4 minEconomy
Venezuela dollarization plan would be largest currency switch since euro, economist says
Steve Hanke, a Johns Hopkins economist advising Venezuela's National Assembly, says full adoption of the U.S. dollar could end the country's 400% inflation and trigger the biggest currency switch since the euro's introduction.
Venezuela's move to abandon the bolivar and adopt the U.S. dollar as its official currency would mark the largest currency switch since the introduction of the euro in 1999, according to Steve Hanke, a Johns Hopkins University economist who has been named a special advisor to the country's National Assembly.
Hanke, known as the "Money Doctor" for his work advising governments on currency reform, said his solution for Venezuela's 400% inflation is full dollarization, which would mean abandoning the bolivar and the central bank. The idea is to remove the risk of the central bank printing money to help the government pay its bills, a practice that has stoked higher prices.
"Taming inflation is the key to restoring stability in Venezuela, and all the other progress flows from that," Hanke told Fortune. "Stability isn't everything, but without stability, which means stable prices, you have nothing. And there's no better case study showing that's true than Venezuela."
Hanke has a track record of such interventions. He persuaded Montenegro in 1999 to abandon the Yugoslav dinar for the Deutschemark. He oversaw Ecuador's switch from the sucre to the U.S. dollar in 2000, marking the first dollarization in Latin America since Panama a century earlier. In 2009, he became an informal advisor to the prime minister of Zimbabwe, which dollarized and reined in inflation, though a new government ditched the dollar in 2013 and hyperinflation returned.
This is Hanke's second attempt in Venezuela. His plan for a currency board in the mid-1990s failed to win a majority in the National Assembly. This time, he sees 50% to 80% odds that dollarization will be approved.
The U.S. dollar is already an integral part of the Venezuelan economy. Due to the collapsing bolivar, which has fallen 78% against the greenback over the past year, most consumers buy virtually everything with dollars. Almost everyone not working for the government or receiving aid and pensions from the government uses dollars. Hanke said this "spontaneous dollarization" raises the chances of an official currency switch.
But the prospect of losing the central bank, which acts as a lender of last resort, and essentially handing over monetary policy to the Federal Reserve remain daunting obstacles. Even Argentine President Javier Milei, who campaigned on dollarization, backed off the idea after taking office. While he helped cool inflation sharply by slashing subsidies and the budget deficit, the annual rate is still high. Argentina must also continue defending the peso, which is pegged to the dollar. Regional elections last year that crushed Milei's party sent the peso into a tailspin, and Treasury Secretary Scott Bessent came to the rescue with a currency swap line.
Still, Hanke sees dollarization as the key to unlocking Venezuela's economy, which is highly dependent on oil exports. A currency switch would induce a big surge of foreign investment into the oil sector, he predicted. Then there is the $250 billion in Venezuelan debt, equivalent to about 150% of GDP. Hanke said increased production would provide the dollars needed to pay the principal and interest.
The end of hyperinflation would also lower interest rates, encouraging a wave of borrowing by consumers and businesses. That would in turn ignite the housing market and drive domestic investment, he added.
"If it happens soon, Venezuela would take off from negative growth this year to positive growth next year," Hanke said.
