Dollarization and Pakistan Perspective

Dollarization occurs when residents of a country extensively use the U.S. dollar or another foreign currency alongside or instead of the domestic currency. Unofficial dollarization occurs when individuals hold foreign-currency bank deposits or notes (paper money) to protect against high inflation in the domestic currency. Official dollarization occurs when a government adopts foreign currency as the predominant or exclusive legal tender. Unofficial dollarization has existed in many countries for years. It has attracted much study by economists, but far less political attention because it is to a certain extent beyond the control of governments. Dollarization has been in the news lately because of interest in official dollarization. In early 1999 the government of Argentina stated that it sought a formal agreement with the United States to become officially dollarized. Argentina or any other country can become officially dollarized even without a formal agreement, but there may be economic and political benefits to a formal agreement. Argentina's action sparked discussion of official dollarization in other Latin American countries, including Ecuador. On January 9, 2000, Ecuador's president proposed dollarization as a way of helping his country out of a deep recession and political turmoil. On January 21 political unrest forced him out of office, but his successor has expressed support for dollarization. As of late January it remains to be seen whether Ecuador will implement dollarization. On January 24, administrators of the United Nations announced that for the time being, the dollar will be the official currency of East Timor, which recently regained independence from Indonesia.