Dollarization of Hemisphere (continued)

Macdonald Stainsby mstainsby at
Sun Nov 26 16:19:37 MST 2000

New York Times/ Business
November 24, 2000

U.S. and I.M.F. Welcome Salvador's Adoption of Dollar

El Salvador's decision to adopt the United States dollar as its currency won
immediate support from the United States Treasury Department and the
International Monetary Fund yesterday, reflecting a growing trend in Latin
America to embrace the dollar as official tender.

President Francisco Flores said on Wednesday that he would introduce a law
that would fix the colon, the local currency, to the dollar and allow free
circulation of the dollar in the economy. The move, if approved by the
nation's Congress, is intended to end the sharp swings in the value of the
local currency against the dollar, which are viewed as discouraging foreign
investment and complicating management of the economy.

Officials said the colon would also remain legal tender.

Earlier this year, Ecuador scrapped its local currency, the sucre, for the
dollar. Panama uses the dollar as official tender, and Argentina has pegged
the value of its peso to the dollar, one for one.

There is a continuing debate in other Latin American economies, most notably
Mexico, about whether to allow the American currency to replace local money.

Some economists say such moves enhance financial stability and may help
attract foreign business because investors are reassured of getting their
money out without suffering a foreign exchange loss.

Critics say that so-called dollarization makes little sense because it turns
over an important tool used in macro-economic management to the Federal
Reserve of the United States. The Fed uses its control of interest rates to
stimulate or cool the American economy, but does not directly consider the
needs of other nations that use the dollar.

International financial authorities have generally remained neutral about
the advisability of small nations' adopting a larger nation's currency as
their own. But both the Treasury Department and the I.M.F. welcomed El
Salvador's decision.

"Combined with a strong economic policy framework, this step should help
contribute to financial stability and economic growth in El Salvador and its
further integration into the global economy," Treasury Secretary Lawrence H.
Summers said in a statement.

El Salvador, a nation of five million people, has not grown as fast as many
of its neighbors in recent years. Its economy expanded at a 2.5 percent pace
in 1999, about one-third of the rate of growth in neighboring Costa Rica and

Horst Köhler, managing director of the I.M.F., said dollarization could help
stoke economic growth, though he also urged the nation to improve its
banking system and enact some proposed budgetary changes to accompany the
monetary change. Mr. Köhler said the I.M.F. would consider making a loan to
El Salvador to back the transition to the dollar.

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