Argentina: what happens if the central bank closes? – 11/22/2023 – Market

Javier Milei, elected president of Argentina last Sunday (19), has not yet given details of his campaign promise to close the country’s central bank. But he will not be able to do so without putting the country’s struggling economy at greater risk, according to analysts interviewed by Sheet.

Amid accumulated inflation of 142.7% in the last year, the ultraliberal proposed to end the peso and dollarize the Argentine economy — he claims that within two years he would be able to stabilize the country’s prices with this measure.

Thus, the Central Bank of the Republic of Argentina (BCRA) would lose its role as monetary authority, a role that falls to the US Federal Reserve in the case of the dollar.

“It is very complicated to give up a monetary authority in a country like Argentina, which suffers from high inflation and needs monetary measures to control the inflationary process”, says Juliana Inhasz, professor at Insper and specialist in macroeconomics.

“Much of what Milei says is due to very mistaken policies from administrations that did not play the stabilization role that the central bank should do. But it is strange to think that, as the policies were not good, we ended up with the bank central, abolishes the currency and dollarizes it. It’s a somewhat radical decision, it doesn’t solve the problem”, he says.

Researcher at FGV Ibre (Brazilian Institute of Economics) and partner at BRCG Consultoria, Lívio Ribeiro remembers that even countries that share their currencies maintained their central banks.

“The most obvious issue is the eurozone, which has the European Central Bank. All countries have their central banks that no longer take care of maintaining fiduciary purchasing power, but take care of banking regulation, operational and administrative issues”, states.

Founded in 1998, the European Central Bank has not abolished local regulatory authorities. The Bank of Portugal, for example, states that its functions include managing the country’s assets and reserves, supervising credit and payment institutions and even issuing currency (according to authorization from the ECB).

In Central Africa, six countries share the same currency, the CFA franc. Cameroon, Central African Republic, Chad, Equatorial Guinea, Gabon and Republic of Congo are part of Cemac (Economic and Monetary Community of Central Africa).

In this case, the countries do not have individual central banks, but monetary policy is made by a centralized institution, the BEAC (Bank of Central African States), based in Cameroon, which in addition to controlling the currency, supervises banking activity and the issuance of public bonds.

Even Ecuador, which dollarized its economy in 2000, as Milei wants to do, maintained its central bank. The body in the country “guards international reserves and directly contributes to preserving the solidity of the economy, promoting the use of payment methods, boosting financial education and ensuring the availability of banknotes and coins in the country”, says the institution’s website.

El Salvador, another country that uses the dollar, also maintained its central bank.

For USP economics professor Mauro Rodrigues, dollarization takes away much of the role of these institutions, “but the central bank is not just that.” He states that without an entity that regulates banks and provides deposit insurance, for example, “you risk having banking and financial crises all the time.” “It’s very risky, I don’t see how to do it. Unless another body takes over these functions, but then you could lose the specialized team of a central bank”, he argues.

Among dollarized economies, one country stands out for not having a central bank — Panama, which has never had such an institution since becoming independent from Colombia in 1903.

The lack of banking regulation makes the country considered an example by liberals like Milei, but also places it among the 16 nations that the European Union considers to be tax havens.

In an article published in the English magazine Economist in September, Milei says that “eliminating the central bank is essential” and justifies the measure largely for monetary reasons. “There is no future for Argentina with the peso,” he says.

Milei argues that it is immoral for the government to “counterfeit” pesos (print banknotes), which he calls theft; he states that “any action taken by a central bank will always be harmful”; and cites negative net international reserves and “financial debt of the banking system so high that it tripled the monetary base” (volume of money issued by the central bank).

“Over the past 20 years, the country’s politicians and their handlers, who benefit from the status quo, have stolen billions of dollars from Argentine workers through the inflation tax [custo da emissão da moeda]. Under the current government, the number is close to US$90 billion. We estimate that, in the last year alone, politicians stole more than 5% of the country’s GDP by devaluing the peso”, he argues.