“Caribbean currencies have outlived their usefulness”
This is hardly the position one would expect to hear from Dr Delisle Worrel, the former governor of the Barbados Central Bank. However, since he raised the argument back in 2018, the perspective has increasingly found favourwith the region’s economists. Caribbean currencies were instituted primarily to combat the scarcity of the pound sterling in the early post-colonial period. At a time when transactions were largely conducted with physical bills or through primitive banking functions, the ability to print money, locally, seemed to be a simple solution to a critical problem. Of course, no treasury allows a foreign country to print its currency – thus the thirteen Caribbean central banks were born.
The necessity of our own unique currencies, in modern times, is harder to argue. Unlike in the colonial era, most transactions today can be conducted digitally – even in the region’s lower income countries. For example, in Jamaica, the latest estimates suggest that only about 17 per cent of the country remains unbanked. Thus, the “physical scarcity” motivation for having a domestic currency has greatly diminished. The other main economic benefits are the ability to control domestic interest rates, as well as influence exchange rates. In theory, our central banks in the Caribbean can either moderate inflation by raising interest rates (as most are doing now) or stimulate growth by lowering the cost of borrowing (as most were doing during the pandemic).
The reality, however, for small open economies like those in the Caribbean, is that a large share of the goods we consume are imported and are hardly influenced by the local interest rate set by the Bank of Jamaica. Despite the Bank’s highly touted “inflation targeting” regime, which holds four to six per cent inflation as a goal, the country’s consumer price index has climbed more than 10 per cent this year, largely in step with the rapid price growth taking place in the large North American economies. Economists like Dr Andre Haughton, at the University of the West Indies, suggest that Caribbean central banks have been similarly ineffective at stimulating growth through monetary policy, as commercial banks have historically only passed-through a small fraction of the savings from an interest rate decrease, on to end borrowers.
Control over one’s own currency also allows for strategic management of the exchange rate. The IMF has historically prescribed currency devaluation to countries in fiscal distress, as a way of cheapening their exports, relative to competitors. However, the people most hurt by devaluations are those with the greatest reliance on the local currency, who tend to be those lower on the economic ladder. The impact on wealth is even greater when we consider that the long run trend of nearly every developing country currency relative to the dollar, is negative. Devaluations also pummel those that are living on fixed incomes (ie. pensioners) and lead to a decline in investor confidence as the potential for labour unrest increases.
Interestingly, up until recently, Jamaica’s central bankers spent a fair bit of their time intervening in foreign exchange markets to inflate the value of the local currency in the hope of lowering the cost of imports for Jamaican consumers. While the pivot toward inflation targeting suggests a shift away from the FX rate targeting of yesteryear, we’ve still seen record level interventions, this summer. Simply shifting the conduct of all business to US dollars, eliminates the emergence of this “dual economy” and the distributional inequalities that come with it.
Dollarization does raise several logistical challenges, the largest of which is likely its cost. In 2018, every Caribbean central bank held enough foreign reserves to exchange their entire local currency issue for US dollars, at the prevailing foreign exchange rates. For Jamaica, dollarization would cost the BoJ approximately $100 billion JMD, roughly quarter of its foreign reserves. The foreign reserves of the central bank are typically invested and generate returns that may be transferred to the nation’s treasury. Last year, the BoJ made its first such transfer to the consolidated fund. Drawing down the nation’s foreign reserves to complete this exchange might not raise much political ire, but it implies that taxpayers will inevitably be the ones left footing the bill, through loss of those present value savings. On the bright side, the change would free Jamaica from the ordeal of having to manage a favorable exchange rate and would allow the country to consume goods and services equal to the full value of what it produces, without increasing debt to fill the gap. These considerations will be critical as the debate continues.
Shua McLean (@shuakym) is a Master of Public Affairs student at Princeton University, concentrating in International Development. He writes regularly on issues of public finance, economic development, and public-sector reform.