In a commentary published in April 2006, an economist wrote: “I am increasingly convinced, however, that the answer to the age-old question of what is the most appropriate exchange rate arrangement for Caricom is ‘none’. All Caribbean countries should initiate official dollarisation, that is, adopt the US dollar as legal tender and stop issuing domestic notes and coins. “In doing so they would join 14 other officially dollarised independent countries.” The economist who in 2006 was “increasingly convinced,” that the 15 members of Caricom should willingly give up their nine different currencies and adopt the US dollar was Jwala Rambarran, then chief economist of CMMB (Caribbean Money Market Brokers), writing in the third edition of the Emerging Market Weekly. In that piece, Mr Rambarran wrote: “Full dollarisation offers many benefits. First it eliminates the risk of currency and balance of payments crises. A government cannot devalue a currency that does not exist… “Second, dollarisation will force governments to strive for fiscal discipline and to reduce high budget deficits, because they can no longer print money to finance deficit spending. Caribbean governments ran an average fiscal deficit of 6 per cent of GDP from 2000 to 2005, double the average fiscal deficit in 1990 to 1997.
“Governments would then have to borrow from the capital markets to meet their financing requirementts, placing their performance (or lack thereof) under greater scrutiny. For example, it is the Central Bank financing of the Government’s spending within the domestic economy that is the main reason behind the liquidity overhang in T&T and which spills over into the foreign exchange market. “I am aware that dollarisation will not produce magic changes in fiscal performance but it will make the price of mismanagement easier to see in the form of a higher risk premium. “Finally, official dollarisation will help to promote increased trade and investment between the US and the Caribbean, providing a fillip to bilateral and multilateral arrangements.” Mr Rambarran added: “Full dollarisation demands that the Caribbean central banks completely give up their monetary policy to the US Federal Reserve.”
There are several interesting aspects of this short essay:
1) Even within the limited space available, it makes no attempt to analyze the experiences of countries that have dollarised, including Panama and El Salvador;
2) It does not deal adequately with the main disadvantage of dollarisation, which is that such countries are virtually held hostage to the performance of the US economy. If, as now, US monetary policy requires that interest rates there should be as low as possible in order to stimulate the US economy, any country that has dollarised with the US dollar would be forced to maintain low interest rates, even if that economy were booming or at a different stage in the business cycle.
3) The reality of countries at different stages of development being hamstrung by what amounts to a dollarisation can be seen throughout Europe where, because of its lack of competitiveness, Greece desperately needs for its currency to be at a much lower value than Germany, for example.
4) The argument, made by Mr Rambarran, that the “shocks” that face the US and Caricom are similar cannot hold water when analysed over the long term as high energy prices favour T&T but not Barbados, Jamaica or the US.
5) It is also untrue today, as it was in 2006, that trade in the Caribbean is concentrated on the US-dollar bloc. Most of the tourism-dependent countries have depended on European tourists for years and, in terms of imports, China is a factor in this region, as it is elsewhere.
Mr Rambarran also states that “the most passionate objection to adopting the US dollar is not economic, but political,” as the national currencies are seen as a “symbol of sovereignty and national pride.” This is simply incorrect as the “most passionate” objections to dollarisation are economic. But issues of national pride and symbols of sovereignty are, without doubt, as important among Caricom countries as they are elsewhere. One is sure, however, that some Caricom nations would drop their national currencies in a heartbeat if they were sure that doing so would lead to an automatic and sustainable increase in the standard of living of citizens. The enquiry into Mr Rambarran’s strongly held beliefs, of course, is not an academic matter.
His appointment as the Governor of the Central Bank nine days ago means that he is now in a position to influence the Government with regard to the replacement of the TT dollar—an issue that he obviously feels strongly about:
• Is the new Governor still as wedded to dollarisation today as he was six years ago?
• Should the population be on the alert to wake up one Monday morning to find that the TT dollar has been replaced by the US dollar and if so, how will the billions of dollars that are now sitting in TT-dollar deposit accounts be affected?
• Should the man in the street take steps to protect the value of their TT dollar savings and investments or should they wait for Mr Rambarran’s beliefs to become reality?
• Is dollarisation to the US dollar appropriate for T&T or any Caricom country?
In discussing the new Central Bank Governor, it is useful for us to recall that Mr Rambarran worked at CMMB for three years and that CMMB was formed in 1999 as a joint venture between JMMB (45 per cent); Clico Investment Bank, a subsidiary of CL Financial (45 per cent), and CL Financial (10 per cent). And, therefore, that between April 2004 and March 2007, the current Governor of the Central Bank was the chief economist at CMMB, an institution that was from inception majority owned (55 per cent) by CL Financial in a joint venture with JMMB. It may also be useful to recall that CL Financial paid US$41.37 million (TT$264 million) for JMMB’s 45 per cent shareholding in CMMB in October 2008, well after Mr Rambarran left the institution to open his own consultancy and that 100 per cent of CMMB was purchased by state-owned First Citizens in May 2009 for $1 as part of the intervention structured by the Central Bank from January, 2009.
At this time, one need go no further on this point but to note the continuing role of the Central Bank in the resolution of matters involving the vast CL Financial empire, including:
• The fact that the Central Bank has Section 44(D) control over Clico;
• That a Central Bank employee is on secondment at the Deposit Insurance Corporation serving as the liquidator of Clico Investment Bank;
• The likelihood that the Central Bank will be called to account for its role in the supervision of Clico and Clico Investment Bank at the Colman Commission of Enquiry; and
• The Central Bank initiated civil litigation about a year ago against Lawrence Duprey, Andre Monteil and others in which the former CL Financial bigwigs are accused of all manner of corporate sins.
Those who are capable of connecting the dots should feel free to do so, but please, don’t say that Anthony Wilson said anything but the facts outlined herein.
Disclosure: Last week this column stated that Euric Bobb was the only deputy Central Bank Governor who was promoted to Governor. In fact, Victor Bruce was appointed as Deputy Governor on January 1, 1966 and became T&T’s first local Central Bank Governor, according to a speech given by former Central Bank Governor Ewart Williams at the opening of the Victor E Bruce Financial Complex in Tobago on June 18.