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Financial sector development and the macrodynamics of ‘de facto’ dollarisation in developing countries: the case of Ghana

By Deodat E. Adenutsi and Charles A. Yartey


Following the massive economic policy restructuring and reforms since the early 1980s, currency substitution, asset substitution and de facto dollarisation have become common phenomena in nearly all transition and developing economies. High and persistent inflation which have been a perennial feature of developing and transition economies is now known to be highly responsible for currency substitution, asset substitution and de facto dollarisation. This paper presents evidence on the macrodynamics of de facto dollarisation, currency substitution and asset substitution during the era of the implementation of the Financial Sector Adjustment Programmes (FINSAPs) in developing and transition economies with special reference to Ghana. The study has found out that de facto dollarisation whether in the form of asset substitution or currency substitution is highly prevalent and poses a serious threat to fiscal and monetary policies effectiveness in developing and transition economies. In Ghana, the principal long-run mainspring of de facto dollarisation is the ad hoc implementation of financial sector development programme that was embarked upon about two decades ago which has resulted in high exchange rate depreciation and price fluctuations. It is, however, likely that as the financial sector develops over a long period a time will come when further development of the financial sector would no longer instigate de facto dollarisation.

Topics: E58 - Central Banks and Their Policies, G0 - General
Year: 2007
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