Opinion: The true effect of dollarizationPOSTED: 12/20/13 12:13 PM
I am very concerned with what is coming from the positions of power and decision making over the last few weeks. I am talking about the dollarization issue. It seems that some members of Parliament and ministers think that dollarization is as simply as changing the price tags on items. The greatest misunderstanding that I hear these leaders say is that St. Maarten is already dollarized, this is absolutely not true.
The thing is that there are advantages and disadvantages to a country assuming the currency of another country. Even though after my research, I am convinced that dollarization is not a good idea for St. Maarten, I will discuss some of the advantages and disadvantages and you can make up your own mind. I apologize now for the length of this article but I hope many of you read it as it is very important issue that we must face in the near future.
The first thing we have to establish is the reason a country would consider dollarization. No country dollarizes for convenience! That is what I hear from our leaders, they are considering dollarization for convenience of the businesses. The affect on the population is not being considered.
A while back I wrote an article about this subject because an editorial of a local paper wrote in support of dollarization and I felt someone should discuss the other side. The thing is that most people that support dollarization have not done the correct amount of research in order to make an informed decision.
Now those that pay attention to the media may say that President of the Central Bank, Mr. E Tromp came out in favor of dollarization. My argument to this is firstly he came out against it and after his job was being threatened in Curacao he was all of a sudden for it. Secondly, in his explanation he proposes some kind of fee to replace the 30 million guilder lost on seigniorage. Why change your currency to then put some form of a fee in place? Doesn’t make sense to me.
As I said above, the main reason for countries adopting the currency of another country is to either contain hyperinflation or to induce currency stabilization. Another reason is to obtain lower interest loans on the foreign market. According to Andrew Berg, whose article I got most of this information from, even with the loss of seigniorage the long term effect of dollarization may offer gains that at first cannot be measured. With the limited possibility of devaluing of a currency some economic crises may be averted.
In the even longer term dollarization makes it easier for a country to trade internationally as it can easily integrate into the global market.
Now let’s look at these advantages one by one when it concerns St. Maarten.
Currency Stability: Our Guilder has been stable for the past 50 years, there has been no major shift for as long as anyone can remember. The reason for this is that our currency, the guilder, is pegged to the United States Dollar. If it moves, we move and since the majority of our ‘trade’ is done with the US, there is actually no benefit here.
Hyperinflation: Some very good friends of mine would argue that inflation is very high in St. Maarten but it cannot be classified as hyperinflation. An example of hyperinflation is what happened in Ghana some years ago, when goods tripled in price overnight. Even though I agree that things here are too expensive, we are not experiencing this phenomenon.
Trade integration: Seeing that we have an abundance of US currency due to North American tourism being our main source of income, this too is not an issue. Many people reading this article trade with the US every week.
Now the disadvantages, the main disadvantage is, as I mentioned above, the loss of 30 Million Guilders a year in seigniorage fees. Additionally, when you dollarize and lose the function of a Central Bank, the Central Bank cannot provide any assistance to the bank and the population in the form of exchange rates or even liquidity support if the banks fail as they did in the US 3 years ago. Lastly, the loss of your own currency or I should say having your own currency is a form of pride and nationalism. It is strange to me that so many nation building and grass roots organizations have said little or nothing about this issue.
Again let’s look at the disadvantages one by one.
Seigniorage: Presently in St. Maarten we accept dollars and give back dollars for change. With that method we and by allowing seigniorage free off-shore accounts for local businesses, we still collect 30 Million Guilders. Can you imagine if we only give back guilders as change and set up change points at the harbor and airport to change back the currency for a fee. Not only would this create some employment, but I am pretty sure that with those steps we can double our seigniorage without changing the law.
Loss of the Central Bank: The banks in St. Maarten as far as I can tell are rather conservative, they don’t take high risk. The Central bank bailing them out of a crisis, I honestly don’t see happening. The only role of the Central Bank other than collecting the seiniorage fee and stocking up on foreign exchange in our economy is interest control.
In conclusion, as you can see since the major benefit of dollarization has little or no effect on St. Maarten and the seigniorage fees are considerable, it is clear to me at least that dollarization is not a good idea for St. Maarten. If we take into consideration what happened in Saba, Statia and Bonaire with the high inflation due to dollarizing, we must really question our representatives that are floating this idea.
We have a similar economy to that of Aruba and they are doing well with their own currency. If our representatives are concerned about a joint Central Bank, then establish your own. We don’t even need to go to Curacao for assistance, the ECC Central Bank has also been very successful in keeping their currency stable. We can look there for help or to our brothers in Aruba.