I have written recently some Letters to the Editor related to the solidity of our currency because I am worried that we cannot hold up the current solid connection between the Guilder and the US Dollar any longer because of the economic situation in Curaçao and its worsening financial situation over there. The result will – in my opinion – be devaluation of our currency the Guilder, being almost inevitable without strict financial efforts on the short term by Curaçao.
In that case, the prices here on SXM in guilders of goods, imported with dollars (food, cars, medicines), will increase with the devaluation percentage (approximately between 10 to 20%). Also, our loans that we have abroad or studies to pay abroad will do the same if our income is paid in Guilders. We have to think about options to avoid this.
In that perspective I came across a very interesting and clear article written by the predecessor of the Central Bank of Curaçao and Sint Maarten that I like to share with you. The text is integral published below.
"According to the president of the Bank of the Netherlands Antilles, Dr. Emsley Tromp, should become dollarization a possible alternative to the monetary union between Curaçao and St. Maarten. Adopting the dollar has its advantages and disadvantages for the countries of Curaçao and St. Maarten. However, given the fragility of the islands in the current world economic order, the balance of dollarization appears to be favourable.
The islands of Curaçao and St. Maarten agreed to form a monetary union in the 2010 new constitutional structure with one central bank and one common currency. However, the vulnerability of the balance of payments forces us to consider alternatives, one of which is dollarization. Three of the five Islands of the Dutch Antilles have already the US dollar as their legal currency. Is dollarization a better monetary system for Curaçao and St. Maarten?
There are arguments on both sides of the question. Adopting the US dollar as one and only legal currency for Curaçao and St. Maarten eliminates the risk of devaluation in a possible balance-of-payments crisis. The absence of this risk will promote trade and financial investments from abroad. Also, dollarized economies can have the benefits of cheaper financial loans from abroad and lower financial international transaction cost.
One of the disadvantages of dollarization is that the authorities will lose the ability to use monetary policy to influence the economy. A second disadvantage is that the central bank loses its role as lender in the last resort for its banking system. Moreover, the central bank will lose its main source of income, namely the investment of foreign exchange reserves and the currency right from the issue of banknotes.
The first argument against dollarization can be undone by the fact that we already have limited scope under the current exchange rate regime to pursue an independent monetary policy. It has become apparent over time that small open economies such as ours rely on fiscal policy and structural measures to promote investment and growth. As for the lender in the last resort, the introduction of a bank insurance plan will address this issue. Some of the funds in such a plan may come from current reserve requirements.
With regard to the sources of income of the central bank, the majority of the Bank's profits consist of licence fees that will continue to exist in a polarized economy. The Bank's profitability can also be saved by investing its capital and reserves (including gold) at a higher yield, as they are no longer required to maintain the central rate.
In choosing the most suitable exchange rate regime for the future countries of the Kingdom, dollarization seems a viable option, given our vulnerability in the current world economic order." [end of the copied text}
This article was written by the Bank of the Netherlands Antilles in July 2009, called Dollarization as an option for the monetary system of Curaçao and St. Maarten, and can be found at: centralbank.sx/uploads/files/Persbericht%20-Dollarisatie.pdf
This is my last post about this topic. Note that if such a process is chosen, the process to have the new system in place might take almost 2 years. The year that devaluation might happen is also ultimately 2021, because it is expected that the reserves of Central Bank will by then be reduced considerably. Therefore, speed is needed to decide politically what to do because otherwise we might be too late.
I really hope that I might be wrong in this whole thing, but the current signals from Curaçao – even with an agreement decided upon between the Dutch and Curaçao today – seems not very promising (because concrete decisions and executions of it need to take place by Curacao really fast to avoid further decline, which might be a too big a challenge on the short term).
For some extra background information see my previous posts: https://www.thedailyherald.sx/opinion/letter-to-the-editor/86558-consider-and-decide-asap-please (April 5th, 2019) https://www.thedailyherald.sx/opinion/letter-to-the-editor/86751-let-us-not-wait-until-it-s-too-late (April 12th, 2019)
https://www.thedailyherald.sx/opinion/letter-to-the-editor/88166-the-solid-connection-between-us-dollar-and-naf-under-pressure-and-what-to-do-now (June 10th, 2019)
G.B. van der Leest