Economic anxiety began to show its presence more and more every day. Problems such as future anxiety and month-end calculations caused people to be more interested in the economy. Of course, this brought new economic terms to them.
One of these terms is dollarization. Dollarization is a big term in itself. There are different types of dollarization as well as its causes and consequences. For this reason, we have transferred the information we have gathered about dollarization in our article.
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What is dollarization, its types and consequences?
What is dollarization?
Dollarization simply means abandoning the domestic currency and accepting any foreign currency as the official currency of the country. But since there are types of dollarization, we can say that this explanation is partially correct. The main use of this foreign currency is to hide the value of the domestic currency. The depreciation of the domestic currency frightens many large companies, and as a result, these companies continue to resort to dollarization. In this case, it means that what is already feared has come to pass.
The country’s economy is a big factor in this regard. If the country’s economy is bad and does not show much improvement in terms of recovery, dollarization spreads quickly and rises. When things start to progress, it starts to bounce from big companies to all working sectors in the country. People start to do their daily shopping in foreign currency, and this situation ends when the domestic currency is completely out of the country and any foreign currency is officially accepted. Of course, although this situation is called dollarization, the issue is not just about the dollar. The main highlight is the acceptance of any currency other than the local currency.
What are the types of dollarization?
- Full (official) dollarization
- Partial (unofficial) dollarization
- Semi-official dollarization
- Financial dollarization
- Reverse dollarization
Full (Official) dollarization:
The country completely abandons its domestic currency and, in short, whatever currency it is accepts a national currency other than the local currency, regardless of the local currency.
Partial (Informal) dollarization:
As a result of rising inflation in the country, people naturally try to prevent this inflation. As a result, they prefer a more robust and reliable currency as opposed to the domestic currency.
Semi-official dollarization:
The domestic acceptance of an extra national currency other than the country’s own domestic currency is called semi-official dollarization. This is generally the case when inflation is so high that it cannot be avoided.
Financial dollarization:
As confidence in the financial system in the country has decreased, people now begin to borrow in a currency other than the local currency. This indicates that the doors of full dollarization have begun to open.
Reverse dollarization:
Reverse dollarization, which is one of the hardest parts of the dollarization genre, may also be the most promising. Because this situation characterizes the reverse operation of the general dollarization process. The local currency is gaining value again and the country is starting to develop in terms of savings and value measures.
What are the causes of dollarization?
- Credits become risky
- Inflation is very unstable
- Economic volatility (Volatility: in financial markets, a certain product has a certain It is the imbalance in the price over time)
- Turning towards foreign currency against the economic decline
Dollarization is definitely a situation that no country wants to experience. Because the depreciation of the local currency in the first place means that the symbol of that country’s sovereignty is gradually damaged. This is a situation that negatively affects everyone, from the state to the local people. Some of the reasons for the increase in dollarization are the fact that the public is trying to save their own money, while companies are pricing goods and services or preparing debt contracts. This situation brings about more insecurity, increase in inflation, decrease in the rate of return of financial assets operating in local currency, unbalanced macroeconomic policies etc. triggering many negative events, it allows the dollarization to rise rapidly and shake the country’s economy. The collapse of the country’s economy, on the other hand, signals that everything will get worse, as you can imagine.
What are the consequences of dollarization?
Positive results of dollarization:
- Preventing the depreciation of the national currency when done correctly
- Lowering inflation and reducing costs
- The country’s borrowing from foreign countries will decrease. Accordingly, investments will increase and the country will begin to develop
- Income instead of purchasing and selling power of the country for a certain period of time
Negative consequences of dollarization:
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As a result, although dollarization has positive results in its own right, getting into such a situation triggers a very difficult, long and complicated process across the country, and naturally, life in the country begins to become difficult in every way due to these negative consequences.
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