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Position paper: Dollarization as possible exchange rate system in Curacao and Sint Maarten

View the complete publication in:  (English)

Following the dissolution of the Netherlands Antilles in October 2010, Curaçao and Sint Maarten became autonomous countries within the Dutch Kingdom. Furthermore, the two countries became a monetary union with a common central bank and common currency. As was the case in the Netherlands Antilles, a conventional peg remained the exchange rate system in the monetary union. Specifically, the domestic currency, i.e., the Netherlands Antillean Guilder (NAf.)1 is pegged to the U.S. dollar.

The current exchange rate arrangement has often been a subject of debate in recent years. Possible risks associated with a high deficit on the current account of the balance of payments and lower transaction costs that could result in more international trade and investments have, among other things, been mentioned as reasons to consider dollarization as an exchange rate arrangement. Particularly in Sint Maarten, where the U.S. dollar is de facto generally accepted as a medium of exchange, dollarization has frequently been mentioned as an alternative for the current peg.

Amid the severe social-economic crisis that Curaçao and Sint Maarten are experiencing due to the COVID-19 pandemic, the Dutch State has been providing liquidity support to both countries in the form of 2-year zero interest bullet loans. The liquidity support is, however, bound to strict conditions. One of these conditions is that a study should be conducted by an independent party on the societal costs of an own currency versus dollarization. The International Monetary Fund (IMF) has conducted this study (IMF, 2021a).

Against this background, this position paper provides, based on a literature review, insights into the costs and benefits of the current exchange rate arrangement in the monetary union of Curaçao and Sint Maarten vis-à-vis dollarization. The position paper is structured as follows. Based on available economic literature, section 2 discusses three different approaches that explain the choice of an exchange rate arrangement. In section 3, the current exchange rate system and monetary policy in Curaçao and Sint Maarten are presented. Section 4 discusses dollarization as an exchange rate system. In section 5, some issues regarding the implementation of dollarization are discussed, while section 6 provides some examples of countries that have dollarized in the past. Finally, the conclusion is presented in section 7.

Last updated: 15.10.2021 13:10