I want to return briefly to the subject of dollarised countries (countries that use the currency of another country). I gave Panama and Timor Leste as examples of countries that use foreign banknotes. Both countries actually use US dollar bills. However, both countries use their own coinage. It is this practice of using their own coins but somebody else's banknotes that I want to examine in more detail.
I'll start by reminding you of the situation in Timor Leste:
"One US dollar equals 100 Timorese centavos; Timor issues its own nationally themed centavo coins for circulation but uses only US bank notes."
What are the advantages of this hybrid system, I wonder? Well, first of all, by using a foreign currency, this small country does not need to incur the costs of creating and running its own central bank. However, one disadvantage is that its banknotes cannot be printed at home. It has to import them in quantity, and presumably at some cost.
The most apparent advantage of using its own coins is that they help to give Timor Leste a sense of national identity. The designs on the coins depict Timor Leste culture and Timor Leste national themes, unlike the US dollar bills that circulate.
In West European countries, of the value of the money in circulation, typically coins constitute about 2 or 3 percent of the total. I don't know what the ratio is in Timor Leste or typical Third World countries. A point to note, however, is that a coin is far heavier in relation to its value than a banknote. What would you rather have? A kilo of one centavo coins - or a kilo of 100 dollar bills? Well, I know which I would choose.
So I'm wondering now, does the relative weight of coins and banknotes play any part in the homeland coins / foreign banknotes situation that we find in Timor Leste? It might, if Timor Leste minted its own coins. However, they are minted in Portugal, so Timor still has to bear the costs of importing these coins. Because each coin is much heavier than a banknote but worth a lot less, then it is in effect much more expensive to import coins than banknotes.
Also, given Timor's location, what would be the difference in cost between importing US coinage from the USA (if this were allowed) and importing its own coinage from Portugal? Would there really be such a great difference? I'm guessing not.
The final consideration: does the USA allow its coinage to be exported for use in foreign countries? I don't know, but its bills certainly end up in these countries and are used, whether legally or not. But ultimately I'm not clear on the legal position. Can anybody enlighten me?
If it were legal for Timor Leste to import US coins, but it chooses not to and uses its own instead, then I think it must being doing so for cultural reasons, that is, for reasons of national pride. Since it still has to import its own coinage, I suspect that it is not a question of cost. Because it doesn't have a national mint, one way or another it would have to import its coins. I suppose another option would be to use no coins at all and instead issue banknotes denominated in centavos; however, that might not be practical.
So I conclude that Timor Leste issues its own coinage for reasons of national pride alone, and that other countries in a similar situation, such as Panama, do the same.
Admittedly I have reached my conclusion by logic alone, and my logic may be wrong. Does anybody disagree with my conclusion, or have any points to add?
