El Salvador - Money

Stabilizing El Salvador's currency and keeping inflation down are key components in the government's plan to attract foreign investment. In 1994, the colon was fixed at ¢8.755 = US$1. Strong reserves allowed the Central Bank to maintain the fixed exchange rate. Bank reserves in 1999 were US$1.97 billion, nearly 4 times what they were in 1992, when reserves stood at US$501 million. The end of the civil war, privatization of state assets, and strong family remittances have fueled the growth in reserves, which rose US$204 million in 1999 alone.

On 1 January 2001, the government in El Salvador gave up control of its monetary policy . It abandoned the fixed exchange rate and "dollarized" the economy. Thus, U.S. currency can be used in El Salvador as legal tender. El Salvadoran monetary policy is now effectively in the hands of the U.S. Federal Reserve Bank.

Proponents of dollarization say it will keep the currency stable and help drive interest rates down. Critics argue that the export sector could be hurt by the move. They point out that exporters are having trouble maintaining market share in the global economy. Converting to the dollar, they argue, might lock in this competitive disadvantage.