BIS Papers No 17 Regional currency areas and the use of foreign currencies Monetary and Economic Department May 2003 Papers in this volume were prepared for a meeting of senior officials from central banks held at the Bank for International Settlements in September 2002. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or the central banks represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned. Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH-4002 Basel, Switzerland E-mail: [email protected] Fax: +41 61 280 9100 and +41 61 280 8100 This publication is currently only available on the BIS website (www.bis.org). A paper version is expected to be available by August 2003. © Bank for International Settlements 2003. All rights reserved. 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ISSN 1609-0381 (print) ISBN 92-9131-648-2 (print) ISSN 1682-7651 (online) ISBN 92-9197-648-2 (online) Table of contents Participants in the meeting ..................................................................................................................iii Introduction ........................................................................................................................................... 1 Economics Economic aspects of regional currency areas and the use of foreign currencies John Hawkins and Paul Masson ............................................................................................................. 4 Europe Regional currency areas: a few lessons from the experiences of the Eurosystem and the CFA franc zone Marc-Olivier Strauss-Kahn (Bank of France)......................................................................................... 42 The currency board and monetary stability in Bosnia and Herzegovina Dragan Kovačević (Central Bank of Bosnia and Herzegovina)............................................................. 58 Shadowing the euro: Bulgaria’s monetary policy five years on Kalin Hristov and Martin Zaimov (Bulgarian National Bank) ................................................................. 61 Monetary policy and management of capital flows in a situation of high euroisation - the case of Croatia Boris Vujčić (Croatian National Bank) ................................................................................................... 79 Malta’s exchange rate arrangements - a medium-term perspective David Pullicino and Alfred Demarco (Central Bank of Malta)................................................................ 99 Middle East The Gulf Cooperation Council monetary union: a Bahraini perspective Khalid Al-Bassam (Bahrain Monetary Agency) ................................................................................... 105 Monetary policy in Qatar and Qatar’s attitude towards the proposed single currency for the Gulf Cooperation Council Fahad Faisal Al-Thani (Qatar Central Bank) ....................................................................................... 108 A common currency area for the Gulf region Muhammad Al-Jasser and Abdulrahman Al-Hamidy (Saudi Arabian Monetary Agency) ................... 115 Concrete steps towards the establishment of a monetary union for the Gulf Cooperation Council countries Mohammed Ali Bin Zayed Al Falasi (Central Bank of the United Arab Emirates)............................... 120 Africa Botswana’s exchange rate policy Kealeboga Masalila and Oduetse Motshidisi (Bank of Botswana)...................................................... 122 Regional currency areas and the use of foreign currencies: Lesotho’s experience Tabo Foulo (Central Bank of Lesotho) ................................................................................................ 128 South Africa’s experience of regional currency areas and the use of foreign currencies Lambertus van Zyl (South African Reserve Bank) .............................................................................. 134 Regional currency areas and use of foreign currencies: the experience of West Africa Michael Ojo (West African Monetary Institute) .................................................................................... 140 Regional currency areas: lessons from the West African sub-region and Nigeria’s policy stance Ernest Ebi (Central Bank of Nigeria) ................................................................................................... 145 BIS Papers No 17 i Other regions The ASEAN currency and exchange rate mechanism task force Ooi Sang Kuang and Sukhdave Singh (Central Bank of Malaysia)..................................................... 151 The use of foreign currencies: the United States perspective David Howard (Federal Reserve Board of Governors)........................................................................ 152 Previous volumes in this series ....................................................................................................... 155 Notations used in this volume e estimated lhs, rhs left-hand scale, right-hand scale billion thousand million … not available . not applicable $ US dollar unless specified otherwise Differences in totals are due to rounding ii BIS Papers No 17 Participants in the meeting Bahrain Monetary Agency Khalid Abdulla Al-Bassam Deputy Governor Central Bank of Bosnia and Herzegovina Dragan Kovačević Vice Governor, Research Department Bank of Botswana Oduetse Andrew Motshidisi Deputy Governor Kealeboga S Masalila Principal Economist, Research Department Bulgarian National Bank Kalin Hristov Policy Adviser Bank of the States of Central Africa André Mfoula Edjomo Directeur des Relations Financières Extérieures Croatian National Bank Boris Vujčić Deputy Governor European Central Bank Christian Thimann Head of Division, International & European Relations Adalbert Winkler Economist Bank of France Marc-Olivier Strauss-Kahn Director General, Directorate General Economics and International Relations Bank of Ghana Lionel Van Lare Dosoo Deputy Governor West African Monetary Institute (WAMI) Michael Olufemi Ojo Director General Peter Johnson Obaseki Policy Adviser Central Bank of Lesotho Tabo Foulo Deputy Governor Central Bank of Malaysia Ooi Sang Kuang Deputy Governor Sukhdave Singh Senior Manager, Monetary and Financial Policy Department Central Bank of Malta David Pullicino Deputy Governor Qatar Central Bank Fahad Faisal Al-Thani Deputy Governor Saudi Arabian Monetary Agency Muhammad Al-Jasser Vice Governor Abdulrahman Al-Hamidy Director General, Research and Statistics Department BIS Papers No 17 iii South African Reserve Bank Lambertus van Zyl Adviser to the Governor Central Bank of the United Arab Emirates Mohammed Ali Bin Zayed Al Falasi Deputy Governor Board of Governors of the Federal David Howard Reserve System Deputy Director, Division of International Finance Brookings Institution Paul Robert Masson Senior Adviser, Visiting Fellow, Economic Studies BIS William R White (co-Chairman) Economic Adviser Head of the Monetary and Economic Department Mario Giovanoli (co-Chairman) General Counsel Gunter D Baer Secretary General Philip Turner Head of Secretariat Group James H Freis, Jr Senior Counsel John Hawkins Senior Economist iv BIS Papers No 17 Introduction John Hawkins and Paul Masson1 The recent introduction of the euro and projects for monetary union in other parts of the world make the replacement of national currencies (either by a foreign currency or by a new, multilateral currency issued by a regional central bank) a topical issue. Related regimes are the tight linkage of the national currency through a currency board and the official or unofficial use of foreign currency - often referred to as “dollarisation”. While these various monetary regimes differ in a number of respects, they have the common feature that they virtually eliminate the possibility of an independent monetary policy. Issues arising include the preconditions required for making these arrangements work, the institutions that need to accompany them, and the extent to which they harm the smooth functioning of the economy (for instance, by eliminating monetary policy flexibility and lender of last resort facilities). Many of these issues were considered by a small group of senior central bankers at the BIS during a two-day meeting in September 2002. The first day focused on economic issues and the second on legal and practical issues. This electronic volume contains edited versions of most of the papers prepared for the meeting and the papers contributed by BIS staff and the participants. All the papers will be included in the subsequent published version. The main economic issues discussed at the meeting were the following. First, and logically prior, is whether abandonment of an independent monetary policy is desirable. Do the benefits of enhanced credibility, predictability and stability of the macroeconomic framework exceed the costs associated with the inability to tailor monetary policy to the circumstances facing a particular country? This question has stimulated active debate since the early 1960s, with the optimum currency area literature suggesting the following criteria for successfully forgoing a national currency: labour mobility, existence of fiscal transfers, symmetry of shocks and a diversified industrial structure. Unfortunately, these criteria are not very