Along with India’s recent use of the Chinese currency to buy Russian oil, Argentina’s move is an example of the global economy's de-dollarization.
Argentina is battling inflation of more than 100% and the worst drought in six decades, hammering its commodities exports and already-weak foreign exchange reserves, and sending the country’s dollar reserve to the lowest level in seven years. Accordingly, when the government made a scheduled $2.7 billion payment on its debt to the International Monetary Fund (IMF) in June, $1 billion of that came from its stockpile of Chinese yuan, the rest consisting of IMF special-drawing rights. The unprecedented step underscores the dire situation of the Argentine economy and the increasing relevance of the yuan as an international currency.
Along with India’s recent use of the Chinese currency to buy Russian oil, Argentina’s move—and the IMF’s agreement to accept it—offers further evidence of the de-dollarization of the global economy, says Radhika Desai, director of the Geopolitical Economy Research Group at the University of Manitoba.
“Such developments also include currency swap agreements between a rising number of countries, the appearance of new non-SWIFT payment arrangements and the adoption of new sources of finance by China particularly, and to a lesser extent by BRICS institutions,” she points out. “Latin America is also abuzz with talk of creating an alternative currency.”
These developments suggest a growing reluctance to trust in the crisis-prone US financial system, Desai argues. “The return of inflation has put the Federal Reserve in a quandary, because if it does not tackle it, it will have to devalue its currency, making it and dollar-denominated assets much less attractive,” she warns. That places countries like Argentina on the cusp between the lingering dollar system and a new emerging alternative.
Argentina’s plight also marks an IMF policy failure, Desai contends. “As one of the longest-standing customers of the IMF, Argentina is a striking indictment of its policies,” she says. “You cannot get development without a very substantial state role in the economy—a role that manages trade and capital flows on the one hand, and transforms the agricultural, industrial and service sectors in a way that enhances productivity and moves the country up the value chain on the other.”
The development policies of the IMF and other official development agencies—emphasizing austerity, privatization and opening the economy to foreign capital—instead amount to the subordination of weaker economies to more powerful players, according to Desai, since “it is only when their currencies are valued at a sufficiently low level that the West and the US can import commodities and labor from them at very cheap prices.”