SER advises government to dollarize: “Leave monetary union with Curacao immediately”

GULIDERS TO DOLLARS

(TODAY) –  St. Maarten – The Social Economic Council (SER) “strongly advises the government of St. Maarten to step out of the monetary union with Curacao,” the council states in advice dated February 28, that was published last Thursday in the National Gazette. The role of a Central Bank in St. Maarten ought to be “limited, if not nil.”

In a 24-page report, the SER warns that “because of the worsening current account imbalance on the part of Curacao a balance of payments crisis may take place. That may lead to a sudden devaluation and inflation of the Netherlands Antillean guilder for the entire monetary union.”

The SER labeled this as “a worrisome situation.”

Stepping out of the joint Central Bank leaves St. Maarten with two options, the advice points out: dollarization or introducing the Sint Maarten Dollar. “However, whatever alternative St. Maarten chooses financial supervision, whether exercised through a Central Bank or an outsourced supervisory authority will still play an important role in promoting monetary and financial stability.”

Dollarization will lead to lower interest rates, lower transaction costs, capital mobility, more investments and the elimination of devaluation risks, the advice notes.
Banks will experience more competition from abroad and feel pressure on their interest margin, losing income from currency conversion, the SER points out, adding that overall the government will carry most of the costs.

Dollarization will have a positive effect on the investment climate and the standard of living if two conditions are met, the SER observes.”These conditions are first and foremost a high level of fiscal discipline, and higher flexibility in price and wage levels. In a dollarized economy financial institutions can still experience liquidity or solvency crises, but then the government is unable to exercise its lender of last resort function. Fit that reason there must be a guarantee that there will always be sufficient US dollars available to keep St. Maarten’s dollarized economy running.”

With dollarization, St. Maarten will have to totally rely on, and have no control over the American monetary policy.

“St. Maarten considers stepping out of the monetary union because the current account deficit has risen to worrisome levels, putting our international reserves under pressure and ultimately requiring devaluation,.” The SER wrote it its advice. ‘Therefore, immediate action to leave the monetary union is required.”

The council advises the government to set a realistic date, to make a time schedule and to start working with a professional taskforce on a strategic plan towards the exit from the monetary union. It suggests calling in the help of the Netherlands as well as that of the BES-islands that have recently gone through the process of dollarization.

Because the American dollar is widely used in St. Maarten official dollarization should not have a huge impact. The SER calls it “an efficient and achievable option” whereby the government remains responsible for protecting consumers against price hikes.

The SER advises the government to outsource its financial supervision.”This is easy to establish, considering that most financial institutions in St. Maarten are subsidiaries or branches of foreign-based companies.”

The government would have to find a way to compensate for the loss of seigniorage revenues (the profit the Central Bank makes from the margin on bank notes – the difference between the cost to print them and their face value) and license fee revenues. The SER estimates this loss at 29 million guilders – approximately $16.2 million.

Lastly, the SER advises that the board for financial supervision Cft should “continue its independent supervision indefinitely” also after December 31, 2015 when its first term expired.

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One thought on “SER advises government to dollarize: “Leave monetary union with Curacao immediately”

  1. The Government can still impose the exchange tax on other foreign currency as the Euro, EC$ etc.
    A very wise and economic sound decision by the SER! SXM should have done this from 2010! Since 2001 we have been talking about this. It is time to take action!

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