The US Dollar is the world’s major reserve currency. It is estimated that over 55% of all currency held in reserve by Central Banks is in USD.
Given the strength of the US Dollar, it is unsurprising that some countries actually use the currency of the USA as their own domestic currency.
Not including territories that are politically tied to the USA, places like Guam, Puerto Rico or the US Virgin Islands, there are actually several fully fledged independent nations that are currently using the USD as their currency.
Below we’ll take a look at who they are and why they use the US Dollar.
Ecuador
Like El Salvador, for over a century Ecuador had its own currency the Sucre.
However, in 1999 it was replaced by the US Dollar following an economic crisis that saw poverty, instability and inflation rise and living standards drop. The crisis would ultimately lead to a coup and a new government.
For a long time, USD had been used informally and the move to ‘dollarisation’ was in many ways just a formalisation of something that was already commonplace. When the Sucre was removed, the exchange rate was fixed at a rate of 25,000:$1. This saw many people’s hard-earned savings collapse in value.
Like El Salvador, there are no plans to see a wholesale re-introduction of a domestic currency anytime soon and USD therefore will remain the official currency of Ecuador for some time to come.
Marshall Islands, Palau and Micronesia
The Republic of the Marshall Islands, the Federated States of Micronesia and the Republic of Palau are all independent island nations in the Pacific Ocean.
During WW2 these islands were controlled by Japan and following various successful military landings, the US captured control and began a decades long administration of the islands on behalf of the United Nations.
In the late 70’s, the various islands were deemed to be economically viable as independent states and thus proclaimed themselves as republics.
Almost immediately they entered into the ‘Compact of Free Association’ with the USA which fundamentally continued to tie the nations together politically, militarily and economically with the USA.
In this context is was deemed to be unnecessary to adopt their own currency, which owing to both a) the small size of the countries (less than 200,000 people combined) and b) the fact they already used USD meant that the nations chose to continue using the US Dollar post-independence.
El Salvador
From 1892 until 2001, El Salvador had its own currency the Colón. However in 2001, then President Francisco Flores announced a controversial plan to ‘dollarize’ the country’s economy.
Flores was incredibly close to the US in terms of foreign relations and believed that by allowing the US Dollar into free circulation domestically, wealth would spread and the country’s economy would become more competitive.
A fixed exchange rate was introduced and the country shifted to make all transactions in dollars.
The move wasn’t as successful as people hoped and unfortunately hasn’t bought the wealth that ‘dollarisation’ promised.
Many people believe that El Salvador is weaker and poorer now 20 years later because of the decision. This is in large why El Salvador recently became the first country to make Bitcoin legal tender, something we’ll look at in a different article.
Timor-Leste
On May 20th 2002, Timor-Leste became the first new nation of the 21st century, gaining independence from Indonesia after a brutal decades-long occupation.
Indonesia withdrew from East Timor in 2000 and a UN-led administration took over until independence was achieved.
At the time, the Indonesian Rupiah was used, however this was seen as both the currency of the occupier and was actually at the time a pretty weak currency in general. The UN-led administration quickly swapped it out with the US Dollar.
At the same time the ‘East timor Centavo’ was introduced, however it was pegged to USD with 1 Centavo = 1 US Cent and banknotes have never been produced.
At the time the country could have opted for the AUD, however they chose not to because it was felt it would make the country too reliant on their neighbour to the south.
In the future, over time the USD could be phased out, however at present there are no plans, especially given the weak domestic economy, high levels of unemployment and low levels of development.
Zimbabwe
We’ve discussed in detail in a previous article the struggle Zimbabwe faced during the 2005–2009 period. In summation, the Zimbabwean Dollar experienced some of the worst hyperinflation since WW2 and the currency had to be abandoned as staple goods like bread cost hundreds of billions of dollars.
In 2009 a new ‘unity’ government was formed and the Zimbabwean Dollar was formally abandoned. Transactions in other currencies were declared legal and the US Dollar was used for all government transactions.
There followed a period of calm and a couple of attempts at re-introducing a local currency, however these attempts floundered and dollars were demanded for payment by public and private sector employees alike.
The dollar therefore remains the de-facto currency of Zimbabwe even if the government formally no longer wants to admit this.
Panama
For a long time Panama was a part of Colombia, however from the late 1800’s, the United States began to take a much more active role in the country. It was the first nation to both support and then recognise the country’s independence and even sent in the US Navy to defend their sovereignty when the newly independent Panama faced threats from Colombia.
Panama is most famous for its canal and after the French backed out, the US took on the financial burden for completing the canal and carved out a chunk of land surrounding it to be a US territory.
For over 70 years the US controlled the ‘Panama Canal Zone’ which consisted of land either side of the canal waters and cut right through the heart of the country.
Given its fundamental ties to the US, right from the beginning in 1903 when they declared independence, Panama used the US Dollar. It introduced its own currency, the Balboa, but tied it at 1:1 to the USD, where it has remained ever since.
As such Panama has no central bank, the Balboa isn’t printed as banknotes and only coins are issued. This is similar to the situation with Tuvalu and the Australian Dollar which we discussed in a previous article.
