Dollarisation option needs more debating

September 8, 2009 by admin
Filed under: Business and Economy 

WILLEMSTAD–Curaçao and St. Maarten are advised to seek broad-based support before opting for full-fledged dollarisation of their economies. The conclusion of the dollarisation conference “Opportunities and Risks of Dollarisation in the Dutch Caribbean” held in Curaçao on Monday was that more debate on the topic is necessary.

The public should also look at other countries that have dollarised economies, advised a majority of the featured speakers during the conference held under the auspices of Minister of Finance Ersilia de Lannooy.

The conference, intended to lay out the opportunities, risks and effects of dollarisation, in particular as these would apply to St. Maarten, Curaçao and the BES islands Bonaire, St. Eustatius and Saba as new entities in the Kingdom of the Netherlands, turned out to be a very technical discussion more suited for financial experts. It was well-attended by political and financial experts of Aruba and all five islands of the Netherlands Antilles.

St. Maarten’s Finance Commissioner Xavier Blackman told The Daily Herald that the conclusion was that a perfect system didn’t exist and in his view dollarisation was only an option.

St. Maarten

In St. Maarten’s case, the question is whether there is any added value in making the step from an informal US dollar economy, which the island already has, to a formal US dollar economy.

“What are the pros and cons? Adopting the US dollar will mean that we will lose some financial autonomy,” said Blackman.

He lamented the lack of statistical information about St. Maarten, which makes it difficult to make predictions about the consequences of dollarisation.

One detail that emerged during the panel discussions, which some considered shocking, is that the St. Maarten workforce consists of 85 per cent foreign labour.

Blackman said yesterday’s conference had been a good beginning and he had spoken with Minister de Lannooy about organising another conference in St. Maarten.

“We want to attract a bigger audience and have less technical discussions. The question that should be answered is: what does dollarisation mean for the average man in the street,” said Blackman.

Tromp

The discussion on dollarisation was triggered after Emsley Tromp, president of the Bank of the Netherlands Antilles (BNA), stated recently that based on the effects of the financial crisis it would be better to have a dollarised economy, as this would mitigate the negative effects.

According to Tromp, the Antilles did not feel the effects of the world financial downturn because of the debt relief programme and funds made available by the Dutch Government in light of the Social Economic Initiative.

However, if such situation should reoccur in three years, the islands would feel the pinch, Tromp said.

Blackman believed that the islands would be able to withstand another world financial crisis if they took care of their budgetary debts in the meantime, but yesterday Tromp reiterated his recent statement that in the view of BNA, dollarisation was an attractive option for Curaçao and St. Maarten.

Aruba

Jane Semeleer, President of the Central Bank of Aruba, was the only speaker to oppose this viewpoint, stating that maintaining an Antillean guilder should be thoroughly considered.

According to Tromp, the deteriorating deficit on the current account balance of payment increases the vulnerability to external shocks. Therefore, dollarisation is a viable alternative monetary system for Curaçao and St. Maarten, as it eliminates this vulnerability and contributes to sound and sustainable economic development.

Semeleer believed that maintaining an own currency would contribute to the identity of the public in general. She said that if the feature countries complied with the necessary conditions it would be as viable to maintain an own currency as it would be to dollarise the economy.

Semeleer said furthermore that Aruba was surprised by BNA considering dollarising, as this would have far-reaching consequences for Aruba as well. If the BES islands as well as Curaçao and St. Maarten introduce the US dollar as their official tender, it would put the Aruban dollar under enormous pressure.

BES islands

Richard Doornbosch of the Dutch Ministry of Finance outlined how the introduction of the dollar would take place for the BES islands.

The US dollar will become legal tender as of January 1, 2011. All “electronic” payments will take place in dollars from 12:00am onwards.

All accounts will be converted automatically at the rate of NAf. 1.79 per US dollar. The Antillean guilder will continue to be legal tender for one month, but hopefully it will be out of circulation within a week, said Doornbosch.

After January 31, 2011, BES citizens can exchange guilder cash for US dollars at designated banks for a certain period.

The Dutch government will take responsibility for possible exchange rate risk for civil servants’ salaries, taxes and other benefits, among other things.

According to Doornbosch, the decision to dollarise the economies of the BES islands was taken because this would bring about macro-economic stability and economic and financial integration in the region, among other things.

World Bank

World Bank senior economist Lars Moller recommended further studying of the several economies all over the world that have introduced the US dollar as legal tender.

He specifically used Panama as a case study, saying the country was one of the largest non-US economies currently using the dollar.

However, Panama has more than 100 years of experience as a dollarised economy and adopted the dollar for historical and political reasons rather than due to an evaluation of the pros and cons of alternative arrangements or the short-term cost involved in the transition to a new regime.

Moller said the more recent experiences of Ecuador (2000) and El Salvador (2001) were more relevant for Curaçao and St. Maarten, but also too recent for empirical analysis.

Lessons learnt from Panama’s dollarisation experience, said Moller, are that it may improve inflation performance, but has some risk of higher growth volatility, and that dollarisation does not guarantee fiscal discipline, but fiscal rules help.

Furthermore, Moller said, dollarisation can help to ensure financial stability and for Panama it facilitated close integration with the US and world economies.

IMF

Mark O’Brian of the Monetary and Capital Markets Department at the International Monetary Fund believed it was difficult to come up with a clear-cut answer to whether the advantages of a move to full dollarisation would outweigh the disadvantages. To get a firmer view on this question, it may be necessary to undertake some further analysis in addition to what yesterday’s conference achieved.

If a decision is made to proceed with dollarisation, significant preparations would need to be undertaken, he said. There will need to be new legislation to define an alternative role for the Central Bank. This implies assigning the Central Bank a different objective, changing its functions and tasks, and revisiting its governing structure accordingly.

Also consultations would need to take place with the US Government regarding areas of cooperation, primarily regarding facilitating the availability of banknotes and maybe coins. In the latter scenario, countries might explore the conditions to ensure that the transport of new cash currency runs smoothly and the replacement of unfit banknotes is seamlessly accepted, although these arrangements could also be made with commercial banks, said O’Brian.

Source: thedailyherald.com

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