http://www.nytimes.com/2000/11/25/business/25SALV.html
New York Times/ Business November 24, 2000
U.S. and I.M.F. Welcome Salvador's Adoption of Dollar By JOSEPH KAHN
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 Nicaragua.
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. [end]