Monday, October 5, 2020

The Pros And Cons Of Dollarisation - It’S No Magic Wand


ActivTrades Weekly

OVER the course of last week the discussion on dollarisation became a hot topic in local news. The debate has been lively with both advocates and opponents arguing passionately. But what exactly is dollarisation and how does the idea work? Could it be the magic wand many long for? Here we’ll look at the concept and try to weigh some of its pros and cons.

Dollarisation is a form of currency substitution; in this case, the term is used to describe the use of US dollars, alongside or completely replacing the domestic coinage of another country. It is usually implemented when national authorities seek to protect themselves from the destabilising attacks of financial speculators on locally denominated assets, or when the currency has become unstable and starts to lose its usefulness as a means of exchange for everyday transactions, as happens in hyper-inflation scenarios. This process may develop as the product of official monetary policy or spontaneously, as a de facto market process with citizens and businesses opting to use foreign means of payment.

Usually, the main reason for dollarisation is the benefit of greater monetary stability, which helps to control inflation and makes it harder for predatorial speculators to attack. Other benefits lie in reducing the costs that otherwise would be incurred by providing and maintaining a country’s own money supply; this is particularly advantageous for nations that maintain strong economic relations with the United States.

And what are the potential downsides?