The new countries Curaçao and St. Maarten will form a monetary union with one central bank and a common currency. St. Maarten is already de facto dollarised and the US dollar is widely accepted in Curaçao. Therefore, it would not be such a big step to formally dollarise St. Maarten and Curaçao.

However, dollarisation has some drawbacks.

First, the authorities lose monetary policy as an instrument to steer the economy, limiting the available policy mix to correcting macroeconomic disequilibria. Second, the “lender of last resort” function of the Central Bank disappears. Finally, under dollarisation, the Central Bank would lose its main sources of income: investment of the foreign exchange reserves and issuing banknotes.

Given the limited scope to pursue independent monetary policy under the current exchange rate regime, this loss would not be substantial, according to the Central Bank. The recent adjustment periods have indicated that small open economies like ours are limited to fiscal policies and structural measures to remain competitive and hence improve their investment climates.

The lion’s share of the Central Bank’s profit consists of licence fees, which will continue to exist under the regime of dollarisation. With the balance of payments constraint no longer binding, the need to hold foreign exchange reserves to maintain the peg no longer applies. Therefore, the bank’s capital reserves will all become investable funds, thereby preserving the profitability of the bank, Tromp pointed out.

“We need to accelerate the deposit insurance scheme. Aside from providing depositors with added security, the funds of such a scheme, some of which can come from the current reserve requirements, will meet the function of lender of last resort. Moreover, the government would have to assume this function even under the current exchange rate regime. This became abundantly clear during the recent financial crisis,” he explained.

Dollarisation would result in no perceptible changes in the profit of the Central Bank and hence no impact on the government budget. Rather, it might lead to an increase in the bank’s profit, as the balance of payments constraint always has confined the bank to pursue a policy of profit maximisation. The bank also has non-interest sources of income in terms of the fees it charges the financial institutions to cover the cost of financial sector supervision.

A careful assessment towards a more realistic balance between the advantages and disadvantages of dollarisation for Curaçao in particular should be part of the public debate in choosing the most suitable monetary system for the future countries in the Kingdom, the bank president suggested. The balance seems to point in the direction of dollarisation, given the vulnerabilities in the present world economic order.

As for financial sector vulnerability in the new constitutional structure of the Kingdom, the bank envisions a financial supervision structure in which every country will have its own supervisory institution, complemented by a standard-setting body on the Kingdom level.

This body will consist of the presidents of the respective central banks and be charged with the preparation of legislation in line with international best practices, the timely implementation of rules and regulations, and monitoring compliance.

Such a structure not only will guarantee compliance with international supervisory standards and create a level playing field with uniform rules within the Kingdom, but also will promote transparency and credibility.

For setting up this structure, the current cooperative arrangements between the central banks of the Netherlands, Aruba, and the Netherlands Antilles can serve as a basis. This approach will ensure a solid supervisory architecture, sound financial institutions, and financial stability in the new countries of the Kingdom, thereby removing a major potentially destabilising force on our financial sector.

* Note from editor : “new country” in this case means, separate country status in The Kingdom of the Netherlands.

* Source : The Daily Herald St. Maarten