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Extensively quizzed by MPs�
PHILIPSBURG--Central Bank of Cura�ao and St. Maarten President Emsley Tromp recognises that the Netherlands Antillean guilder has been stable for the past forty years, but made a case for the two countries to move to the use of the US dollar ? dollarization.
He made his case during a meeting of the Central Committee of Parliament in Dr. A.C. Wathey Legislative Hall on Monday afternoon.
Tromp was extensively quizzed by Members of Parliament (MPs) on the likely consequences of any move to the US dollar, especially by Democratic Party (DP) MP Roy Marlin who questioned whether the balance of payment deficit that has led to Tromp's promotion of dollarisation would be wiped clean by this move.
R. Marlin also asked whether dollarisation would reduce the interest rate charged on loans and savings. He also asked Tromp whether the focus should not be on stabilising the economy and whether political agreements made leading up to the constitutional change related to finances should not be given an opportunity to work and bear fruit.
Tromp said the suggestion to dollarise stemmed from the trend the bank had noticed in the past years, especially after the global recession in 2008, when there could be financial issues in the future if the islands continued to import extensively without any export to generate revenues. Dollarisation, he said, would eliminate the risk of devaluation of the Antillean guilder or the joint Caribbean guilder set to come into effect in 2012.
The Central Bank, Tromp also noted, is no longer a lender of last resort for financial institutions such as banks if they get into any financial jams, because the holdings of many of the main institutions with cross-border business far outweigh the gross domestic product (GDP) of St. Maarten (NAf. 1.5 billion) and of Cura�ao (NAf. 5.3 billion).
In this scenario, if the Central Bank should be called on as a lender of last resort it would have to use reserves to help the institution, a move that would weaken the countries, similar to the problems being experienced in Iceland.
Dollarisation would insulate the small and open economies of the two countries, which are more exposed to external shocks, Tromp said, explaining that the two countries' balance of payment deficit was growing wider and would be less able to deal with such shocks. The move is a way to ensure they can withstand the next big economic crisis.
The benefits of making the US dollar the official currency include the elimination of devaluation of the currency and reduced default risk, lower transaction cost for banks, promoting soundness of the financial sector, better integration with international financial markets, macro-stability and continued economic growth.
National Alliance (NA) Parliamentarian Frans Richardson questioned whether the reduced cost for banks would lead to the need for less staff, what would become of property values, and whether the push for dollarisation was a policy being forced throughout the Caribbean to make the US dollar strong against the euro. He also asked whether moving to the dollar would take away the possibility to print more money in times of need.
Tromp said banks would look to their overhead by possibly cutting their wage bill, but it had been seen that banks had moved into other types of financial products and the fact that there would be lower fees should trigger more economic activity and more work for the banks in the long run.
He batted down the notion that printing more money in time of need was a viable reason to not dollarise and added that printing more money would not aid in any situation if there were no reserves to back up the currency.
As for the regional push to move to the US dollar, Tromp said it would make no sense if the region moved to the dollar and theirs as well as the US economy were weak.
Dollarisation would also cost some NAf. 89.9 million annually for the Central Bank/the two governments, because no licence fee (NAf. 72.2 million annually) would be needed and seigniorage (NAf. 17.7 million) would not be levied.
However, these losses are outweighed by the fact that the Central Bank has some NAf. 1 billion in gold reserves and NAf. 1.2 billion in foreign exchange reserves and these can be invested with dollarisation. Tromp explained that the gold reserves would no longer be needed for security, as with the foreign exchange reserves, and these could be used for investments so that they generated more income than the amount from the seigniorage and licence fees.
The requirements to dollarise include a local currency (the guilder) that is successful pegged to the anchor (US dollar) currency, reserve coverage of the monetary base, a domestic banking sector that is functioning and well-supervised, and broad acceptance for the move, Tromp said.
United People's (UP) party MP Jules James had queried about the challenges to dollarisation, what was needed to ensure that people were well informed about any changeover and what this would mean to their income/revenues. He also asked whether the Central Bank would review its growth projection for St. Maarten, as this was being used by the Committee for Financial Supervision CFT in the budget process.
Tromp said that for examples of how the movement to another currency took place the islands had to look no further than Bonaire, St. Eustatius and Saba that began using the US dollar as their currency this year, and the European Union's change to the euro several years ago.
As for review of growth estimation, a new one was being worked on for St. Maarten, he said.
Independent MP Patrick Illidge and MP Johan "Janchi" Leonard questioned why move from the guilder when there was no issue with it. Illidge asked why Aruba had not moved to the dollar and Leonard queried Tromp's change of heart from his stance of the islands' having their own currency several years ago to the promotion of the dollar.
Tromp said the Aruba Minister of Finance had indicated to him that if St. Maarten and Cura�ao dollarised, Aruba would move in that direction too. If the two islands dollarise, Aruba would be only partner in the Caribbean part of the Dutch Kingdom with its own currency if it chose not to make the move.
On the change of heart, Tromp said the reality of the times had shown that there was need to secure the economies of the two islands and the financial crisis had shown that the world was now very different.
Meanwhile, he pointed out, the use of actual banknotes and coins has been on the decline, because more people are using electronic payment.
NA Parliamentarian George Pantophlet asked whether the emerging stronger economies of Brazil, Russia, India and China (BRIC) were being factored into the dollarisation equation and what the issues would be if those countries decided not to peg their currencies to the US dollar.
Tromp said the US dollar had two roles: economic and financial. The latter continues to be very important for trade even though the US economy has seen some dipping due to the subprime housing market crash, he said.
UP Parliamentarian Romain Laville wanted to know why the Central Bank was not allowing more locally-run money transfer places to open. Tromp said there was a moratorium on this type of business due to the change in international regulations on money laundering and terrorism financing. Licences to MoneyGram and Western Union were issued long before the moratorium.
DP Parliamentarian Leroy de Weever asked about the Central Bank's deposit insurance scheme. Tromp informed him that such a scheme was in development together with Aruba and the Netherlands, which oversees Bonaire, St. Eustatius and Saba.
The early stage of Monday's meeting was chaired by Deputy President of Parliament De Weever. He handed over the reins to President of Parliament Gracita Arrindell when she arrived for the meeting after Tromp's opening presentation. Arrindell was reportedly taking care of other matters prior to attending the meeting.
The final point of the meeting's agenda was an explanation of the Central Bank's supervisory role for commercial banks, credit unions and insurance agencies, among other things. Bank Supervision Director Shelwyn Salesia made the presentation and informed MPs that several amendments to laws related to the Central Bank's supervisory roles were pending approval.
Salesia also said the bank was working on improving its supervisory function, which would include changes in regulation of the makeup of credit unions, such as the need for more than 50 members.
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