Dollarisation
Also called: Currency substitution · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Dollarisation is the use of the US dollar alongside, or instead of, a country's own currency for prices, payments and savings. It is also called currency substitution. In full dollarisation, the dollar replaces the national currency altogether. In partial dollarisation, people keep dollar deposits because they do not trust the local currency, which often happens in economies under stress. A fully dollarised country gives up its own monetary policy.
Example
Ecuador adopted the dollar as its currency in 2000, and El Salvador did so in 2001. Zimbabwe moved to a multicurrency system in 2009.
Don't confuse with
- De-dollarisation: this is the opposite trend of reducing reliance on the dollar in trade, reserves and finance.
- Currency board: here the country keeps its own currency but issues it only against full backing of foreign reserves. Hong Kong has done this since 1983, at about HK$7.8/$.
Related concepts
- De-dollarisation
- Rupee internationalisation
- Rupee trade settlement
- Nostro and Vostro accounts
- Local currency settlement