Contrary to Argentina, Uruguay launches an offensive to discourage the use of the dollar

Starting next year, Guillermo Tolosa, the head of the Central Bank of the neighboring country, plans implement measures to promote the use of the Uruguayan pesothe agency reported Bloomberg. It is part of a strategy to develop a local capital market that could benefit those who need funds, from companies and individuals to the government itself. Tolosa plans to announce on Friday the guidelines of monetary policy and the plans for dedollarization of the central bank.

The first measures will include higher capital requirements for banks for some dollar loansalong with the elimination of reserve requirements for certain deposits in pesoswith the aim of encouraging entities to grant more credit in local currency. Other measures under evaluation include requiring companies that set prices in foreign currencies to also display them in pesos, he detailed. Bloomberg.

It will be a long road to discourage the use of the dollar in a country where More than two-thirds of bank deposits are in US currency. Uruguayans began adopting the greenback during periods of high inflation and currency depreciation in the second half of the 20th century. Today, ATMs offer pesos and dollarsand high-value purchases, such as cars and real estate, are priced in the US currency.

President Yamandú Orsi’s de-dollarization drive contrasts with that of his counterpart on the other side of the Río de la Plata. In Argentina, Javier Milei is advancing with labor reforms that would allow salaries to be paid in dollars or Argentine pesos. Although his most radical monetary proposals are on hold, the President during the campaign had said that It could eventually eliminate the peso, close the Central Bank and adopt the dollar.

Tolosa maintains that Uruguay’s attachment to the dollar reflects an old habitforged in times of economic instability, which the country would have already overcome.

“Let’s please let go of the pacifier once and for all”he told business leaders in September. “Your purchasing power when you invest in dollars is going to be very volatile. Investing in dollars in a context like this is a kind of scam, a casino.”

Uruguay’s attempt to reduce its dependence on the greenback, although driven primarily by internal concernsalso reflects a broader international debate about the future of the dollar. Few expect the U.S. currency to lose its dominant role in the global economy any time soon, but the increasing competition from other currenciesgeopolitical tensions and US deficits have eroded some of its appeal.

The dollar’s share of central bank reserves fell from around 71% at the beginning of the century to almost 59% last yearaccording to data from the International Monetary Fund. Dollar assets within Uruguay’s reserves fell to 84% in September from 90% in March, when Tolosa took office.

The Central Bank intends to achieve significant progress in the development of markets in pesos and in the reduction of dollarization during Tolosa’s mandate, the monetary authority indicated.

Tolosa has sought to generate public support for its dedollarization campaign by arguing that Uruguayans are losing money by saving in dollars. Dollar-denominated checking accounts lost half their purchasing power in the last two decades, he noted. The shortage of local currency deposits also restricts the supply of credit, as regulations limit dollar loans to households and companies with income in pesos.

However, to persuade Uruguayans to keep more of their life savings in pesos, monetary authorities will have to adopt a lower inflation target —3% instead of the current 4.5%— and sustain it for years, he told Bloomberg Aldo Lema, economist and partner of the regional consulting firm Vixion Consultores.

“Uruguay has been very slow in the convergence of low and stable inflation in contrast to Peru, which has had low and stable inflation for a long time and has de-dollarized,” said Lema.

Until recently, Uruguay was an exception in Latin America, with consumer price increases averaging 8.8% annually between 2001 and 2022. That situation was widely tolerated thanks to collective bargaining agreements and business contracts designed to protect the parties from price fluctuations. High inflation did not prevent Uruguay from obtaining investment grade credit ratings nor did it attract billions of dollars in foreign investment, including pulp mills and luxury properties on the coast.

The restrictive monetary policy is beginning to bear results: inflation has remained within the Central Bank’s 3% to 6% tolerance range for two and a half years and has hovered around the 4.5% target for six consecutive months.