In an interview in today’s Diario Libre, University of Miami economics professor Michael Connolly expressed his favour for an eventual dollarization of the Dominican Republic. To do so right now, however, would be too risky because the Central Bank would not be able to rid itself of pesos not backed by gold (or by dollars) and the central government would have to abandon this type of financing. He explained this would be very costly and would entail a high probability for failure rate. In his opinion, it would be best to first set out the rules, which for him would be: a zero deficit, a significant increase in dollar reserves and no printing of any money not backed by gold or dollars. He said that while dollarization creates a dependency on US economy policy. Sometimes it is better to depend on the dollar and the US Federal Reserve than on the Central Bank of the Dominican Republic. Do you trust the Central Bank of the Dominican Republic? It is better to assume a foreign currency than to have inflation, devaluation and lots of volatility in prices and the exchange rate, he stated.
Macroeconomics in the DR has changed with the collapse of Baninter, high emission, high inflation and high levels of indebtedness, he told the newspaper. Connolly mentioned that in 2002 the per capita indebtedness of the DR was US$620 but today it is closer to US$2,000.
He also commented that the IMF has evolved to become the guarantor of international investors who lend to countries knowing well that these countries cannot guarantee the yields offered. He said that as the system works today, the debtors do not calculate the real risks. “Many times they say, ‘well, if they do not pay, we will be rescued by the IMF’.”
He explained that in the past the role of the IMF was to make conditioned short-term loans in cases of emergency. But in recent years, they have instead made loans to rescue foreign investors who in turn made loans they knew beforehand could not be paid. He points to the cases of Argentina and Russia as examples.
Connolly furthermore doubts IMF money is used to rescue the economy of a country. “In some cases, when the government is very corrupt, the money goes directly to Switzerland. In other cases, when the money is delayed in arriving, it goes to Washington to pay debtors. In most of the cases the money leaves the country. This money produces in the governments a lack of political will. It is a game.”