Argentina's Dollarization: Lessons From El Salvador
Source: Tomas Cuesta, El Pais
On the campaign trail, Argentine presidential candidate Javier Milei promised to dollarize the economy and end the lingering three-figure inflation crippling Argentina’s development. Successive administrations in Argentina have relied on printing pesos to cover budget deficits, which has brought the money supply to unsustainable levels and thrown the economy into a downward hyperinflationary spiral. According to Milei, adopting the US dollar as the official currency and abolishing the Argentine peso would eliminate the dangerous temptation of the “money printing machine” by handing national monetary policy to Washington. Nevertheless, upon winning the presidency in November 2023, Milei apparently shunned his campaign pledge on dollarization and focused on stabilizing the Argentine economy through deregulation, austerity, and reduced government spending. Indeed, although Milei asserted that it was “really easy to dollarize Argentina,” the truth is that dollarization was economically unfeasible in the short term, as dollarizing central bank liabilities necessitates a substantial dollar reserve that the government lacks.
Argentina's net foreign exchange reserves have been largely negative until recently. Nevertheless, Milei’s controversial economic policies have so far made great strides in tackling inflation and wasteful spending. Moreover, his administration has striven to address the hurdles to dollarization. Notably, it secured a $20 billion loan from the IMF in April 2025, replenishing its foreign exchange reserves. Moreover, in May 2025, it implemented important measures to incentivize Argentinians to deposit their informal dollar savings, amounting to 271 billion in cash, according to government estimations, into the formal banking system. This includes removing the obligation to explain the origin of undeclared money up to US $90,000 and increasing the threshold for transaction amounts to be reported to tax authorities tenfold.
Consequently, as Argentina appears to be determinedly headed toward dollarization, learning from the experiences of countries that have undergone such a process is essential to assess the consequences of this policy. This article draws on recent research published by the author in Latin American Policy on El Salvador's monetary experiment with dollarization. Understanding the implications of dollarization for El Salvador offers a clearer picture of what adopting the dollar as a national currency entails before embarking on this unalterable path.
El Salvador adopted the dollar in 2001 to spark economic growth in the country. The dollarization of the economy was envisioned as a radical panacea to hedge against inflation, lower interest rates, stimulate trade, and attract foreign investments. Moreover, it would facilitate the transfer of remittances from Salvadorans living in the United States to family members in El Salvador by eliminating exchange and transaction costs. Indeed, following the waves of migration during the 1979–1992 Salvadoran Civil War, the equivalent of one-fourth of El Salvador's total population resides in the United States and sends $1.9 billion in remittances home annually, amounting to 15% of Salvadoran GDP.
The Monetary Integration Law, which kickstarted dollarization, was implemented expeditiously without public discussion under the administration of Francisco Flores Pérez. The government thus relinquished sovereignty over monetary policy, lost the benefit of seigniorage (the profit made by a government by issuing its currency), and deprived the Central Bank of its capacity to act as a lender of last resort. However, the replacement of the Salvadoran colón with the US dollar had immediate effects on inflation rates, which fell to the level of the United States and have since remained comparable to the US average. The case of Ecuador is even more striking: its inflation rate reached 96% in 2000 and fell to 2.7% in 2004, following the same dollarization process in 2000. Similarly, the average inflation level in El Salvador since 2001 has been lower than that of its direct Central American neighbors, Honduras, Guatemala, and Nicaragua, which have not adopted the dollar.
Dollarization also succeeded in lowering interest rates in El Salvador. After suffering from high interest rates on short- and medium-term credits and a lack of long-term loans throughout the 1990s, El Salvador finally began to benefit from long-term loans with lower interest rates. Real interest rates have been continually lower in El Salvador compared to its Central American neighbors. A counterfactual analysis suggests that these rates would have been 4–5 percentage points higher had dollarization not been adopted.
On the facilitation of trade, however, El Salvador has faced more adverse consequences. While trade flows with the United States, El Salvador’s most important trading partner, increased, it has come at the expense of the country’s trade balance. Labor and commodities have become more expensive in dollarized El Salvador, damaging the country’s competitiveness. It also made imports cheaper and undermined the consumption of local products. Finally, growing remittance flows, which reached nearly 22% of El Salvador's GDP before the Great Recession, fueled the consumption of imported goods. Overall, the trade deficit increased by 654% between 2001 and 2022.
The attraction of foreign investment is the most disappointing aspect of dollarization. In 2001, El Salvador had a Baa3 credit rating, the lowest investment-grade rating from Moody's Corporation but the highest among its Central American neighbors. Before the adoption of Bitcoin in 2021, however, El Salvador’s rating had fallen to B3, the lowest rating in the sub-region and considered a junk bond rating. This testifies to the failure of the adoption of the dollar to improve the investment climate in El Salvador. While the dollarized system was expected to instill stability in the country, it also made fiscal prudence indispensable, given the government's inability to monetize its debt. Consequently, the Salvadoran government had to maintain a strict, balanced budget to offset the downside of dollarization, which it ultimately failed to realize. The repetitive budget deficit problem and growing debt to finance it weighed on El Salvador’s credit rating, which degraded several times over the first 20 years of dollarization. El Salvador has also underperformed compared to its neighbors in terms of attracting foreign direct investment. The Great Recession made El Salvador’s economy more vulnerable during the crisis in the United States. The country's dependence on the dollar and its inability to pursue an independent monetary policy weakened its economy and undermined its capacity to respond to the financial crisis, thereby worsening the country's investment climate. El Salvador's FDI fell drastically after 2007, reaching net disinvestment in 2010, and has struggled to recover to the level of its neighbors ever since.
In terms of GDP growth, the dollarization has been inconclusive. El Salvador has consistently experienced slower growth than its neighbors both before and after adopting the dollar. The country's lack of investment drives this predicament. By failing to uphold a balanced budget in a dollarized economy, El Salvador’s creditworthiness declined steadily, making the country less attractive for investments. The adverse effects of the Great Recession exacerbated the deteriorating investment climate in El Salvador, which has been reflected in the country's slow economic growth compared to its neighbors. Consequently, dollarization per se does not guarantee GDP growth without the adequate fiscal policy necessary to harness the benefits of such a measure and mitigate its disadvantages.
Dollarization in El Salvador produced mixed results. While inflation and interest rates decreased and stabilized, El Salvador’s competitiveness was adversely impacted, and the trade deficit increased. The adoption of the dollar also fell short of attracting investments and generating GDP growth. The Salvadoran government’s neglect of fiscal discipline and increasing reliance on debt to fund budget deficits undermined the effectiveness of dollarization and compromised the sustainability of public finances under a dollarized system. The adoption of the dollar, thus, did not open the doors to prosperity envisioned when it was implemented in 2000. Indeed, dollarization provides a conducive economic framework for development characterized by low inflation, interest rates, and reduced devaluation risks. However, it falls to the government to implement the appropriate policies to capitalize on benefits while mitigating their shortcomings. As a result, unless accompanied by measured fiscal policy, dollarization does not inherently support economic prosperity.
This conclusion is timely, given the ongoing debate in Argentina about dollarization, which has become increasingly politicized. Dollarization serves as a buffer against the rampant inflation that Argentina has found itself helplessly bogged down in. Nevertheless, the adoption of the dollar is unlikely to be a silver bullet to all of Argentina’s economic woes. This is especially true given Argentina's complicated history with sovereign debt, on which it has defaultednine times since independence, most recently in 2020. Therefore, the country must ensure its readiness and commitment to responsible budgeting and fiscal balance as a precondition for dollarization.