Banking
Common Dollar for the Region?
ANU Researcher Says Australian Dollar Use Would Reduce Vulnerability
Kiribati, Tuvalu and Nauru use the Australian dollar rather than adopt currencies of their own. Niue uses the New Zealand dollar, to which the Cook Islands returned after its own currency crashed. France’s Pacific territories use the Pacific franc. The Marshalls, Micronesia and Palau remained fixed to the U.S. dollar after their independence. Six of the region’s countries, Papua New Guinea, the Solomon Islands, Vanuatu, Fiji, Samoa and Tonga have their own currencies.
Some of these six would do better to switch to the Australian dollar, argues Gordon de Brouwe, of the Research School of Pacific and Asian Studies, at the Australian National University (ANU) in Canberra. This move need not undermine their national sovereignty and would bring them greater economic stability, de Brouwe says, writing in the latest edition (Volume 15, 2/2000) of the ANU’s Pacific Economic Bulletin.
- ADVERTISEMENT -
“Given the economic importance of Australia to these nations and the size of the Australian dollar market, the Australian dollar is the most suitable candidate. Such dollarization would be simpler and likely to provide more benefits than the adoption of a currency board.”
Candidates for going Australian are countries with narrow ranges of exports that make them especially vulnerable to such shocks as bad weather, crop failure, slumped markets and political unrest, he says. All these factors load pressure on foreign exchange reserves and the value of their currencies.
“Some countries, most notably Papua New Guinea, have had tremendous difficulty in maintaining the independence of their central bank and the focus of their monetary policy, which has seriously weakened the argument for monetary independence.” Australia is the economy of most importance to Pacific Island nations. It accounts for more than 40 percent of PNG’s exports and more than 50 percent of its exports. It takes more than 25 percent of Fiji’s exports and 40 percent of its imports. Samoa, Tonga and Vanuatu have similar patterns.
There are two other reasons why a small country can gain from using a bigger country’s economy, de Brouwer says. Firstly, damage to its exchange rate caused by domestic shocks, particularly political problems, can be eliminated. Political instability from mid 1997 to September 2000 cut the value of PNG’s kina by 29 percent and the Fiji dollar by 12 percent against the Australian dollar. Vanuatu’s political instability brought pressure on the Vanuatu vatu in late 1999 and early 2000. Using the currency of much larger, more politically stable countries dilutes the harm of local instabilities and pressures, de Brouwer says.
Use of a bigger economy’s currency can solve problems of exchange rate management caused by lack of liquidity in the foreign exchange market. “Using the currency of another country with large liquid markets can eliminate this difficulty. The Australian dollar is the seventh most traded currency in the world and so offers substantial liquidity.”
The U.S. and New Zealand dollars are also candidates but Australia’s dollar is the “most viable anchor for currency union” by island nations. Australia is not only the region’s key trade partner, but the stabilizing properties of its dollar are “substantially greater” for commodity price shocks.
The downside of abandoning a national currency are outweighed by the advantages of doing so, de Brouwer says in noting emerging debate in New Zealand about having a common currency with Australia or using the Australian dollar.
One consequence of using another country’s currency is having limited ability to bail out failing local banks. “This is not an insuperable problem since Pacific islands governments can borrow funds in international financial markets or could form an agreement with the Australian government for funds to be lent at commercial rates in a crisis.”
