Argentina's Milei outlines detailed path to dollarization. Here are the details

Argentina's President Javier Milei provided the most detailed outline yet of his administration's plan to dollarize the Argentine economy, reinforcing a key campaign promise.

Speaking at a business event in Buenos Aires, Milei detailed the steps his government will take to transition the country toward a dual-currency system where both the peso and the US dollar are legal tender.

Milei explained that the initial phase involves clearing the central bank’s balance sheet by paying down local liabilities and reforming the financial system.

The peso will be maintained at a flexible exchange rate during this period.

Eventually, the central bank will cease printing pesos, facilitating the US dollar's emergence as the dominant currency.

“The peso will become like a museum piece and when it becomes very rare, what do you think we will do? We will dollarize and that way the peso will disappear,” Milei remarked, emphasising the peso's phased-out role.

Since assuming office on December 10, Milei has aggressively pursued measures to tackle Argentina's severe inflation, which exceeds 100 per cent annually.

His administration has focused on reducing the central bank's liabilities, cutting borrowing rates from 133 per cent to 40 per cent, a major drop intended to curb inflation and stabilise the economy.

This approach aims to shift debt from central bank instruments to more stable treasury notes.

Luis Caputo, Milei’s economic chief, has led efforts to make treasury notes more attractive compared to central bank debt.

This move has already seen a significant migration of debt from one-day notes, known as "pases," to treasury holdings.

This transition is essential for the eventual elimination of the central bank's liabilities, which will precede the lifting of capital controls and the introduction of currency competition.

However, Milei was cautious about setting a specific timeline for lifting capital controls, noting that market conditions would dictate the appropriate moment.

Echoing this sentiment, Caputo, speaking before Milei at the same conference, indicated that removing controls prematurely would be "inappropriate," stressing the need for a stable economic environment before such measures could be safely implemented.

This plan is part of Milei's broader strategy to dismantle Argentina's central bank and stabilise the nation's economy through radical financial reforms.

The steps outlined aim to replace the peso with the US dollar, which Milei and his team believe will bring more stability and reduce inflationary pressures that have long plagued the Argentine economy.

The move toward dollarization represents a significant shift in Argentina’s economic policy, with the potential to reshape the financial landscape and address long-standing economic challenges.

(With inputs from Bloomberg)