by Tito Correa, Nyasha Chingono and Miguel Lo Bianco

QUITO/HARARE/BUENOS AIRES (Reuters) – In the streets of Harare, the capital of Zimbabwe, as in the stores of Quito, that of Ecuador, greenbacks bearing the image of American presidents have become commonplace since these countries opted for the dollar in the hope of stabilizing their economies.

The example of these two countries can serve as a lesson for Argentina at a time when its elected president, the ultraliberal Javier Milei, says he wants to replace the peso with the American currency to get the country out of an infernal cycle of devaluation. and hyperinflation.

The dollarization of the economy – or at least the anchoring of the local currency to the dollar – has been seen in several countries as the ultimate means of taming galloping inflation and responding to the loss of confidence in the local currency, as this was the case in the 1990s in Ecuador, faced with a deep economic crisis, or in El Salvador after the civil war.

In Argentina, self-proclaimed anarcho-capitalist Javier Milei, elected Sunday to the country’s highest office, considers dollarization as a way to curb inflation, which is approaching 150% and which has plunged four out of ten people into poverty.

This is the choice that Zimbabwe made in 2009 when its currency – the Zimbabwean dollar – lost all value, plunging the country into uncontrollable hyperinflation. The greenback has since established itself as the almost sole currency, even after the government’s attempt to reintroduce the local currency in 2019.

Zimbabwe’s experience of dollarization holds both warnings and promises for Argentina’s new president.

Many Zimbabweans saw their savings evaporate when the dollar was adopted in 2009.

“That morning, when I woke up, there was nothing left in my account. No more life insurance, no more health insurance, everything had disappeared,” Bongiwe Mudau, who worked in a bank. “Dollarization destroyed all my savings.”

For this mother of three children, now aged 47, using the greenback was not such a bad idea because it helped stabilize prices, which had practically doubled every day for a year. In 2009, after the adoption of the dollar, they fell by 7.7%, according to data from the International Monetary Fund (IMF).

“For the first time in years, I was able to establish a budget knowing that prices were not going to change. It brought some order to the economy,” she says.

ALWAYS LOSERS

Zimbabwe plans to remain dollarized until 2030 to preserve this newfound stability.

The picture, however, is not so rosy for all residents of the southern African country.

Moses Mhlanga, 50, who sells sweets on the streets of Harare to survive, remembers struggling to find greenbacks when they were introduced, like all workers in the informal sector.

“For some of us, there was no source of American dollars. We had to look for them, it was really very difficult,” he recalls. “It’s better now because we’ve gotten used to this currency and it’s available everywhere.”

With one significant drawback: the difficulty in obtaining small denominations, which are more expensive to transport. “It makes shopping difficult, especially in the street. We lose customers because we can’t give change,” laments Moses Mhlanga.

Argentina itself is not its first attempt with the dollar. For most of the 1990s, it imposed a peso-to-dollar parity that helped tame inflation.

But the experiment proved untenable because of the profound imbalances it had created. As the economy faltered, the government panicked and imposed what Argentines called the “corralito,” blocking access to individuals’ savings or forcibly converting their dollar savings into pesos. This initiative provoked the serious riots of 2001-2002 and the worst economic crisis in the country’s recent history.

The experience continues to fuel Argentines’ distrust of the peso and the banking system. Many of them placed their savings abroad or slipped them under the mattress, a sustainable strategy as long as prices did not increase but which was shattered by the sudden resumption of the cycle of devaluation and hyperinflation, who played a big role in Javier Milei’s victory.

MILEI GOES IN REVERSE

In exchange offices, the dollar was sold in the weeks preceding the election three times more expensive than the official exchange rate practiced by the banks, fueling a significant black market.

“We are coming out of an era of monetary convertibility. We have experienced ten years of economic stability which allowed us to plan, to develop, to work,” considers Nestor Cerneaz, 57, a resident of Buenos Aires.

“It was possible to save money and buy an apartment. I really miss that period.”

Since his presidential victory, Javier Milei himself has seemed to backtrack on his idea of ​​rapid dollarization of the Argentine economy, highlighting the lack of foreign currencies, the high poverty rate or the importance of the budget deficit .

He also does not have a majority in Parliament to pass a law to this effect.

This situation should encourage Argentines to look towards Ecuador, another South American country which resigned itself, in 2000, to dollarizing its economy.

After suffering an average annualized inflation rate of 33% for five years, the country quickly managed to control the rise in prices. Over the past decade, the annualized rate has averaged 1.54%.

“It was the best solution for us at a time when Ecuador was in bad economic shape,” said Wilson Andrade, a 72-year-old retiree living in Quito.

“With our currency, we could no longer buy anything, everything was too expensive, so dollarization (…) offered people more security.”

There are, of course, downsides to such a policy. Reliance on the dollar limits a country’s ability to control its own monetary policy. It also makes any devaluation impossible, which can sometimes be used to control trade imbalances.

With an economy five times larger than Ecuador’s and a reliance on exports of agricultural commodities like soy, corn and wheat, made more competitive by a weak peso, Argentina would have much to lose if it adopted the greenback.

Of 125 Argentine businessmen interviewed by Reuters last month, only two said they were in favor of total dollarization. Two thirds were more inclined towards a dual peso-dollar system, which they believed would stabilize the economy.

(Reporting by Tito Correa in Quito, Nyasha Chingono in Harare and Miguel Lo Bianco in Buenos Aires; writing by Rodrigo Campos in New York; Tangi Salaün, editing by Bertrand Boucey)

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