Dollarization of the South Pacific Island Countries: Results of a Preliminary Study

This paper examines the case for adopting the Australian dollar as a common currency among the island countries in the South Pacific. The proposal of a single currency was informally floated by Australia at the Pacific Forum Leaders Meeting in Auckland, in August 2003. The Pacific Forum consists of 14 developing island countries and the developed countries in the region, namely, Australia and New Zealand. In early 2003, a committee of the Australian Senate recommended adoption of a single currency as a possible remedy to meet the deteriorating economic situations in the Pacific island countries, arising out of poor fiscal discipline and failure to effectively use external aid inflows. Successful adoption of a single currency with either a new currency or an existing currency of a dominant partner in trade and development requires the fulfillment of various prerequirements, which are well known as optimum currency area conditions. The paper assesses the feasibility of the proposal in the light of these conditions and concludes that the time for adoption has not yet arrived.