A 33-year old bad idea is being dusted off to be presented again: dollarization. And again it’s supposed to be the ultimate economic cure-all.
Dollarization -the use of the US dollar (USD) as legal tender in place of the Netherlands Antillean Guilder (ANG)- is not new. In 1985, facing economic downturn (devaluation of the Venezuelan Bolívar, ending of the tax treaty with the US and the Shell pulling out), the Curaçao financial sector presented dollarization as a wundermittel which would force politicians to bring about structural changes such as reducing spending, improving productivity, cutting red tape and modernizing immigration. The Central Bank of the NA (BNA) sent this plan not once, but twice to the International Monetary Fund which cautioned that dollarization would not result in a turnaround. The University of the NA also warned against blind faith in the USD and stressed that not dollarization but, structural changes were necessary for economic recovery.
In 2008 the BNA caught everyone off guard by proposing dollarization on a very short term. When asked, BNA management told me that dollarization was necessary because it didn’t trust the politicians with our finances in the wake of the disintegration of the NA. Yet, just a few years earlier the same BNA had jumped on the bandwagon in favor of Curaçao becoming part of the EU as an Ultra-peripheral region (UPG). What’s curious is that without exception all UPGs use the Euro. Was the BNA betting on two horses? Slowly dollarization talk, like in 1986, disappeared from the headlines.
Why dollarization? In theory it could lower transaction costs and interest rates which benefits international trade and foreign investments. However some of the tasks of the Central Bank of Curaçao and St. Maarten (CBCS), especially the function of lender of last resort for local banks that are experiencing financial stress, will disappear. The CBCS will also have to buy back the ANG for which large quantity of USD is needed plus reserves to help support economic shocks. Dollarization will also eliminate seigniorage earnings, which is the income of the CBCS from issuing the ANG minus the cost of printing it which leads to less income to the government.
Only a handful of countries have dollarized because of economic crisis, among them Ecuador, El Salvador and Zimbabwe. Studies have yet to conclude if it has brought about welfare to these countries. In fact, faced with fiscal deterioration, Ecuador forced banks and financial institutions to adopt a new electronic currency in 2015, an apparent move to de-dollarize.
I digress. Again we are facing very hard times. Unfortunately again the same arguments made 3 decades ago -dollarization being the savior of our problems- are being recycled. Those in favor of dollarization also claim that it will reduce the size of CBCS which they consider too large and the costs of maintaining the ANG too much for such small islands. Yet, Aruba which is much smaller than us, has demonstrated that a good track record of maintaining the fixed exchange rate of a local currency with the USD together with a credible central bank, makes dollarization unnecessary.
There is no urgency to make the much needed structural adjustments. We seem more focused on finding the magical wand, be it the USD, UPG, Guangdong Zhenrong, oil and gas off our coasts and what not. Politicians know all to well that tackling structural shortcomings don’t produce vote, so we keep voting for those who promise ‘no more measures’ no matter how bad the situation is. People need to realize that the longer we postpone these changes the more painful the consequences will be.