Financial sector queries Tromp's proposal

The director of the Central Bank of Curaçao and St. Maarten (CBCS), Emsley Tromp, recently suggested to come up with a transfer compensation to counterbalance the revenue loss if the choice is made for dollarization.

According to the financial sector, a few questions are in order here. Why introduce a compensation, if one of the reasons for dollarization is to abolish the so-called seignior age fee and the foreign exchange provision of 1 percent on transfers in dollars (licence fee). The discussion on dollarization or not, has flared up again with great intensity. St. Maarten is still thinking about dollarization and stepping out of the monetary union with Curaçao. In this connection, the Curaçao government is also considering dollarization. However, within the financial sector, many are still of the opinion that the advantages of dollarization do not outweigh the disadvantages.

During the past years, CBCS has become a fervent supporter of dollarization. Tromp’s reasons to consider dollarization are the constitutional changes within the Kingdom: Bonaire, St. Eustatius and Saba have implemented the dollar as official currency. According to him, another reason is the limited capacity of small countries with an open economy to counter external shocks. These are lessons that could be learned from the recent international financial crisis. A larger vulnerability due to the loss of economy of scales after October 10th 2010 and an increasing loss of the current account on the balance of payments, make the countries more vulnerable. According to Tromp, the vulnerability of balances of payments had increased and the number of countries using a system of fixed exchange rates has decreased during the last fifteen years. However, he does not mention examples of such in his presentation. Advantages of dollarization are the elimination of the currency/standard risk, lower transfer costs, increasing the reliability of the financial sector, integration with international financial markets, more macro-economical stability by limiting monetary financing of tax deficits, and stimulating economical growth. However, one must not forget the fact that we’ve had the same exchange rate for forty years now (thus a stable monetary climate), the effect of dollarization on the economical growth could only be marginal. In his presentation, Tromp also ignores that the Netherlands Antilles have had deficits on the current account of the balance of payments for decades. Nor does he mention that the vulnerability of our balance of payments is because as a country, we import much more than we export.

Dollarization will not change this. In short, if the local economies appear to be insufficient after the dollarization to cover the desired investment of companies, as country we will then have to finance deficits on the balance of payments with contracting foreign debts. The foreign exchange currently functions as buffer. During the past forty years, the monetary policy of the Central Bank of the former Netherlands Antilles often succeeded in bringing the import cover of several weeks decreased foreign exchange reserves to a safer level again. With a current import cover of almost four months, the question is why one is considering dollarization now. With the dollarization, Curaçao will loose their monetary autonomy and put their economical fate in the hands of Ben Bernanke, the president of the federal system of American Banks (Fed). The island cannot counter economical shocks without monetary policy. The possibility of dollarization on St. Maarten and Curaçao was recently also the subject of discussion between the Ministers of Finance George Jamaloodin (MFK) and Hiro Shigemoto (DP, St. Maarten) During Shigemoto’s visit to Curaçao last week. Within this framework, Jamaloodin discussed a document on dollarization – drawn up by the Curaçao International Financial Services Association (Cifa) – with Shigemoto.

St. Maarten still indecisive
In a press report, Shigemoto announced he explained to Jamaloodin that St. Maarten had not taken a decision on dollarization yet and that the government is still collecting and exchanging information, and discussing with stakeholders. In a reaction to the document, Cifa chairperson Etienne Ys says that the association does not have a viewpoint on dollarization. At the request of Minister Jamaloodin, the Cifa made an inventory of the members on the viewpoints regarding dollarization. Only twenty-five of the more than one-hundred members responded. Eighty percent of these 25 certainly supports dollarization, and the remaining percentage opposes such. The members, who had responded, were mainly trust companies. However, because the number of members who had responded is not representative, Cifa cannot draw conclusions, or take a viewpoint on dollarization, according to Ys.
Ys finds that lowering the compensations that are to be paid (one of the reasons to introduce dollarization) will lapse with the introduction of the transfer compensation. “There is no reason to introduce dollarization, if one is going to replace the current compensations by a different compensation,” says Ys.

Missing out on 90 million guilders
According to Tromp’s presentation last week on St. Maarten, Curaçao and St. Maarten will miss 90 million guilders on compensations by introducing their own currency (17.7 million guilders) and foreign exchange provision for financial transactions in dollars (72.2 million guilders) due to the dollarization; in other words, approximately 90 million guilders per year. In order to compensate this, Tromp suggested coming up with a transfer compensation on all financial transactions – for import and export – that is to yield 122 million guilders. By choosing for dollarization, Tromp further states that the gold reserves, capital reserves and foreign exchange reserve, and invested funds – yielding a possible additional 50.6 million guilders per year – of which 30 million as a result of interest on the revenues from invested monies, becoming available upon selling the current ‘gold reserve’.
The other comment on Tromp’s recent presentation – mentioned on the website of the Central Bank – is that the introduction of a transfer compensation does not require dollarization. It could be introduced also under the current monetary system of the collective guilders of Curaçao and St. Maarten; a choice to be made by the countries. If this choice is made, the countries will loose the advantage of lower transfer costs – ensuing from the dollarization. In any case, the bank association does not support dollarization. Most of the banks oppose this – with the exception of Fons Simon, director of Banco de Caribe – who says he supports this.

Gold reserve
From the presentation of Emsely Tromp (director of the Central Bank), one cannot ascertain how he arrives at the amount of 30 million guilders on revenues from making investments of the gold reserve. The website http://en.wikipedia.org/wiki/Gold_reserve states that the gold reserve of the former Netherlands Antilles currently amounts to 13.1 metric ton. One metric ton is equivalent to 32.150 troy ounces. Per December 31st 2010, the price of gold amounted to 405.50 dollars per troy ounce. A quick calculation shows that the current market value of the gold reserve is just above 1 billion guilders. To yield the 30 million on annual basis mentioned by Tromp, one must somewhere realize a risk-free interest of 3 percent on a yearly basis. The Central Bank of the United Stated (the federal reserve (Fed)), currently pays between 0 and 25 basic points (0.25 percent) per year. The Dutch Bank and the Bank of England both pay below the 50 basic points (0.5 percent) per year. Therefore, investments in these funds would yield less than 5 million guilders on an annual basis. On the other hand, does one intend to invest the available funds (after conversion of the gold stock) into more risk-bearing funds?

(Source: National Newspaper Amigoe)

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