What is Dollarization, Types and Results?

Economic anxiety began to show its presence more and more every day. future anxiety, month-end calculations Problems like this have caused people to be more interested in the economy. Of course, this brought new economic terms to them.

One of these terms is dollarization. Dollarization is a big term in itself. Types of dollarization There are also causes and consequences that cause it. For this reason we have dollarization We have conveyed the information we have gathered about it in our article.

What is dollarization?

Dollarization simply means that the domestic currency is abandoned and the country accepts any foreign currency as official currency. But since types of dollarization exist, this explanation partially true we can say. The main use of this foreign currency is to hide the value of the domestic currency. The depreciation of the domestic currency scares the big company and as a result, these firms continue to resort to dollarization. In this case, it means that what is already feared has come to pass.

The country’s economy is a big factor in this. If the country’s economy is bad and does not show much improvement in terms of recovery, dollarization spreads and rises rapidly. When things start to progress, big companies in the country starts tabbing to all work sectors. People start to do their daily shopping in foreign currency, and this situation means that the local currency will be completely out of the country and not any foreign currency. ends with the official acceptance. Of course, although this situation is called dollarization, the issue is not just about the dollar. The main highlight is the acceptance of any currency other than the local currency.

What are the types of dollarization?

• Full (official) dollarization
• Partial (unofficial) dollarization
• semi-official dollarization
• Financial dollarization
• reverse dollarization

Full (Official) dollarization:

The country completely abandons its domestic currency and, in short, no matter what currency it is, such as the dollar or the euro. other than local currency accepts a national currency as the local currency.

Partial (Unofficial) dollarization:

As a result of the rising inflation in the country, people naturally to inflation tries to prevent it. As a result, they prefer a more robust and reliable currency as opposed to the domestic currency.

Semi-official dollarization:

The acceptance of an extra national currency other than the country’s own domestic currency within the country is called semi-official dollarization. This situation is generally unstoppable for inflation It happens when it rises.

Financial dollarization:

in the country Confidence in the financial system has declined. People now begin to borrow in a currency other than the local currency. This indicates that the doors of full dollarization have begun to open.

Reverse dollarization:

Reverse dollarization, which is one of the most difficult parts of the dollarization type, is also most promising Could be kind. Because this situation characterizes the reverse operation of the general dollarization process. The local currency revalues ​​and the country begins to develop in terms of savings and value measures.​

What are the causes of dollarization?

• Loans start to be risky
• Inflation is too unstable
• Economic volatility
• Turning to foreign currency against economic decline

Dollarization is definitely the kind of situation that no country wants to experience. Because, in the first place, the depreciation of the local currency means that the symbol of sovereignty of that country is also lost. it means slowly getting damaged. This is a situation that negatively affects everyone, from the state to the local people. Some of the reasons for the increase in dollarization are the fact that the public is trying to save their own money, while companies are pricing goods and services or preparing debt contracts. This situation brings about more insecurity, increase in inflation, decrease in the rate of return of financial assets operating in local currency, unbalanced macroeconomic policies etc. the rapid rise of dollarization by triggering many negative events and shake up the country’s economy provides. The collapse of the country’s economy, on the other hand, signals that everything will get worse, as you can imagine.

What are the consequences of dollarization?

Positive results of dollarization:

• Preventing the depreciation of the national currency when done correctly
• Lower inflation and lower costs
• The country’s borrowing from foreign countries will decrease. Accordingly, investments will increase and the country will begin to develop.
• The purchasing and selling power of the country is restored, even for a certain period of time.

Negative consequences of dollarization:

• If dollarization is high, the country will not be able to handle unexpected possible shocks and will be much more vulnerable to this situation than it should be.
• As a result of the depreciation of the local currency, the foreign currency entering the country has a very high effect on the price of anything sold locally.
• As the financial systems are shaken, the situations related to the payments are much less, unbalanced and risky compared to the past.
• Being in debt puts more strain on local people than ever before
• The welfare level in the country decreases due to negative consequences such as the decrease in purchasing power.
• The country’s relationship with foreign countries may be damaged, problems may arise.

As a result, although dollarization has positive results in its own right, it is quite difficult to enter such a situation across the country. long and complicated triggers a process and naturally, because of these negative consequences, life in the country it’s starting to get all kinds of hard.