Moving Towards De-Dollarization: Argentina And Brazil Are Discussing Plans For A Common Currency
Brazil and Argentina, South America's largest and second-largest economies, are considering the use of a common currency to avoid trade in dollars to save their respective economies from acute inflation and the possibility of recession due to volatile global geopolitical situations.
Both of the largest economies of South America will also invite other nations to join this initiative to stable the south American economy as a whole and primarily to reduce reliance on dollars.
The new currency name "Sur" south has been suggested by the Brazilian president, Luiz Inácio Lula da Silva, primarily to boost regional trade.
The concept of a common currency has derived from the common ground in the same way that Europe once formulated the Euro. Although, the release of the common currency doesn't have any deadline, yet, and would not seek euro-style monetary unification.
However, Sur South, will have some prominent advantages and those will be :
1. it will eliminate the cost of exchange rate fluctuations within the South American region.
2. The common currency will protect businesses and consumers within the continent's geographical boundaries from abrupt and costly swings in currency markets, which are used in some countries to undermine investor confidence and cause economic instability.
3. The common currency will create a global impact on the world economy.
4. The common currency could be used as a world reserve currency to conduct business in a specific region.
5. It will also improve the financial market along with growth and stability.
Many of these benefits are interconnected. For example- if the financial market will improve, It will eventually create a gullible environment for investors to invest in the country, and it will eventually assist the government in developing an efficient budget for the country's people.
The most important aspect of this currency will be that it will end the ongoing Forex crisis and unending inflation problems in several South American countries, including Argentina.
Let's look at the crisis in the Argentinian economy:
Domestic inflation in Argentina reached a whopping 70% in 2022, and the country's economy was on the verge of collapse. As a result of that, the country's central bank raised the interest rate to 52% to discourage investors to dump their asset investments in pesos.
The major exporter of soybean, wheat, and sunflower oil is suffering from the forex reserve crisis due to the use of expensive energy imports from countries and payment in dollars, causing the dollar reserves to plummet to the lowest.
In 2018, a currency crisis led to the peso losing half of its value against the dollar. President Mauricio Macri then signed a $57 billion deal with the International Monetary Fund, but the deal failed to stabilize the economy and put the economy into the gorge, during the 2019 general election.
The 2019 election triggered a massive sell-off of inter-government bonds, forcing the government to default on the bond amount that was due to be paid using the forex reserve, which was already depleting.
The Argentinian economy nosedived into an economic crisis in 2018, and it is still in the same position as it was in 2018.
Nearly 39.5% of Argentinians are still living in poverty today, compared to about a quarter at the start of the crisis.
Argentina's economic paradox is an enduring story since the country's inception after it gained independence from Spain. According to the World Bank, Argentina has spent more than almost any other nation in recession since the 1950s. The Argentinian economy faced hyperinflation in 1989 and 1990.
As a result, the common currency will benefit Argentina the most in comparison to Brazil, despite the fact that the Brazilian economy faces slightly different problems, which cannot be avoided.
Problems in the Brazilian economy:
The Brazilian economy is now facing slow growth, rising poverty, and food insecurity.
According to Oxfam, 33 million Brazilians are currently suffering from famine, and 63 million are living below the World Bank's poverty line.
Brazil's foreign debt is rising in tandem with the cost of imported energy, and individual public debt is also skyrocketing.
The recent government of Luiz Inácio Lula da Silva needs to fix the tax system in order to improve the country's financial market. It will increase investor confidence in the Brazilian economy. Therefore, These two South American titans took an initiative that may help them and other ailing South American economies feed each other and stay afloat in the current economic downturn.
Take the examples of Peru and Venezuela: Peru is experiencing widespread protests due to economic conditions, and the Venezuelan economy is nearly bankrupt as a result of punitive sanctions imposed by the United States government.
When the South American continent has its own currency, it will no longer be dependent on American dollars to conduct trade between South American nations and the rest of the world.
However, de-dollarization will be a difficult task because the US economy is strong and its currency is stable. To dethrone the dollar, they must make their continent self-sufficient and effectively integrated.
Brazilian government's proposal
The proposal of this common currency came to the limelight when the Brazilian president, Luiz Inácio Lula da Silva, was on his first foreign visit to Argentina.
He announced that both of the country's foreign ministries formulate the rule of implementing the common currency, first between the two countries, and later among all other South American countries.
According to Brazil's Finance Executive Secretary, Gabriel Galipolo, the currency, or "regional unit of account," would be accompanied by additional credit to support exports to Argentina through Brazilian banks that operate locally.
Brazil's government would guarantee bank loans, while Argentina would be required to provide collateral in the form of grains, gas, or oil.
In the meantime, the Argentinian and Brazilian governments will continue to use their local currency. The new tender will solely focus on trade only.