El Salvador had a short period of exchange rate fixing with limited monetary policy, followed by a period of unsuccessful focus on exchange rates and fiscal dominance in the 1980s that was gradually superseded by financial liberalisation and more coherent policy in the 1990s, before it switched (by choice and not in crisis) to full dollarisation from 2001.
| Years | Targets and attainment | Classification |
| 1974-79 | official exchange rate pegged to USD within narrow margins set by central bank; monetary policy instruments include rediscount policy, administratively set interest rate structure, and reserve, capital and portfolio requirements on banks; | augmented exchange rate fix AERF |
| 1980-2000 | official exchange rate pegged to USD within narrow margins set by central bank, but more or less active parallel market; 1979-92 civil war, brutal state repression, marked fall in economic performance; 1982 transfer of some transactions to legalised parallel market, increasingly managed (by commercial banks); 1983 renewed black market; significant central bank financing of large but varying fiscal deficits; further large transfers to legal parallel market 1984-5 with effective depreciation; limited attempts at stabilisation from 1982, but slippages; 1986 new stabilisation effort including unification of official forex markets at devalued peg to USD (but more import and exchange controls); October 1986 earthquake; 1989, with continuing 15-30% inflation eroding competitiveness, new and more flexible ‘bank’ forex market to which most transactions transferred (with rate close to black market rate); 1990 temporary multiple exchange rates, followed by reunification with flexible rate; 1991 central bank independence increased, within wider programme of free market economic and financial reform associated with end of civil war 1992 and reconstruction; 1992 deposit rates liberalised, credit controls eliminated, auctions of central bank stabilisation bonds and open market operations; stabilisation more or less successful by mid-late 1990s | loosely structured discretion LSD |
| 2001-2023 | full dollarisation, with explicit aim of lowering interest rates and raising growth: USD made legal tender, financial system accounts and, more gradually, domestic currency converted to USD, reserve requirements replaced by remunerated liquidity requirements, deposit insurance fund and lender of last resort facility restructured, but some ongoing open market operations and central bank’s liabilities not assumed by government; for some years IMF remains concerned about continued high fiscal deficits, possible reversibility of dollarisation and limited lender of last resort capability; fiscal deficits decline but slowly from 2014, helped by 2017 pension reform and later adoption of fiscal rule; strong and effective response to Covid-19, but sharp temporary rise in fiscal deficit; mid- 2021 Bitcoin made legal tender (alongside USD, which remains reference currency), with government-supported e-wallets and guaranteed conversion from Bitcoin to USD, but take-up limited; IMF argues, and continues to argue, that Bitcoin should have more limited role | use of another sovereign’s currency UASC |
Selected IMF references: RED 1975 pp14-17, 20, 30; RED 1977 p16; RED 1982 pp29, 61-3; SR 1982 pp9, 16-17; RED 1983 pp8-9, 18; RED 1984 p50; RED 1985 p44; SR 1985 p13; RED 1986 pp43-4, 59-60; SR 1986 pp10-11; RED 1990 p38; SR 1990 pp9, 18; RED 1991 p38; SR 1993 pp8-9; RED 1994 pp2-3, 15, 16-18; SR 2001 pp14-15, 20; SR 2002 pp17-18; SR 2003 pp14-15; SR 2005 pp9, 16-17; SI 2006 pp21-34; SR September 2010 pp9-10, 18; SR 2014 pp8-12; SR 2016 p31; SR 2018 pp11-16, 23; SR 2019 pp8-13, 27; SR 2022 pp8-11, 24-9, 86-8; Staff Concluding Statement of the 2023 Article IV Mission, press release 10 February 2023; Interest in Central Bank Digital Currencies picks up in Latin America and the Caribbean while crypto use varies, news article 22 June 2023 (available at https://www.imf.org/en/News/Articles/2023/06/22/cf-interest-in-cb-digital-currencies-picks-up-in-latam-the-caribbean-while-crypto-use-varies, accessed 28.8.24); IMF Staff Statement on El Salvador press release 6 August 2024.
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Monetary Policy Frameworks 