The production of currencies at a national level has existed since about the 7th century BC. Indeed, currency has been a notable facet of centralized power from the onset of kingdoms and early states. Not every state has been able to maintain its own, however. Whether by a neighbour’s influence, an economic crisis, a war, or whatever else, there have been instances in which certain states have been forced to adopt a foreign currency. In this article, we will explore five countries that today use another nation’s money, with some brief explanation as to why.
1. Zimbabwe
Zimbabwe is perhaps one of the most infamous examples of a country that uses a foreign currency. From the late 1990s on, the Zimbabwean dollar experienced serious hyperinflation, climaxing in 2009 when the country stopped printing its own currency. The reasons for the hyperinflation are multifold. Confiscation of private farms and the subsequent bestowal of these farms upon individuals who had no knowledge of farming did not do wonders for the economy. This, coupled with the printing of money to finance Zimbabwean involvement in the war in the Congo, and the institutionalized corruption that came to plague the nation under the Mugabe regime, were some of the greatest contributors to the plight of the Zimbabwean dollar.
Today the country uses a basket of currencies as legal tender. The British pound, South African rand, euro, Indian rupee, Chinese yuan, Australian dollar and Botswana pula are all accepted. But it is the United States dollar that is by far the most prevalent in use.
2. El Salvador
El Salvador is one of a multitude of countries to have adopted a foreign currency as its own. After suffering a devastating civil war in the 1980s, in 1992 a series of actions were enacted meant to reinvigorate the economy after over a decade of conflict. The banking system was privatized, and economic restrictions were loosened. To prevent the further destabilization of the Salvadoran colon, in 2001 the US dollar was introduced.
The dollar remains in place today as the official currency of El Salvador (though the colon is still accepted as legal tender). While the effects of dollarization have proved to be both good and bad for the country, the dollar looks set to stay on for the foreseeable future.
3. Ecuador
Ecuador is another one of the Latin American countries to have adopted the US dollar as the official currency. In the 1980s, the sucre saw a steady depreciation, causing inflation, and in 1999 a banking crisis stemming from mismanagement put the country in dire straits. Millions were forced to emigrate due to mass unemployment, and in 2000 Ecuador adopted the dollar.
Dollarization had already been taking place in an unofficial capacity, and the 2000 action by the Ecuadorian government represented only an official confirmation of what was already becoming the reality. The move did help to stabilize the economy. Although, as with El Salvador, dollarization did not occur without its challenges, in the case of Ecuador the pros have almost certainly outweighed the cons.
4. Micronesia
Gaining independence in 1979, the Federated States of Micronesia have used the US dollar from the outset. A close relationship with the United States had been maintained ever since the end of the Second World War, from which time Micronesia was administered by the US as part of the Trust Territory of the Pacific Islands until independence. Indeed, the dollar is not the only link to have been preserved between the US and Micronesia. A Compact of Free Association between the two nations took effect in 1986.
In exchange for special access to the Micronesia’s land and waterways for strategic purposes, the Compact provides the people of those islands with financial assistance, defence of their territorial integrity, and visa-free travel to the United States.
5. British Virgin Islands
Rounding off our list is the British Virgin Islands, an island territory (not a country like the others) that has used the US dollar as its official currency since 1959. There are several reasons for this. Firstly, with a population of only 30,000 people, the costs of maintaining a national currency would simply be too great to be worth it. Proximity to the US is certainly another big factor, but perhaps the greatest reason is the nature of the British Virgin Islands’ economy itself. Financial services accounts for over half of the GDP, the remaining amount is made up by tourism.
The use of the US dollar in the country thereby forms a huge foundation stone of the national economy, benefiting the financial sector by cutting down on the costs of transactions and exchange rates, and tourism again for much the same reasons. According to KPMG, almost half of all of the world’s offshore companies are formed in the British Virgin Islands, making it one of the largest tax havens on the planet. The fact that the US dollar is the official currency is, beyond doubt, significantly responsible for this.
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