The countries of the CFA franc zone of West and Central Africa are recent examples of states with firmly pegged currencies that have successfully devalued to overcome severe external shocks and sluggish growth. The 14-nation franc zone resembles a currency board, with a fully convertible currency and an exchange rate fixed at par with the French franc from 1948 until 1994. From the second half of the 1980s into the early 1990s, output in the CFA franc zone stagnated as the French franc rose in value against the U.S. dollar, the CFA franc appreciated accordingly, the terms of trade deteriorated, and labor costs rose sharply. In 1994, the 14 countries resorted to a 50 percent devaluation, achieving a turnaround in higher output, exports, and investment.
Finally, countries with highly credible policymakers can also be well placed to benefit from devaluation, since the increase in expectations of inflation is likely to be lower than in countries with records of loose fiscal and monetary policies. For example, the CFA franc zone devaluation caused little inflation, occurring, as it did, against a long history of exclusive reliance on internal adjustments to deal with economic shocks.
Devaluations with High Cost. These examples suggest countries may pay a high price for foregoing the option to exit from a fixed exchange rate arrangement. The reverse is true where monetary policy has been poorly managed and expectations of inflation are highly sensitive to the exchange rate. In these countries, devaluation can sharply raise domestic prices, making it hard to achieve changes in the real exchange rate. Similarly, in countries that have become so dollarized that the dollar is often the de facto unit of account, devaluation quickly raises domestic prices, again limiting the effectiveness of devaluations. In fact, these were central reasons why Argentina adopted a currency board.
Countries with a high degree of financial asset dollarization have a further reason to avoid devaluation. If a country’s banks or corporations receive large amounts of dollar-denominated lending, devaluation sharply worsens their balance sheets. Even if banks on-lend to domestic firms in dollars, maintaining matched risks in terms of currency on their books, they still carry a substantial currency risk. A sharp depreciation of the domestic currency would cause a large drop in revenues in dollar terms for the banks’ clients, reducing their ability to service dollar debts.
As the currency crises in Mexico in 1994 and East Asia in 1997 demonstrated, when there are weak banking systems and large foreign exchange exposures in the private sector, the financial health of banks and firms is at such risk following a devaluation that economic activity is severely disrupted. Thus, devaluation as a policy option may be prohibitively costly for highly dollarized economies, and moving to full dollarization would not entail the loss of an important policy tool.
Lender of Last Resort Function and Financial System Stability
While full dollarization eliminates vulnerability of the banking system to the risk of devaluation, it does not eradicate all sources of banking crisis. And when they occur, full dollarization may well impair the country’s lender-of-last-resort function and hence the central bank’s response to financial system emergencies.
The central bank’s role in operating a discount window to provide short-term liquidity must here be distinguished from its role as the ultimate guarantor of the stability of the financial and payments systems in the event of a systemic bank run. Dollarization should not greatly impede the ability of the authorities to provide short-term liquidity to the system or assistance to individual banks in distress. Such facilities are available if the central bank (or its replacement) saves the necessary funds in advance or perhaps secures lines of credit with international banks.
In contrast, the government loses some ability to respond to a sudden run on bank deposits throughout the entire system. In the case of a generalized loss of confidence, the authorities would be unable to guarantee the whole payments system or to fully back bank deposits. Ultimately, the ability to print money as needed is what allows a central bank to guarantee beyond any doubt that all claims (in domestic currency) will be fully met under any circumstances. Once the ability to print money ceases to exist, limits to the lender-of-last-resort function appear.A fully dollarized country that had already spent its foreign currency reserves to redeem its stock of domestic currency might well lack the resources to respond.
A Cushion for Currency Boards. Currency boards can create base money only to the extent that they accumulate reserves, so they are almost as tightly constrained as the monetary authorities would be in a dollarized economy. In important currency board cases, however, the authorities have allowed themselves some flexibility to create money that is not fully backed on the margin, partly to be able to deal with banking crises. In the case of the run on the Argentine peso during the 1995 “tequila” crisis, for example, the Argentine monetary authorities were able to partially accommodate the conversion of peso deposits into dollar deposits held abroad as well as into dollar cash.
By temporarily reducing their reserve coverage of the money base, they could increase the issuance of dollar cash and provide the dollar credits the banks needed to stay afloat. In the wake of the 1997 attack on the Hong Kong dollar, the Hong Kong Monetary Authority introduced in September 1998 a discount window to provide short-term liquidity to banks in a more flexible way and at lower cost than under previous arrangements. The new system is expected to reduce the volatility in short-term domestic interest rates. The maximum volume of rediscounts is limited, however, and the Hong Kong Monetary Authority fully backs rediscounts with foreign exchange.
The scope for accommodation to bank runs in a currency board is inevitably restricted. Indeed, even without the restrictions imposed by a currency board system, the ability of a central bank to find a way out of a financial crisis by resorting to printing money alone is limited. The injection of liquidity into the banking system to keep it from defaulting on deposits may only lead to greater pressure on foreign reserves or the exchange rate.
Summing up, the main pros and cons of dollarization are as follows:
Advantages
· Dollarization avoids currency and balance of payments crises. Without a domestic currency there is no possibility of a sharp depreciation, or of sudden capital outflows motivated by fears of devaluation.
· A closer integration with both the global and U. S. economies would follow from lower transaction costs and an assured stability of prices in dollar terms.
· By definitively rejecting the possibility of inflationary finance through dollarization, countries might also strengthen their financial institutions and create positive sentiment toward investment, both domestic and international.
Disadvantages
· Countries are likely to be reluctant to abandon their own currencies, symbols of their nationhood, particularly in favor of those of other nations. As a practical matter, political resistance is nearly certain, and likely to be strong.
· From an economic point of view, the right to issue a country’s currency provides its government with seigniorage revenues, which show up as central bank profits and are transferred to the government. They would be lost to dollarizing countries and gained by the United States unless it agreed to share them.
· A dollarizing country would relinquish any possibility of having an autonomous monetary and exchange rate policy, including the use of central bank credit to provide liquidity support to its banking system in emergencies.
What is the balance of costs and benefits of full dollarization? The answers may seem frustratingly two-handed. This is inevitable, given the complexity of the issue and the current state of knowledge about it. The potential benefits of lower interest rates and the cost of forgone seigniorage revenues can at least be estimated. But many of the most important considerations, such as the value of keeping an exit option and lender of last resort protections, are virtually unquantifiable.
Which countries are likely to benefit from dollarization? The most obvious are those already highly integrated with the United States in trade and financial relations. Yet most countries in Latin America are quite different from the United States in their economic structure and would probably not benefit greatly from dollarization unless accompanied by deep market integration, as in the European Union.
The current discussion centers on a different group of candidates: emerging market economies exposed to volatile capital flows but not necessarily close, in an economic sense, to the United States. For this group, the more the U.S. dollar is already used in their domestic goods and financial markets, the smaller the advantage of keeping a national currency. For an economy that is already extremely dollarized, seigniorage revenues would be small (and the cost of purchasing the remaining stock of domestic currency also would be small), the exposures of banks and businesses would make devaluation financially risky, and the exchange rate would not serve as a policy instrument because prices would be “sticky” in dollar terms. In such cases, dollarization may offer more benefits than costs.
Part 3.
CONTRACT
Moscow
“_____” _________________ 20____ г.
hereinafter referred to as the Sellers, on the one hand and ____________________________, hereinafter referred to as the Buyers, on the other hand have concluded the present Contract as follows:
1. Subject of the Contract
The Sellers have sold and the Buyers have bought on (FOB)_________________________________ (port) basis the goods to the amount of ____________________________ in the quantity, assortment, at prices and according to technical conditions as stated in Supplements N 1,2… which are the integral part of the present Contract.
2. Price and Total Amount of the Contract
The prices for the goods are fixed in __________________________
(currency)
and are to be understood _______________________________ (FOB, CIF…) packing and marking included.
The Total Amount of the present Contract is ______________________.
6. Dates of delivery
Delivery of the goods under the present Contract should be effected within the dates stipulated in the Supplement N ____ to the present Contract.
The data of the Bill of Lading and/or the date of frontier station stamp of the Sellers’ country stated in (rail-)way bill to be considered as the data of delivery.
4. Quality of the goods
The quality of the goods should conform to the technical conditions stated in the Supplement N __ .
7. Packing and Marking
Tare and inner packing should secure full safety of the goods and protect the goods from any damages during transportation by all kinds of transportation means taking into consideration transshipments.
Each case is to be marked with indelible paint as following:
Case N. __________________________
Contract N. ______________________
Consignor ________________________
Consignee ________________________
Gross weight _____________________
Net weight _______________________
6. Delivery and Acceptance of Goods
The goods shall be considered as delivered by the Sellers and accepted by the Buyers:
in respect of quality - according to the Certificate of Quality issued by the Seller; in respect of quantity - according to the number of cases and weight as shown in way-bill or Bill of Lading.
7. Payment
Payment for the goods delivered is effected in ________________________
under an irrevocable, confirmed divisible Letter of Credit established by the Buyer with the Bank ________________________________________________
The Letter of Credit to allow transshipment and partial shipment and to stipulate that all the expenses connected with the opening and the extension of the Latter of Credit and any other banc charges to be for the Buyers’ account. The Letter of Credit is to be valid for _______ days.
The terms and conditions of the Letter of Credit should correspond to the terms and conditions of the Contract; the terms which are not included in the Contract to be not inserted in the Letter of Credit.
The Letter of Credit to be available against presentation of the following documents:
8. Full set of clean on board Bills of Lading issued in the name of ________________________________________________________________
(Buyer)
for shipment of the goods to ___________________________________
(destination port)
2. Invoice in triplicate;
3. Specification in triplicate stating Contract N., Numbers of shipped cases;
4.Quality Certificate issued by the Seller in duplicate confirming that the quality of the goods corresponds to the conditions of the present Contract;
5. Master’s Receipt confirming the receiving for delivery of 4 non-negotiable copies of Bill of Lading and 4 copies of specification together with the goods.
The Sellers should submit the above- said documents to the Bank for payment within ___________________________________ days after loading of the goods.
Should the Seller fails to do this he is to bear the expenses for prolongation of the Letter of Credit.
8. Claims
Claims in respect of the quantity in case of shortage inside the case may be submitted by the Buyers to the Sellers not later than ________ days and in respect of the quality of the goods in case of non-conformity of same to that stipulated by the Contract not later than ______ days after the arrival of the goods at the port of destination.
Contents and ground of the claim should be certified either by Expert’s Report or by a Report made up with the participation of a representative of an uninterested competent organization.
The Sellers should consider the received claim within _____ days counting the date of its receipt. In case of no reply from the Sellers after expiration of the said date the claim will be considered as admitted by the Sellers.
The Buyers have the right to return to the Sellers the rejected goods for their replacement by the goods of proper quality.
All the transport and other expenses connected with delivery and return of defective goods are to be paid by the Sellers.
9. Arbitration
All disputes and differences which may arise out of the present Contract or in connection with the same are to be settled without application to State courts by Arbitration Court at Chamber of Commerce, Moscow in accordance with the Rules of procedure of the above Court the awards of which are final and binding upon both Parties.
10. Force-majeure
Should any circumstances arise which prevent complete or partial _ulfillment by any of the Parties of their respective obligations under the present Contract, namely: fire, acts of God, war, military operations of any kind, blockade, prohibition of export or import or any other circumstances beyond the control of Parties, the time stipulated for the fulfillment of such obligations shall be extended for the period equal to that during which such circumstances will remain in force.
Should the above circumstances continue to be in force for more than _____ months, each Party shall have the right to refuse any further _ulfillment of the obligations under the Contract and in such case neither of the Parties shall have the right to make a demand upon the other Party for the compensation of any possible damages.
The Party for whom it becomes impossible to meet their obligations under the present Contract, shall immediately advise the other Party as regards the beginning and the cessation of the circumstances preventing the _ulfillment of their obligations.
The certificates issued by the respective Chamber of Commerce of the Sellers’ or of the Buyers’s country shall be sufficient proof of such circumstances and their durability.
11. Other Conditions
All dues (including port and dock ones), taxes and customs duties levied in the territory of the Sellers’ country connected with execution of the present Contract are to be paid by the Sellers and for their account.
The Seller is bound to obtain Export Licenses if such are required.
From the moment of signing the present Contract all the previous negotiations and correspondence connected with same are null and void.
None of the Parties has the right to assign their right and obligations under the present Contract without written consent of the other Party.