Between 1919 and 1990, the lempira maintained an artificially fixed rate against the U.S. dollar at L2.0:US$1. This meant the Honduran economy was vulnerable to shifts in U.S. monetary policy . Furthermore, the printing of domestic currency was constrained by the need to keep local money supplies in line with U.S. dollar reserves. In March of 1990, in an effort to give the Central Bank and the Honduran government more control over the country's fiscal development, the fixed rate was removed and the value of the lempira sharply declined. By the end of that year, the exchange rate had risen to L5.3:US$1. The government tried to support the currency by strictly enforcing laws which required exporters to repatriate foreign exchange earnings (meaning exporters selling to the United States, for instance, would have to convert their profits from dollars to lempiras when placing them back in Honduran banks). However, these efforts were insufficient and the lempira continued its downward slide throughout the first half of the 1990s. In 1994, in a further attempt to stabilize the currency, the Central Bank
|Exchange rates: Honduras|
|lempiras (L) per US$1|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
established a public U.S. dollar auction system. In this system the Central Bank sold American dollars to domestic commercial banks at a slightly elevated exchange rate. This allowed the Central Bank to make money on the exchange, and by pulling lempiras out of the system (taking them from commercial banks in exchange for dollars) it lowered the supply of domestic currency, thereby raising its price. By the end of 1995, the lempira's decline had begun to slow, improving the performance of the external sector and boosting investor confidence. By 1999 the lempira had steadied at L14.5:US$1, representing a 3.3 percent appreciation against the U.S. dollar in real terms for the year.