Question

Provide a written summary of the pros and cons of dollarization.

Answer 1

The concept of dollarization is defined "When any country adopts a foreign country as its own legal tender and makes the market use it on par with national currency ".There are several advantages and disadvantages over a country's dollarization​ policy .

Pros :-we can witness low fiscal costs as production costs will be made normal.interest rates will be cheaper and currency crisis can be checked. Economic relations will be made stronger with the particular foreign country as mutual agreement provides for a clear understanding between the countries.Local financial sector can be grown stronger.balance if payments will be controlled easily .Stable and risk free market can be seen . Foreign investors will be willing to invest more if the country adopts dollar as part of dollarization and relations with IMF and world Bank could be improved .High inflation can be reduced owing to the adoption of full dollarization in developing countries.conversion and exchange of currencies are made easier.

Cons :-the autonomy and liberty of local economy may be put at stake as direct domestic economic influence is no longer existing .control of foreign country's currency is not good as investors may feel that economy is controlled externally and there will be uncertain risk of economic crisis in the foreign country.the domestic country can't assure the foreign investors over the stability of adopted currency and market maintenance.national currency serves as the symbol of country's economy so when a foreign country enters there will be a threat to the economic autonomy.the central bank may lose some if its powers to control the money flow in the market and it is no longer considered as the lender of last resort since having made the country dollarised . Securities and bond papers must be in adopted dollars .