Dear President Varela, it is one thing to have your currency pegged to the dollar. It is quite another actually to use the dollar as your currency. If you should ever need to break the peg, you will have to build all the infrastructure of currency management – during an emergency.
For example, the Federal Reserve has lately created four trillion new dollars, with the express intention of creating inflation – driving up condo prices in Miami and Panama City. Inflation will hit Panama harder than the United States, and the Fed will tighten when it suits their policy, not yours.
The other emergency comes when the dollar is too strong. Then you have to manage an internal devaluation – like Greece. Greece’s problems (the monetary ones, at least) stem from being yoked to the Euro. Generally, one has both emergencies in sequence. The hot money rolls in, creating inflation, and when it rolls out you have a recession. India’s central banker knows something about this.
Incredibly, several Latin American countries use the dollar. A small, low income country using the dollar (or the Euro) can expect to have its money supply whipped up and down. The Bundesbank had a reputation for price stability, and the Fed before Greenspan. Not anymore.
Jeremiah recommends starting now to de-dollarize. Keep the peg, but begin the process of printing Balboa notes and removing the dollars. Expats and importers will need dual currency banking. Set the peg at $0.97 or $1.03, so merchants can practice their spread pricing.
This will cost some money, in the near term, but it will serve you well. When the time comes, you will be able to hike interest rates. Look at Brazil. Also, as trade with China increases, you will want to clear transactions in Yuan.
From an American perspective, we have enjoyed the “exorbitant privilege,” but now our leaders are squandering it. You might as well save yourself.
See also: Poder a Los Estudiantes