banks empty because they will take their dollars abroad, as they have traditionally done and continue to do to this day.” ”.
“The data show that, as theory expects, capital will stay where it receives the highest returns once the risks of operations are discounted”
However, he stated that Argentines “prefer to keep their wealth in dollars than in pesos and, given the bad experience they had in getting hold of their dollars if they kept them in Argentina, they prefer to send them abroad and, preferably, secretly.”
“The data show that, as theory expects, capital will stay where it receives the highest returns once the risks of the operations are discounted,” highlighted this expert who worked with the World Bank.
“In Argentina, capital leaves the country because peso interest rates are too low to compensate for the peso’s loss of value,” Hinds observed.
“People know that if the government manages the currency, it will pass on the costs of its fiscal and monetary deficits to depositors, holders of assets in pesos, retirees and employees with salaries in pesos. This is what the Milei government is doing today,” said Manuel Hinds.
For that reason, “the Argentine people are becoming poorer at a rate and to a degree never seen in the country. People then take their resources. To do this, they withdraw pesos from the banks, buy dollars and send them abroad.”
“The Central Bank issues more pesos to replace those that are withdrawn, which increases the inflation rate and further devalues the peso, increasing the demand to exchange pesos for dollars. “This is the classic vicious circle of inflation produced by an accommodative central bank,” he explained.
“In 2023, on average, loans could be obtained in dollars at 7.86% per year, but in pesos at 87.68% per year it does not cover the risk, and people take the money”
And he added: “This vicious circle produces a mirage that is explainable to people not specialized in economics but inexcusable to economists, who think that people trust more in pesos (which retain their volume because the central bank issues them) than in dollars (which They have a limited supply).”
But distrust “is demonstrated by comparing the interest rates of dollars and pesos in the same country, where all the risks, except those associated with the currency, are the same,” Hinds explained.
“People who deposit resources in Argentina run the same risks, except for the loss of value of the deposited currency. In 2023, on average, loans could be obtained in dollars at 7.86% annually, but in pesos at 87.68% it does not cover the risk, and people take the money,” the economist clarified.
“As has been seen in the experience of all dollarized countries, this problem is automatically solved by dollarizing the economy and at meager interest rates,” he emphasized.
Of course, Hinds clarified, “you can always stabilize the economy through the sheer force of will of the Central Bank not to issue money unless it buys foreign currency for pesos. “Argentina has not shown the propensity to exercise such willpower.”
“You can always stabilize the economy through the sheer force of will of the Central Bank not to issue money unless it buys foreign currency for pesos”
“But even if it did, Argentine investors would have to pay higher interest rates than necessary. That’s the price of holding a lower investment currency. This was the reason why El Salvador dollarized,” he expressed.
In this regard, the economist highlighted that “the inflation rate was around 2% and the country was one of the few with investment grade in Latin America (five, later reduced to two, Chile and El Salvador). But the interest rate on the loans was too high, around 20% per year. Dollarization reduced it to about 6% on average. It was worth doing.”
In this way, Hinds joined other economists such as Steve Hankealso from the JHU, who questioned Milei for not accelerating dollarization, as he had promised in the election campaign, as did the columnist Maria Anastasia O’Grady from the Wall Street Journal. On the other hand, other experts from various ideological schools consider that the best way to lower inflation It is with a fiscal surplus and an independent central bank, without the need to re-fix the exchange rate.
