Over the last 40 years, particularly in the 1980s and early 1990s, there was a surge of dollarisation that swept many developing and emerging economies in the world, with many countries using the US dollar to either prop up or stabilise their economies.
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Political instability, macroeconomic imbalances and the significant inflow of dollars through international trade, mobility of workers, tourists and foreign grant activities led many countries in South America to dollarise their economies between the 1980s and 1990s.
But dollarisation was not limited to just South America. There were also many Asian countries that went down the same route, seeing the US dollar as a vehicle to revive or further improve their economies.
Israel, Poland, Cambodia, Peru, Lebanon, Mexico, Armenia, Estonia, Liberia, Pakistan, Lithuania, Brazil and Bolivia are just a few examples of countries that dollarised their economies or accepted the US dollar as a legal tender.
However, recently there has been a push for many countries to reverse course and de-dollarise their economies.
Countries such as China and Russia have been pushing to lessen their dependence on the US currency and allow for greater flexibility on the political front. To them, being dependent on the US dollar means that the United States or their Western allies have greater leverage on forcing them to toe the “Western line” when it comes to politically sensitive issues.
For some countries, the reason to de-dollarise is simply to achieve greater economic independence, with others no longer seeing the need for the US dollar to further prop up or stabilise their economies.
There are some countries that have successfully achieved de-dollarisation with minimal impact on their economies. But there are also some that have experienced serious difficulties along the way or had a negative experience with de-dollarisation.
A study conducted by the International Monetary Fund (IMF), found Israel and Poland as the countries that are considered “success stories” when it comes to de-dollarisation.
“In the cases of Poland and Israel, both countries embarked on a successful disinflation programme initially built around a strong exchange rate anchor,” the IMF treatise stated.
“In Israel, the domestic financial system offered alternative forms of indexed assets, including dollar-indexed deposits with higher reserve remuneration rates. In Poland, interest rates on domestic currency assets were raised to maintain a differential in favour of local currency deposits,” the study further stated.
Pakistan and Mexico were also mentioned in the study as examples of countries that successfully de-dollarised their economies. But, as the study noted, the process is still ongoing and it is too early to tell if they will completely succeed.
On the opposite side, the experiences of Bolivia and Peru in the decades of 1980s have been often cited as examples where de-dollarisation failed.
“Often, these attempts involved administrative enforcements without fully restoring confidence in the local currency or eliminating the underlying instability that led to dollarisation in the first place,” the IMF study noted.
Frederic Chan, executive director at ANG Group Property Investment & Development, said he was not surprised that some of these countries failed at de-dollarisation.
“Evidence and facts showed that only a few countries have managed to de-dollarise effectively their economies and it is near to impossible to implement without a full and complete restart of key macroeconomic and microeconomic drivers and official financial and regulatory institutions,” he said.
In the case of Cambodia, the macroeconomic and financial conditions have been stable for around two decades, creating a platform to promote the use of a national currency; however, it still requires a comprehensive strategy based on market mechanisms and the participation from all relevant parties to de-dollarise its economy.
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