Dollarization- Converting currency into DOLLAR

It is the process by which a country decides to use two currencies the local currency and generally a stronger, more established currency like the US dollar.

Javier Milei, the recent winner of Argentina’s presidential election, has drawn attention for his plan to replace the country’s currency “Peso” with the dollar.

Occurrence- It occurs in developing countries with a weak central monetary authority or an unstable economic environment.
It usually happens when a country’s currency becomes unstable or loses its value due to high inflation or other economic problems.

Example- Zimbabwe ran a dollarization test to see if the adoption of foreign currency could reduce high inflation and stabilize its economy.

significance of dollarisation?

Economic stability- It can lower inflation rates and stabilise prices, as the dollar is less prone to devaluation and volatility than the domestic currency.
Promote investment- It can avoid currency crises, which reduces the sovereign risk premium and lowers interest rates, leading to higher investment and growth.
Boost trade- It can facilitate trade and integration with international markets, as the dollar is stronger and more widely accepted than the domestic currency.
FDI destination- It can encourage foreign direct investment (FDI), as investors do not need to worry about exchange rate risks or currency fluctuations.
Cost effective- It can promote fiscal discipline and a competitive financial system, as the government and the banks cannot rely on printing money to finance their deficits or bailouts.

3 fully dollarised economies - Ecuador, Panama and El Salvador have had successful economic outcomes following dollarisation.

Types- There are 4 types of dollarization that countries can adopt.

Ecuador model of dollarisation

Price stability- It helped the country to reduce inflation which was over 100% in 2000 to around 4% in following years.
Lower interest rate- Interest rate declined making credit more affordable and encouraging investment and consumption.
Fiscal discipline- It limited government’s ability to finance its spending by printing money. This also improved the country’s credit rating and reduced its country risk premium.
The country used the oil revenues to increase social spending and reduce poverty and inequality.

Issues of dollarisation?

Monetary autonomy- It can reduce the country's monetary autonomy, which means it cannot adjust its money supply or interest rates according to its economic needs.
- Greece benefited from using the Euro as a common currency, but lost its policy autonomy.
- Ecuador’s dollarisation led to losing of monetary autonomy and exchange rate policy autonomy.
Seigniorage- It can lose the revenue generated by issuing currency.

Seigniorage is a term that refers to the profit that a government or a central bank makes by issuing money.

Country’s identity- The country may face a loss of public support or legitimacy, especially if the decision to dollarise is perceived as imposed by external forces or interests.
External factors- It can increase the country's vulnerability to foreign influence and external shocks, as it depends on the US monetary policy and dollar availability.
Liquidity risks- It can impair the lender-of-last-resort’s ability to provide emergency liquidity to the financial system in times of crisis.

De-dollarisation

It is the process of reducing the reliance on the US dollar as a reserve currency, a medium of exchange, or a unit of account in the global economy.
It gained prominence due to US-China trade war, COVID-19 pandemic, rise of digital currencies and growing multi-polarity in world economy.
It can increase monetary autonomy, diversify their currency reserves, or challenge the US influence on the world financial system.
Global regulatory landscape-
- China- It is promoting the use of its Renminbi in international trade and finance, especially with its Belt and Road Initiative partners.
- Russia- It promotes the use of Rouble after facing US and European Union sanctions over its involvement in Ukraine.
- India- It has released a roadmap for the internationalisation of the Indian rupee to create broader acceptance for increasing trade and investment ties.
- European Union- It is promoting the use of Euro in international currency to reduce its exposure to US sanctions and monetary policy spill overs.

Source:

Join Our Telegram

Electoral Reforms and Postal Ballot

Bharat Stage Emission Standards & Air Pollution

Pradhan Mantri Suryodaya Yojana

06 Feb, 24
SHARE

Recently, Prime Minister announced Pradhan Mantri Suryodaya Yojana under which 1 crore households will get rooftop solar power systems. India’s Status of Current Solar Capacity India currently stands at 4th place globally in solar power capacity. As per Ministry of New an

Foreign Contribution Regulation Act (FCRA)- NGO

06 Feb, 24
SHARE

The Foreign Contribution Regulation Act, 2010 (FCRA) registration of two prominent non-governmental organisations (NGOs) — Centre for Policy Research (CPR) and World Vision India (WVI) have been cancelled this month. What is FCRA? Key provisions of FCRA, 2010 Key aspects Description

Voice clone-AI

06 Feb, 24
SHARE

Voice clone fraud has been on the rise in India. AI voice cloning – It is the process of creating a synthetic replica of a person’s voice through machine learning and speech synthesis technology.It is called as voice deepfakesor audio deepfakes. Objective – To achieve a high level of na

Science communication- how to promote

06 Feb, 24
SHARE

Steps taken by India to promote Science Communication Publications and Information Directorate (PID) - An organisation under Council of Science and Industrial Research (CSIR) established in 1951 for publishing and disseminating scientific information in India. National science magazines- The PI

Universal Basic Income (UBI)- Analysis

05 Feb, 24
SHARE

Universal Basic Income (UBI) can strengthen welfare architecture and unlock the nation’s latent demographic potential. UBI - It is an income support mechanism typically intended to reach all or a very large portion of the population regardless of their earnings or employment status. Objective- To provide enough to co