6

Official Dollarisation: An Option Generally

Rejected by CARICOM Countries

Anton Belgrave, Trevor Campbell, Kevin Greenidge

and Ryan Straughn

Introduction

D Ollarisation exists when residents of a country

extensively use the United States (US) dollar or
another foreign currency alongside, or instead of, the domestic
currency. In an attempt to shed some light on this debate, this
paper assesses the relative advantages and disadvantages of
adopting the US dollar as the official currency for the countries
of CARICOM by looking at the evolution of exchange rate,
inflationary and fiscal issues. Section one addresses the pros and
cons of dollarisation. Section two briefly looks at some countries
that have adopted or agreed to dollarisation. The third section
discusses this topic with respect to CARICOM, a regional
grouping comprising both fixed and floating rate currencies. A
conclusion follows in Section four.

1. The Pros and Cons of Dollarisation

It is important at the outset to distinguish between

policy dollarisation and de facto dollarisation. The former occurs
when governments replace the domestic currency with a foreign
currency, while the latter exists if residents of foreign countries
seek refuge in the dollar (or other strong currencies) to hedge
against inflation, default or confiscation by their own
governments. One new phenomenon in the 1990s is that defacto

93
94 • Official Dollarisation: An Option Generally Rejected

dollarisation has occurred even beyond the point where it is

likely to be justified by economic and other risks. This has led in
turn to a view, in some quarters, that the costs of maintaining a
national currency are outweighed by the benefits of adopting a
strong international currency_ Hence, Argentina and a few other
countries considered, and decided against, a policy of
dollarisation. Europe's creation of the euro has also sparked
interest in the possible payoff from explicit abandonment of
monetary sovereignty (albeit in that case it is for a common
currency rather than another country's currency).
As in most aspects of life, decisions have benefits and
costs. The decision to or not to dol1arise, which involves a
complex menu of trade-offs for policy-makers., is no different.
The most obvious benefit of dollarisation is that it eliminates
transaction costs of exchanging one currency for another. In the
view of Berg and Borensztein (2000), dollarisation also reduces
the risk of a currency crisis and, in turn, a country's risk premia,
with a consequent lowering of interest rates. Furthermore, lower
interest rates and more stability in international capital
movements are likely to be significant factors in reducing the
fiscal cost of servicing public debt. An important caveat is that
while dollarisation has the potential to eliminate some currency
risk, it is uncertain whether total country risk is removed, since
the question remains as to the effects of dollarisation on default
risk.
A powerful, but somewhat hypothetical argument
raised by Berg and Borensztein (2000) for full legal dollarisation,
is that the change in nlonetary regime may establish a firm basis
for a sound financial sector, which would stimulate strong and
steady economic growth. The underlying rationale for this
argument is that dollarisation signals more than the adoption of
a foreign currency; it may be perceived as an irreversible
institutional change towards low inflation, fiscal responsibility
and transparency_
Countries with weak national economies will be
financially fragile, no matter whether they have fixed or floating
exchange rates. As emphasised by Hausman (1999), most
 Anton Belgrave, Trevor Campbell, Kevin Greenidge and Ryan Straughn • 95

emerging markets have national currencies that cannot be used

by local firms or the government to borrow abroad, or even at
home for long-term borrowing. In this case, dollarisation is a
preferred option because abandoning the weak currency in
favour of a strong international currency eliminates currency
mismatches, as debts are denominated in the same unit as a
company's cash flow, and also facilitates these countries' efforts
to borrow longer-term. Hausman asserts that in spite of its
chequered political history, dollarised Panama has the largest
domestic credit market in Latin America and is the only Latin
American country to offer 30-year fixed rate mortgages.
There are a number of key drawbacks with dollarisation,
however, as a policy option. The main one advanced is lost
seigniorage. As currency is worth more than its printing costs,
printing money generates revenue for whoever owns the
printing press. Seigniorage, which represents a form of income,
usually accrues to national governments. The annual flow of
seigniorage is frequently measured as the increase in base
money (the sum of currency plus bank reserves). Governments
can use seigniorage to purchase assets (foreign currency
reserves, government securities) or finance their fiscal deficits.
Under current conditions, any government giving up its
currency foregoes this revenue and, indeed, this income is
shifted to the issuer of the currency.
Some authors have highlighted the tendency for the
dollarisation [Link] be recessionary (see Molano, 1999). This
argument is based on the notion that most developing countries
in distress are also facing large fiscal imbalances, and
dollarisation tends to trigger a draconian adjustment that
involves slashing government spending, which almost inevitably
leads to a recession. Moreover, dollarisation is associated with
high real interest rates. While it is true that dollarisation lowers
nominal interest rates, there is a tendency for real interest rates
to spike, as investors demand additional compensation for
political and economic risks. Molano (1999) believes that it is,
therefore, illogical to think that interest rates in an economy in
96 • Official Dollarisation: An Option Generally Rejected

the midst of an exchange rate crisis can automatically converge

to US interest rates.
Another negative view expressed is that dollarisation
subordinates external bond-holders. Governments that dollarise
transform international reserves into base money. The
elimination of international reserves at the conversion date
represents the removal of an asset that can be used to repay
international creditors. Under the assumption that the fiscal
deficit creates an inflation tax on local currency-holders, external
bond-holders have a senior claim on the country. Dollarisation
bumps local currency- holders up the seniority ladder and
allows them to be paid prior to the external creditors.
In addition, dollarisation brings no reasonable exit
strategies. If a country successfully dollarises and the results are
not beneficial, how then does this country end dollarisation?
Governments usually consider dollarisation when there is no
confidence in their abilities to implement macroeconomic
policies. One, therefore, wonders how can a new regime restore
confidence without removing the doubts that existed prior to the
dollar initiative?
According to Spiegel (1999), dollarisation implies the
reduction or complete elimination of lender of last resort
capability. Central bank discount lending to commercial banks
is not possible under full dollarisation, as central banks are
unable to expand the monetary base to provide commercial
banks with additional funds. In this case, the lender-of-last-
resort function either has to be provided by private sources, by
the Treasury or by some external agent. Initially, there has been
some discussion of the possibility of the United States Federal
Reserve Bank acting as lender of last resort by providing solvent,
but illiquid banks with formal access to its discount window.
However, the United States has firmly pledged no assistance to
the banking system of dollarised countries, either supervisory or
otherwise.
Flawed institutional design has been identified as one of
the key components of policy mismanagement (Burhki and
Perry, 1998). Molano (1999), for example, argues that the
 Auton Belgrave, Trevor Campbell, Kevin Greenidge and Ryall Straughn • 97

political systems of many Latin American governments lacked

feedback mechanisms whereby policy-makers, or political
parties, were held accountable for policy actions, while most of
these countries lacked an independent central bank.
Dollarisation in his view is a shift away from fixing institutional
design. While proponents of dollarisation argue that the
stabilisation of macroeconomic variables can lead to the
emergence of a new institutional framework), this is a backward
solution to the problem. It is difficult to see how dollarisation
can force a government to repair deep-rooted institutional decay.
In addition, dollarised governments fail to develop the skills and
experience needed to develop macroeconomic policies to
manage the different phases of the business cycles. Dollarisation
is a pessimistic view on the capability of society to fully develop.
Perhaps the most significant loss of a dollarised country,
however, is its ability to conduct monetary policy. This is
especially important as it forces the full burden of combating
recession on fiscal policy. This loss of flexibility becomes more
evident if the business cycles of the source country and the
dollarised economy are asymmetric.

2. The Experiences of Selected Countries That Have

Adopted or Considered Dollarisation

Although the dollarisation debate has been relatively

topical in the 19905" this approach has been adopted by various
countries for may years. Panama is the longest officially
dollarised economy, with almost 100 years of experience with
such a system. Since 1904, Panama has used US dollar notes as
its domestic currency.. issues the balboa as coins.. and does not
have a central bank or any centralised foreign reserves.
Therefore, the US collects all seigniorage accrued on the use of
US dollars in Panama. Panama only receives a small amount of
seigniorage on domestic balboa coins that constitute about 9 per
cent of total cash and coins in circulation.
98 • Official Dollarisation: An Option Generally Rejected

In 1970, a banking law liberalised Panama's financial

sector and allowed full entry of foreign banks. The capital
account is entirely open and banks are free to invest excess funds
in Panama or abroad. Because there is no domestic lender of last
resort, domestic banks have established lines of credit with
foreign-owned banks and have been able to draw on them
during liquidity crunches.
Panama's macroeconomic performance has been
relatively good. The growth of real gross domestic product
(GDP) has averaged 8.1 per cent from 1961 to 1971 and from
1978 to 1981, and 2.5 per cent in the period 1982 to 2000. The
inflation rate has been 3 per cent per year on average between
1961 to 1997, with real interest rates in the low to mid-single
digits. In addition, the real exchange rate has hardly varied,
compared to other Latin American countries, and there have
been no systemic banking crises despite the experience of several
tnajor shocks. Some of these shocks were the political crisis of
1964, which was caused by riots in the Canal Zone, the oil price
shocks of 1973-74 and 1979, the 1982 Latin American debt
default and the 1988 to 1989 crisis immediately preceding and
during the embargo and the US invasion. These all resulted in
the withdrawal of deposits and economic dislocation. However,
during the 1964 and 1967 to 1969 crises, several private banks
responded by selling their assets abroad and increasing domestic
credit, despite the outflow of domestic deposits. These actions
helped cushion the adverse impact on the domestic economy.
After the devaluation of the Brazilian real in January
1999, the Ecuadorian Sllcre came under increased speculative
pressure. Indeed, it was devalued on March 2 of that year. On
that same day, eight troubled banks closed, and nine days later,
the Governnlent froze deposits in the entire banking system.
The level of discontent in the financial system and the state of
the economy created interest in the possibility of dollarisation.
In January 2000, the President of Ecuador announced official
dollarisation to end the rapid depreciation of the sucre. The US
dollar was declared legal tender and the Central Bank would
 Anton Belgrave, Trevor Campbell, Kevin Greenidge and Ryan Straughn • 99

only issue sucre coins. The redemption of sucre bank notes was
to proceed gradually over six to twelve months.
EI Salvador considered doIIarisation in 1995.. but
abandoned the plan amid opposition to the elimination of the
currency, a symbol of national identity. However, in November
2000, the decision to dollarise was announced by its President.
In 1999, Argentina's President Carlos Menem declared
that the Government was studying the possibility of official
dollarisation. He was prompted to do so because of lingering
doubts of the credibility of the currency board-like system.
Argentina attempted to negotiate a share of seigniorage from the
use of the dollar in Argentina, access for Argentine banks to the
discount window of the Federal Reserve System, and
cooperation on bank supervision. However.. while the US did
not rule out the possibility of sharing seigniorage with new
countries in the Western Hemisphere (see Berg and Borensteinz,
2000).1 officials of the US Treasury and the Federal Reserve stated
that the US would neither grant access to the discount window
nor help supervise banks in dollarised economies. President
Menem.l s successor, Fernando de la Rua, took office in December
1999 and although Argentina did not officially dismiss
dollarisation, it appeared unlikely given that Argentina created
an elaborate system of floating trade tariffs, which essentially
devalued the peso for foreign trade purposes. Speculation of
dollarisation ended in January 2002, after a severe crisis led the
Government of Argentina to abandon the fixed exchange rate
and to float its currency.

3. Implications for CARICOM

Seigniorage income does not represent a major source of

revenue for most CARICOM countries (Table 6.1). For example,
in the 1990s, the seigniorage earned by Barbados from its local
currency accounted for a very small share (0.5%) of national
income. However, seigniorage income for Jamaica and Guyana
100 • Official Dollarisation: An Option Generally Rejected

was significantly higher, 3.7 per cent and 4.1 per cent of GOP,
respectively.
Barbados, Belize, The Bahamas and the OECS region all
maintain fixe~ exchange rate regimes. Barbados' and Belize's
exchange rates are fixed at 2 local dollars per US dollar, the rate
in the Bahamas is fixed at par with the US dollar, and the rate of
exchange in the OECS countries is fixed at EC$2.80 per US
dollar. Jamaica maintained a. fixed exchange rate until 1984,
Guyana until 1991 and Trinidad and Tobago until 1993 (Figure
6.1). At the end of 1984, the Jamaican dollar reached J$3.94 per
US dollar. By end-1991, it had risen to J$12.1 per US dollar.
Three years later, a further increase to J$33 per US dollar was
experienced. At the end of 2000, the nominal exchange rate was
J$40 per US dollar.

Table 6.1

Seigniorage in Selected Carib bean Countries

(0/0 of National Income)

Trinidad
and
Barbados Tobago Guyana Jamaica
Averages
19605 1.2 0.3 0.7 0.7
1970s 1.6 1.9 2.0 1.3
19805 0.7 0.3 12.6 3.2
1990s 0.5 1.1 4.1 3.7
Souxce: International Finandal Statistics, International Monetary Fund
 Anton Belgrave, Trevor Campbell, Kevin Greenidge and Ryan Straughn _ 101

Figure 6.1

Exchange Rates for Trinidad and Tobago,

Guyana and Jamaica
300T

2501
I 50
200.,. tJ)

1'50~
i:i
40 tJ
fa
30 ~

20
-
Q

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: International Financial Statistics; International Monetary Fund

When Guyana announced a floating exchange rate

regime in 1991, the rate of exchange was G$111 per US dollar.
Three years later, the rate fell to G$138, then to G$150 in 1998,
G$178 in 1999 and G$183 in 2000. With the introduction of the
floating exchange rate regime by Trinidad and Tobago in 1993,
the exchange rate at that time was IT $5.35 per US dollar. The
rate moved to TT$6.25 per US dollar by the end of 1997 and has
remained relatively stable since then. There have been several
interventions by the Central Bank of Trinidad and Tobago over
the past few years to maintain this stability. Since December
2000, the exchange rate of the Trinidad and Tobago dollar has
remained at $6.26 per US dollar. It is dear that unlike Trinidad
and Tobago, both Jamaica and Guyana have experienced
exchange rate instability. If this were the only criterion used for
judging whether or not a country should dollarise then Guyana
and Jamaica qualify. However, there are other factors to be
considered.
102. Official Dollarisation: An Option Generally Rejected

Figure 6.2

Inflation Rates of Selected Caribbean

Countries
90~------------------------------------------~

80
70
60
50
~ 40

30
20
10
o~~~~~~~~~~~~~~~~~~~~~
-10 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: International Finandal Statistics, International Monetary Fund

The inflation patterns for the CARICOM countries are

also worthy of note (Figure 6.2). As expected, those countries
with fixed exchange rates have been able to maintain low rates
of inflation. For example, since 1995, Barbados has recorded an
average inflation rate of approximately 1.5 per cent, with the
exception of 1997 when the rate jumped to 7.7 per cent because
of the introduction of the value-added tax. The OEeS countries
have also been able to maintain average annual inflation rates of
almost 2 per cent over the past ten years, as well as Belize, with
the exception of 1996. However, Guyana's annual rate of
inflation averaged around 6 per cent since 1994, Jamaica's was
well over 10 per cent, and Trinidad and Tobago recorded
average annual inflation of 5 per cent since 1993. If inflation
were the only factor to motivate dollarisation, one could argue
that both Jamaica and Guyana are possible candidates.
However, Jamaica has outright rejected dollarisation and it does
not appear that Guyana has ever considered it.
 AlltOIl Belgrave, Trevor Ounpbelt Kevin Greenidge and Ryall Straughn • 103

Figure 6.3

Fiscal Def"lCits for Selected CARICOM Countries

(%ofGDP)
10

0 ",
?;;ft -5
-10

-15

-20

-25
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 :WOO

I""'-Guyana - Barbados - - TrinIdad and Tobago ; Jamaica I

Source: International Financial statistics, International Monetary Fund

Figure 6.3 displays the fiscal balance (as a percentage of

gross domestic product (GOP» for Barbados, Guyana, Jamaica
and Trinidad and Tobago. In general, Barbados has maintained
low fiscal deficits. However, in 1991, when Barbados entered
into a stabilisation programme with the International Monetary
Fund (IMF), its fiscal deficit was recorded at 7.2 per cent of gross
domestic product (GOP). Huge government expenditure was
given as one of the reasons for the large reserve loss that was
experienced. Indeed, the import reserve cover at end-1991 was
equivalent to a mere 2.9 weeks of imports. Ever since then,
Barbados has endeavoured to ensure that its fiscal deficit does
not exceed 2.5 per cent of GDP. This target has been exceeded
only once, that is, in 1996 when the deficit rose to 3.2 per cent of
GOP. Oata on the Bahamas show that the fiscal deficit averaged
annually 3 per cent between 1990 and 1993 and has fallen since
that period.
104. Official Dollarisation: An Option Generally Rejected

Table 6.2
Ratio of Foreign Currency Deposits to the Money Supply

Coun 1990 1999

Bahamas 1.61 1.90 2.23 1.79 1.32 1.57 1.28 1.65 2.09 1.63
Barbados 0.96 1.22 0.89 1.13 1.40 0.68 1.11 1.19 1.30 1.32
Belize 0.62 0.33 1.48 0.73 1.23 0.77 2.54 1.77 2.01 2.71
Belize" 0.65 0.35 1.48 2.94 5.58 7.38 10.22 7.72 10.99 10.48
Guyana 3.35 2.57 4.30 5.42 6.46 5.28 5.34 6.50 6.10 5.06
amaica+ n.a. n.a. 21.30 19.50 28.10 25.00 25.41 30.45 27.88 26.73
Trinidad & Tobago n.a. n.a. n.a. 8.45 15.20 14.16 18.42 18.52 18.38 17.91
OECS:
Anguilla 57.56 61.45 63.86 66.72 66.43 70.10 69.47 70.89 73.18 7249
Antigua & Barbuda 4.29 5.02 4.82 3.36 4.33 3.57 4.02 5.14 5.27 5.36
Dominica 0.17 2.68 3.49 3.19 2.33 1.34 1.02 1.91 2.38 2.76
Grenada 2.04 2.70 2.66 3.03 3.54 3.28 4.71 4.94 3.94 4.95
Montserrat 1.33 5.58 6.92 6.42 4.93 4.78 4.66 2.46 1.97 3.36
1St Kitts & Nevis 14.62 1282 13.59 15.56 14.21 17.70 18.23 23.00 19.08 19.59
St. Lucia 0.18 0.24 0.18 0.31 0.45 0.52 0.42 0.48 0.71 1.92
St. Vincent & The
:Grenadines 0.49 0.95 0.54 1.00 2.01 1.49 1.09 1.83 2.35 2.85
Source: Research Department, Central B a Barba as.
Notes: ... Includes Foreign Curren~ Deposits of both residents and non-residents.
* Data for the period 1992- 5 were taken from Issues in Dollarisation, IMP Course on Finandal
Programming and Policies, Bridgetown, Barbados, Edda Zoli, August 14, 2000.
 Allton Belgrave, Trevor Campbell, Kevin Greenidge and Ryan Straughn • 105

The same argument can be advanced for the OECS countries, as

they have managed to keep their deficits within 3 per cent of
GDP. In contrast, Guyana's deficit reached 21 per cent of GDP in
1991 and rose to 23.5 per cent of GDP in the following year.
Some reduction was experienced in the next six years, with the
lowest ratio of 3.1 per cent achieved in 1997. Nevertheless, in
1998, the fiscal deficit grew to 6.2 per cent of GOP. While data
on Jamaica's fiscal deficit-to7 GOP ratio have been somewhat
dubious, during the 19805, double-digit figures were recorded
for this country. In 1999, the Central Bank Annual Report stated
that Jamaica's fiscal deficit amounted to US$273.2 million, which
would surely have surpassed 3 per cent of GOP. Trinidad and
Tobago's fiscal deficit exceeded 4 per cent of GOP in the latter
1980s, but the country actually recorded surpluses from 1993 to
1995, and again in 2000.
The ratio of foreign currency to broad money, which
gives the percentage of broad money that constitutes foreign
currency deposits held by residents of a country, is presented in
Figure 6.4 and Table 6.2. This percentage can be used as a
plausible estimate of the degree of dollarisation in an economy.
Those countries with a ratio in excess of 30 per cent can be
classified as highly dollarised, whereas those with a ratio of less
than 30 are moderately dollarised.
Table 6.2 shows that the ratios for Barbados, The
Bahamas, Belize, Guyana, Jamaica, Trinidad and Tobago and the
OECS countries classify them generally as only mildly dollarised
economies. Barbados, The Bahamas and Belize have ratios that
have not exceeded 3 per cent of broad money. Indeed, since
1990, Barbados' highest ratio was 1.40 in 1994. The Bahamas'
ratio ranged from 1.32 to 2.23, somewhat surprising, considering
that The Bahamas dollar is on par with the US dollar. Belize's
ratio was at its lowest in 1991 (0.33) and reached its highest in
2000 (2.71). The OECS countries had ratios in the vicinity of 15
per cent since 1990. However, these ratios have been distorted
by Anguilla and St. Kitts and Nevis.
106 • Official Dollarisation: An Option Generally Rejected

Figure 6.4
Foreign C'QI'rency Deposits of Residents as a Percentage
of :Money Supply (M2)

35~----------------------------------------~

30

25

0/0 20

15

10

5
f
,-j..,.
If"- _ ~.."t- ----..~ -- _. ~ :'-- --i:'i--.. ~_,._~._~ --){ ... _--""'---
o
1900 1991 1992 19ro 1994 19~ 1006 1997 1900 1009

Source: International Financial Statistics, International Monetary Fund

Anguilla's ratio averaged around 60 per cent over the past ten
years and would easily qualify as a highly dollarised economy,
comparing favourably with Argentina, Bolivia, Uruguay, Peru,
Costa Rica and Turkey, to name a few. Its close proximity to the
US may be one of the possible reasons for this pattern. st. Kitts
and Nevis recorded an average of around 15 per cent. It actually
rose as high as 23 per cent in 1997. The average ratio is about
five times the ratio of any other OECS country1 Anguilla
excepted. Guyana's ratio appears to be considerably lower than
expected given the history of macroeconomic instability there.
The authors suspect that there may be some problems with the
data for that particular country.
 Antoll Belgrave, Trevor Campbell, Kevil! Greenidge and Ryall Straughn • 107

Excluding Guyana, the foreign currency ratios for the

larger CARICOM economies are considerably greater than for
the smaller territories. Trinidad and Tobago's ratio increased
from 8.5 per cent in 1993 to 17.9 per cent in 1999. It is
noteworthy that since 1993, when this country's dollar was
floated, there has been a steady rise in the local holdings of
foreign currency deposits.
Although Jamaica has been classified as a moderately
dollarised economy, its ratios have placed it dangerously close to
that of an economy that is highly dollarised. In 1992, the ratio of
foreign currency deposits to the money supply was recorded at
21.3 per cent. By 1993, it fell by two percentage points, but in
1994 rose sharply to 28.1 per cent, a mere two percentage points
from being classified as a highly-dollarised economy. Three
years later, a ratio of 30.4 per cent classified Jamaica as a highly
dollarised economy although at the end of 1999, it had declined
by four percentage points.
Access to US banks and the income loss of central banks
have not so far been dealt with. In a dollarised system,
CARICOM countries would not be guaranteed assistance from
the US Central Bank. The income loss of central banks would
present a number of thorny problems both at the economic and
the political levels. Under dollarisation, there is some loss of
national sovereignty over the cond uct of national
macroeconomic affairs. For example, the monetary policies of
CARICOM would now coincide with those of the Federal
Reserve Bank. Most central banks in the region might agree that
this is unacceptable, as domestic decisions might not agree with
those of the US.
108 • Official Dollarisation: An Option Generally Rejected

Table 6.3

The Risk Premium· versus the Degree of Dollarisation

Risk Premium Degree of

Dollarisation

Bahamas -0.76 1.71

Barbados 2.12 1.12
Belize 0.07 1.42
Guyana 12.98 5.04
Jamaica 24.24 25.55
Trinidad & Tobago 4.61 15.86
Antigua 2.13 4.52
Dominica 1.55 2.13
Grenada 1.63 3.58
St. Kitts 1.63 16.84
St. Lucia 2.13 0.54
St. Vincent 1.63 1.46
Correlation Coefficient 0.74
Source: International Financial Statistics, International Monetary Fund
Note: "'The risk premium is calculated as the spread between a country' 5
3-month Treasury bill rate and the United States Treasury bill rate.
 Anton Belgrave, Trevor Campbell, Kevin Greenidge and Ryan Straughn • 109

Figure 6.5

The Degree of Dollarisation versus

the Risk Premium

30

25
•
Jamaica
c:
::s
20
"8
~ 15
p.. •Guyanl
~ 10
i:2
5
• Trinidad

0
•••• • • • Sc KitlS

-5 5 to 15 20 25 30
Dep ofDolBrisaoon

Source: International Financial Statistics, International MonetaIy Fund

Conclusion

This paper has attempted to analyse various aspects of

dollarisation in an effort to determine whether the decisions of
CARICOM countries failed to consider this option based on
persuasive arguments. If one is guided by the individual
country data, Barbados, The Bahamas and the OECS countries
(despite the performance of Anguilla) are not good candidates
for dollarisation. These countries maintained a fixed exchange
rate and a low inflation regime and have been able to record
small fiscal deficits. In addition" the ratio of their foreign
currency deposits to the money supply has been low, suggesting
no real need by their citizens to hold foreign currency. With the
exception of Trinidad and Tobago, CARICOM countries that
have adopted a floating exchange rate regime experienced
exchange rate instability, high inflation and fiscal deficits in
excess of 3 per cent of GDP. Even in this case, there are serious
110 • Official Dollarisation: An Option Generally Rejected

downside risks. As Table 6.3 and Figure 6.5 show, there exists a
positive correlation (0.74) between the degree of dollarisation
and the risk premium for CARICOM countries. Dollarisation is
not a cure for the problems associated with slow growing or
stagnant economies. If, for example, the problems of exchange
rate instability and high inflation are caused by high government
spending, then dollarisation is not the answer since the fiscal
imbalance needs firstly to be addressed. Most Caribbean
countries which have considered dollarisation as an alternative
measure were facing fiscal problems.
If CARICOM countries should try to successfully tackle
their fiscal problems and maintain exchange rate stability, so as
to diminish any inducement for dollarisation, the case for
dollarisation is weak. It is also doubtful whether CARlCOM
countries would be willing to give up their implementation of
monetary policies and unclear as to how political leaders would
respond to the changed role of their respective central banks.
These are some of the key issues that would have to be seriously
considered. It is clear that regional economies have made their
choices otherwise.
 Anton Belgraue, Trevor Campbell, Kevin Greenidge and Ryan Straughn • 111

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Monetary Union in the Caribbean Realistic?.. The World
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Berg, A. and E. Borensztein; The Pros and Cons of Full

Dollarisation, IMF Working Paper, No. 50, March 2000.

Burki, S.J. and G. Perry; Beyond the Washington Consensus:

Institutions Matter, World Bank: Washington, D.C., 1998.

Hausmann, R.; Currencies: Should There be Five or One

Hundred and Five?, presented at the Inter-American
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Panama, 1999.

Molano, W.T.; Addressing the Symptoms and Ignoring the

Causes: A View from Wall Street on Dollarisation,
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