CARICOM Single Market and Economy - Single Currency

Single Currency

Although not expected until between 2010 and 2015, it is intended that the CSME will have a single currency. As it stands a number of the CSME members are already in a currency union with the Eastern Caribbean dollar and the strength of most regional currencies (with the exception of Jamaica's and Guyana's) should make any future exchange-rate harmonization between CSME members fairly straightforward as a step towards a monetary union.

The aim of forming a CARICOM monetary union is not new. As a precursor to this idea the various CARICOM countries established a compensation procedure to favour the use of the member states currencies. The procedure was aimed at ensuring monetary stability and promoting trade development. This monetary compensation scheme was at first bilateral, but this system was limited and unwieldy because each member state had to have a separate account for each of its CARICOM trade partners and the accounts had to be individually balanced at the end of each credit period. The system became multilateral in 1977 and was called the CARICOM Multilateral Clearing Facility (CMCF). The CMCF was supposed to favour the use of internal CARICOM currencies for transaction settlement and to promote banking cooperation and monetary cooperation between member states. Each country was allowed a fixed credit line and initially the CMCF was successful enough that both the total credit line and the credit period were extended by 1982. However, the CMCF failed shortly thereafter in the early 1980s due to Guyana's inability to settle its debts and Barbados being unable to grant new payment terms

Despite the failure of the CMCF, in 1992 the CARICOM Heads of Government determined that CARICOM should move towards monetary integration and commissioned their central bankers to study the possible creation of a monetary union among CARICOM countries. It was argued that monetary integration would provide benefits such as exchange rate and price stability and reduced transaction costs in regional trade. It was also thought that these benefits in turn would stimulate capital flows, intra-regional trade and investment, improve balance of payments performance and increase growth and employment.

The Central Bank Governors produced a report in March 1992 that outlined the necessary steps and criteria for a monetary union by 2000. The 1992 criteria were amended in 1996 and were known as the 3-12-36-15 criteria. They required that:

• countries maintain foreign reserves equivalent to 3 months of import cover or 80% of central bank current liabilities (whichever was greater) for 12 months;

• the exchange rate be maintained at a fixed rate to the US dollar (for Fixers) or within a band of 1.5% on either side of parity (for Floaters) for 36 consecutive months without external debt payment arrears and;

• the debt service ratio to be maintained within 15% of the export of goods and services.

The report envisioned the fulfilment of a monetary union in 3 phases on the basis of grouping the member states into 2 categories, A and B. Category A included the Bahamas, Belize and OECS states. Category A countries had already met the original criteria in 1992 and only had to maintain economic stability to begin the monetary union. Category B consisted of Barbados, Guyana, Jamaica and Trinidad and Tobago (Suriname and Haiti were not yet members and so were not included). These countries had to make the necessary adjustments to meet the entry criteria.

Phase 1 of the monetary union process was scheduled to conclude in 1996. It was to include the Bahamas, Barbados, Belize, the OECS states and Trinidad and Tobago and there was to have been a common currency as a unit of account (cf. the Euro from 1999–2002) amongst these states with the exception of the Bahamas and Belize. This phase would also involve the coordination of monetary policies and the movement towards intra-regional currency convertibility among all member states. Phase 1 would also have seen the formation of a Council of CARICOM Central Bank Governors to oversee the entire process.

Phase 2 was to have occurred between 1997 and 2000 and should have seen a number of initiatives:

• the formation of a Caribbean Monetary Authority (CMA), which would be accountable to a Council of Ministers of Finance.

• the issuance and circulation of a physical common currency in all Phase 1 countries except the Bahamas.

• the use of the new currency in the other countries (the Bahamas, Guyana and Jamaica) as a unit of account in settling regional transactions.

• the continued efforts by Guyana and Jamaica to meet the criteria for entry into the monetary union if they had not already done so and achieved economic stability.

Phase 3 was planned to begin in 2000 and had as its ultimate goal to have all CARICOM countries entering into the monetary union and membership of the CMA.

However, the implementation of Phase 1 was put on hold in 1993 as a result of Trinidad and Tobago floating its dollar. In response and in an effort to continue pursuing monetary cooperation and integration, CARICOM Central Bank Governors made their regional currencies fully inter-convertible. A subsequent proposal called for Barbados, Belize and the OECS states to form a currency union by 1997 but this also failed.