UK Edition
Independent Scotland 'would be forced to dump pound on day one for its own floating currency'
Scotland would be forced to dump the pound for its own free-floating currency immediately after independence, the country's most eminent macroeconomist has warned as he denounced the "poor" plans produced by both sides of an SNP battle over the issue.
Professor Ronald MacDonald, research professor of macroeconomics and international finance at Glasgow University’s Adam Smith Business School, told the Telegraph a separate currency not linked to sterling would be needed to pay off the country's £16 billion balance of payments deficit.
He said the Scottish Government could not practically keep the pound on a temporary basis after independence, as proposed by Nicola Sturgeon, as it would lack the currency reserves required immediately after separation to keep clearing the balance of payments.
The latest official figures show a balance of payments deficit of 10 per cent of GDP. This means Scotland imports more goods, services and capital than it exports and a separate Scottish Government would be responsible for funding the gap.
Prof MacDonald similarly dismissed proposals by a group of SNP rebels to move more quickly to a currency pegged to sterling, saying: "It's very poorly thought out on either side of the divide."
The alternative blueprint would also require massive reserves to deal with the balance of payments, he said. Running down any available reserves "is not going to be a credible system," he added.
The only viable option, he argued, was a free-floating currency that would depreciate to make Scotland's exports cheaper to buy in foreign markets.
This, in turn, would generate the foreign exchange reserves required to keep clearing a separate Scotland's balance of payments deficit.
However, even this plan would require at least £30 billion of reserves to be there on day one to protect the new currency from economic shocks and speculators. For a currency pegged to sterling this figure could be as high as £300 billion.
Ms Sturgeon is facing a battle at next weekend's SNP conference to get her party to approve her new currency plan, which would see Scotland keep the pound on an unofficial basis immediately after separation.
Scotland would later move to its own currency once six tests, proposed by the party's Scottish Growth Commission, were met. These include having a credible central bank and sufficient reserves.
But she is facing a challenge from the Campaign for an Independent Currency (CIC) demanding that Scotland dump sterling in the first parliamentary term following separation from the UK.
Prof MacDonald denounced the blueprints produced by both sides as "irrelevant", saying they would have to be ditched if a separate Scotland became a reality. He argued the "only test" that counts is how an independent Scotland would meet its balance of payments obligations.
Although Scotland would inherit around £10 billion in reserves from the Bank of England, Prof MacDonald argued that this would be exhausted very quickly if Scotland continued using sterling or a new currency pegged to the pound.
The macroconomist said: "Indeed the pressures would be so great in this regard that if people were hoodwinked into voting for independence by the currency plans on offer they would quickly find out that by Independence Day Scotland would have to have a separate currency, floating on currency markets."
He said this would be "the only way you could get things to work" but warned using a currency with a different value from the UK pound would have major implications for "trade with our largest trading partner and the revaluation of assets and liabilities."
Norway holds around £30 billion of foreign exchange reserves for its free-floating currency. Hong Kong, which fixes its exchange rate to the US dollar, holds around £300 billion.
But a spokesman for the CIC said: "Establishing a currency within the first term of an independent Scottish Parliament is achievable and it should be the clear aim of the SNP."