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CONTRIBUTORS

Nicholas Hardingham, CFA

Portfolio Manager, Franklin Templeton Fixed Income

Stephanie Ouwendijk, CFA

Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income

Robert Nelson, CFA

Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income

Joanna Woods, CFA

Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income

Carlos Ortiz

Research Analyst, Franklin Templeton Fixed Income

Jamie Altmann

Research Analyst, Franklin Templeton Fixed Income

Preview

Inspired by President Javier Millei’s proposal to dollarise Argentina, this paper explores the phenomenon of dollarisation, where countries adopt a foreign currency, most commonly the US dollar, to address economic challenges and goals.

Various factors fuel the move towards dollarisation, and monetary stability is the primary catalyst among them. As such, nations facing economic turmoil, marked by currency devaluation and hyperinflation (for example, Ecuador and Zimbabwe), see dollarisation as a fast track to restoring economic equilibrium. Meanwhile, countries with open economies and robust private sectors (such as Panama), lean towards dollarisation to enhance trade and economic stability. This strategy is especially beneficial when the adopted currency aligns with a nation's principal capital and trading partners. The relationships between the United States and Panama, the eurozone and countries like Montenegro/Kosovo, and South Africa with Lesotho/Eswatini are examples. Additionally, cases like El Salvador highlight a desire to bolster already-established monetary stability to further attract foreign investment and instil confidence in the national economy.

In this paper, we differentiate between full and soft dollarisation and the reasons driving these different shades of dollarisation. We consider the following:

  • Forms of dollarisation
  • Dollarisation, a cost-benefit analysis.
  • The process of dollarising.
  • Case study: Argentina eyeing dollarization
  • The double-edged sword of Zimbabwe's multicurrency regime
  • Does dollarisation actually work?

The impact of dollarisation on economic growth is seemingly mixed. Given the small subset of countries that have dollarised, it is difficult to draw hard conclusions other than that it has had a seemingly positive effect on these particular countries. The mixed evidence on the impact of dollarisation means that applying what occurred in dollarised economies to others may not be totally applicable given their unique characteristics and the lack of external validity of prior research. Therefore, a country would need to assess their own unique circumstances before taking the leap to dollarisation and ensure it meets certain preconditions before it does so.

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