Which countries eliminated the central bank and what do they say about what will happen in Argentina?

Argentina Central Bank
Key facts:
  • Most countries without a central bank are small states with open microeconomies.
  • Zimbabwe, the country with the highest inflation in the world, tried to close its central bank in 2019.

One of the main proposals of the elected president of Argentina, Javier Milei, has to do with the elimination of the Central Bank of the Republic. This, is part of the economic plan that he plans to implement to overcome the crisis that affects the country. 

This idea raises the question of which countries in the world have chosen to operate without their central banks and what results they have obtained so far.  

Statistics indicate that there are around 10 countries globally that operate without this organization. Most of them have chosen to adopt foreign currencies as legal tender. Nations such as Panama (in Latin America) and Zimbabwe (in Africa) stand out in the group, which are the largest and most populated.  

Also on the list are a group of microstates with open economies, among which are the principalities of Liechtenstein, Andorra and Monaco (in Europe); Marshall Islands and the small countries that make up Micronesia, such as the Manx Islands and Palau; in addition to Kiribati and Tuvalu (all in Oceania).  

It is evident that the list of nations without a central bank abounds in a number of small countries, both in size and population, which are characterized by having open economies, a more flexible policy and greater foreign dependence. 

Without a central bank, the management of monetary policy is renounced

Central banks aim to administer monetary policies, independently of political power (in theory). They are also responsible for supervising commercial banks, regulating the financial system and managing international reserves.  

Consequently, countries that do not have this body lose the power to establish their monetary policy, which includes functions such as setting interest and exchange rates against international currencies and printing money.  

However, as other tasks necessary for economic management are still pending, these countries require the authority to exercise some of the other economic functions that a central bank is responsible for, including ensuring the country’s liquidity and managing international reserves. . It also deals with local monetary policy and some decisions related to interest rates and the money supply of commercial and financial banks. 

Let’s see below how this situation has been handled in some of the countries that do not have a central bank. 

Panama, a country that was born without a central bank

The Central American country has lived without a central bank since its independence in 1904. Its monetary system is based on the use of the US currency as legal tender, adopting the gold standard for the local currency and giving the Panamanian balboa the same value. than the US dollar.  

The closest thing to a central bank in Panama is the National Bank, an official entity that is responsible for minting coins locally (the balboa is used for accounting purposes), manages official accounts, and backs some external loans. 

The National Bank exercises some of the functions of a central bank in Panama. Source: Wikipedia .

This fact has led to the country’s money supply being driven by the market, since by not having a central bank it must buy and obtain dollars by producing or exporting goods or services.     

Banks, for their part, operate without a lender of last resort and do not have a deposit insurance institution. Due to this, a  report from the Inter-American Development Bank (IDB) considers that the Panamanian financial system has difficulties serving certain business and population segments.  

“The concentration of the banking business in a few segments has promoted the development of a conservative system in Panama, with a reduced product offering and a limited capacity to adapt quickly and offer innovative solutions to other relevant sectors of the economy,” the study notes.  

However, it is believed that since banks do not have a lender of last resort or deposit insurance, they are obliged to act responsibly to stay afloat. A fact that favors the proper management of recessions, in the opinion of David Sied Torrijos, former director of Public Policies of the Ministry of Economy and Finance of Panama. 

Due to banking competition, and without an entre that facilitates cartelization, banks cannot inflate their interest rates due to stipulations from a central bank. Banking is in charge of cleaning up the excesses resulting from expansions, contracting credit, thus causing the necessary recession at the right time. Central banks do the opposite, they try to inflate the monetary supply in times of recession, which hinders the exit of bad investments, worsening the recession. David Sied Torrijos

This position is supported by Juan Jované, Panamanian economist, professor and politician, for whom the main benefit of not having a central bank has been stability, low inflation and growth of the economy. “The costs, on the other hand, are associated with the few economic tools that those responsible for public policy have, who can only resort to fiscal resources,” according to him.  

This limitation led the Panamanian government to open a multimillion-dollar line of credit with the International Monetary Fund in 2020, in order to address the social needs that arose during the Covid quarantine.  

It should also be noted that, by having the dollar as its currency, the country also suffered the repercussions of the issuance of inorganic money and the increase in interest rates in the US, being another victim of inflation.   

Zimbabwe, a more complex case

The case of Zimbabwe is much more complex, showing two different scenarios for the central bank: one with dollarization where the organization almost disappears and another with de-dollarization in which it takes center stage.  

The economic history of the African country has been catastrophic: in 1980 inflation reached 7%, in 1990 17%, in 2000 55%, in 2005 586% and in 2006 it reached 4 digits with 1281%. In 2008, it rose to 11,200,000%. 

After more than a decade of hyperinflation,  Zimbabwe’s government  adopted the US dollar as its official currency in 2009, dollarizing the economy and virtually eliminating its central bank.  

Although they managed to reduce inflation to acceptable levels, a few years later the shortage of foreign currency worsened and the country entered recession again. According to analysts, it was because they did not undertake structural reforms to accompany the monetary change. All this in a scenario where sanctions were applied to the country, there were excess expenses and acts of corruption.  

In 2019, Zimbabwe’s monetary entity, which had practically left the scene in 10 years, under government control decided to reintroduce the local currency (the Zimbabwean dollar) to end dollarization.  

Although the closure of the Reserve Bank was proposed, the organization continued its functions. In 2020, they allowed goods and services to be paid in foreign currency, so the use of the US dollar was de facto imposed again. Citizens also began to turn massively to bitcoin (BTC) and the government even thought about cryptocurrencies as a monetary alternative.  

In October of this year, the monetary entity cut the interest rate from 150% to 130% in the midst of another inflationary crisis, with prices through the roof and a strong devaluation of its currency that plummeted around 85% against the dollar. The result is hyperinflation which is estimated at more than 800% so far in 2023.  

Zimbabwe continues to lead the lists of countries with the highest inflation rate in the world. According to economist Steve Hanke’s ranking, it is the most inflationary economyfollowed by Venezuela and Argentina.  

Zimbabwe, Argentina and Venezuela are the countries with the highest inflation. Source: Steve Hanke. 

Microstates that do not need a central bank

When we talk about microstates we are referring to sovereign but very small nations with a very small population, many of them associated with other countries. Some characteristics that make the creation of a central bank inadvisable from an administrative point of view.  

These are nations that usually have very limited economic sectors,  where the economy depends largely on tourism, foreign investments, remittances and international aid. Something that reduces the need for a complex monetary policy  to justify the existence of a central bank . Hence, it is more viable for them to use a foreign currency as currency.  

It is worth mentioning, as an example, the case of Andorra. The principality, located in the Pyrenees (between Spain and France), has a population of almost 70,000 inhabitants in a territory of just over 400 kilometers.  

The monetary policies of European principalities such as Andorra and Monaco depend on the European Central Bank. Source: Wikipedia.

The currency, the Andorran franc, is pegged to the euro at a rate of 1:1. Monetary policy is in charge of the government, revolves around the euro and is set by the European authorities.  

Another striking case is Monaco, the European principality famous for its casinos that only has 30,000 inhabitants. The euro is its currency and the economy is focused on tourism and gambling. Monetary stability depends on the policies established by the European Central Bank and is the basis for the confidence or doubt of many investors and visitors to this small nation. 

What can Argentina expect without a central bank?

Given previous experiences, the question should be asked about what will happen in Argentina when the central bank is eliminated, if Milei keeps his promise during his mandate. 

As Federico Ruffino, an Argentine public accountant and financial expert, told the Market Times, the situation in each country is different and that is why it is not easy to make predictions. Still, looking at the cases of Panama and Zimbabwe, it becomes clear that not having a central bank seems to have advantages and disadvantages at the same time. 

First of all, in all countries, there is an authority that assumes some of the functions of the central bank, with the exception of monetary policy, which in Argentina would depend on the US Federal Reserve. This, if the dollarization of the country.

Argentina and central bank.
What would an Argentina be like without a central bank? Composition by CriptoNoticias. Aleksandr Vorobev / Pir / luzitanija / stock.adobe.com.

From a negative perspective, there is the possibility of greater indebtedness for Argentina, given the constant need to seek foreign currency that countries without a monetary entity have, and which is complicated by not having a direct lender of last resort such as the central bank. This is what the case of Panama shows us, which has even had to turn to the IMF to seek resources.  

In contrast, inflation control has been achieved in the Central American country and partially in Zimbabwe. Although Panama was finally affected by the devaluation of the dollar in recent years, an example of the consequences of depending on the central bank of another country.   

However, the possibility of reducing inflation would be very favorable for the Argentine economy and population, strongly affected by this scourge in recent years. It is striking, in this sense, how the ill-advised intervention of the Reserve Bank of Zimbabwe, after having remained sidelined during the years of dollarization, led the country back to hyperinflation.  

In any case, it is to be expected that the elimination of the Banco de la República in Argentina will not occur immediately. As some economists recently pointed out, Milei will not be able to implement it as soon as it would like, taking into account that dollars are required. Money that would come from the liquidation of reserves and that also implies strong reforms in the financial and banking system.

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