economicorder.substack.com/p/why-the-imf-keeps-lending-to-countries
1 correction found
it cannot have a balance of payments crisis in the traditional sense
Fully dollarized countries can still face balance-of-payments crises or IMF-recognized balance-of-payments needs. IMF sources explicitly say dollarization does not eliminate external crises, and Panama—an officially dollarized economy—received IMF financing in 2020 for immediate balance-of-payments needs.
Full reasoning
This claim is too categorical.
Dollarization removes a domestic currency devaluation mechanism, but it does not eliminate external financing crises or IMF-recognized balance-of-payments needs. The IMF’s own publications say this directly:
- In the IMF’s Finance & Development article “The Dollarization Debate” (March 2000), IMF economists Andrew Berg and Eduardo Borensztein wrote that “dollarization would not completely eliminate the risk of external crises; indeed, Panama has had several crises and consequently entered into a large number of IMF programs.”
- In the IMF’s 2021 Article IV report on Panama—a fully dollarized economy—the Fund states that Panama requested IMF financial support in 2020 “to address immediate balance of payments needs.”
Those two IMF sources directly contradict the article’s statement that a dollarized country cannot have a balance-of-payments crisis “in the traditional sense.” Even if the author meant that dollarization prevents a classic local-currency devaluation spiral, the sentence as written goes further and is incorrect: fully dollarized economies can still experience external financing crises serious enough to require IMF balance-of-payments support.
2 sources
- Finance & Development, March 2000 - The Dollarization Debate
The IMF article states: “dollarization would not completely eliminate the risk of external crises; indeed, Panama has had several crises and consequently entered into a large number of IMF programs.”
- Panama: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Panama
The IMF report says Panama “requested financial support under the Rapid Financing Instrument (RFI) ... to address immediate balance of payments needs,” even though Panama is a fully dollarized economy.