Currency substitution

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

Dollarization can occur

• unofficially, when private agents prefer the foreign currency over the domestic currency. They hold for example deposits in the foreign currency because of a bad track record of the local currency.
• semiofficially (or officially bimonetary systems), where foreign currency is legal tender, but plays a secondary role to domestic currency
• officially, when a country ceases to issue the domestic currency and uses only foreign currency. It adopts the foreign currency as legal tender.

Official dollarization has gained prominence as several countries have considered and implemented it as official policy. The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.

The biggest economies to have officially dollarized as of June 2002 are Ecuador (since 2000), El Salvador (since 2001), and Panama (since 1904).

As of August 2005, the United States dollar, the euro, the New Zealand dollar, the Swiss franc, the Indian rupee, and the Australian dollar were the only currencies used by other countries for official dollarization. In addition, the Turkish lira, the Israeli shekel, and the Russian ruble are used by internationally unrecognised but de facto independent states.

List of officially dollarized economies

Worldwide use of the U.S. dollar and the euro:

  United States

  External adopters of the US dollar

  Currencies pegged to the US dollar

  Currencies pegged to the US dollar within narrow band

  Eurozone

  External adopters of the euro

  Currencies pegged to the euro

  Currencies pegged to the euro within narrow band

U.S. dollar

• British Virgin Islands
• East Timor (uses its own coins)
• Ecuador (uses its own coins)
• El Salvador
• Marshall Islands
• Federated States of Micronesia
• Palau
• Panama (uses its own coins)
• Turks and Caicos Islands

Euro

• Kosovo
• Monaco (formerly French franc; issues own euro coins)
• Andorra (formerly French franc and Spanish peseta)
• San Marino (formerly Italian lira; issues own euro coins)
• Vatican City (formerly Italian lira; issues its own euro coins)
• Montenegro (formerly German mark and Yugoslav dinar)
• Bulgaria uses a currency pegged to euro (see Bulgarian lev).
• Bosnia and Herzegovina uses a currency pegged to euro (see Bosnia and Herzegovina convertible mark).
• French Overseas territories use a currency pegged to euro (see CFP Franc) used in French Pacific islands.
• Former French territories continue to peg their currencies to that of France, i.e. CFA Franc and Comorian Franc.

New Zealand dollar

• Cook Islands (issues its own coins)
• Niue
• Tokelau
• Pitcairn Island

Australian dollar

• Kiribati (issues its own coins)
• Nauru
• Tuvalu (issues its own coins)

South African Rand

Further information: Common Monetary Area

• Swaziland
• Namibia
• Lesotho
• Zimbabwe officially starting February 2009 after the announcement of the 2009 budget by the then Minister of Finance Senator Patrick Chinamasa and again reiterated by Tendai Biti the current minister of Finance

Others

• Russian ruble: Abkhazia and South Ossetia (de facto independent states, but recognized as part of Georgia by nearly all other states)
• Indian rupee: Bhutan
• Swiss franc: Liechtenstein
• Israeli shekel: Palestinian territories
• Turkish lira: Turkish Republic of Northern Cyprus (de facto independent state, but recognized as part of Cyprus by all states but Turkey)

See also

• Monetary union
• Currency board

External links

• Dollarization.org (Reference for list of dollarized economies)