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Dollarization pressures in Central America

Several Central American economies are experiencing renewed pressures toward dollarization as exchange rate volatility, inflationary pressures, and external debt burdens weigh on monetary stability. While El Salvador fully dollarized its economy more than two decades ago, countries like Honduras, Nicaragua, and Guatemala are witnessing a steady rise in U.S. dollar use for savings, business transactions, and real estate. Economists caution that while dollarization can provide short-term stability, it may also limit policy flexibility and expose economies to external shocks.

By James Parker
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El Salvador’s Longstanding Experiment

El Salvador remains the region’s most prominent example of full dollarization. While the policy has anchored price stability and encouraged investment, it has also limited the government’s ability to respond to fiscal shocks. Recent debates surrounding cryptocurrency adoption highlight ongoing challenges in balancing monetary sovereignty with integration into global financial markets.

Honduras and Nicaragua See Rising Informal Use of Dollars

In Honduras and Nicaragua, the dollar’s role is expanding beyond international trade into domestic transactions. Households and businesses are increasingly turning to the dollar as a hedge against inflation and exchange rate uncertainty, eroding confidence in local currencies.

Brazil’s Digital Real Pilot and Regional Implications.

Brazil has emerged as a regional leader in digital currency innovation with the launch of its Digital Real pilot, aimed at enhancing the efficiency, security, and transparency of its financial system. Spearheaded by the Central Bank of Brazil, the pilot integrates programmable features and supports tokenized assets, positioning the country at the forefront of CBDC development in Latin America. As Brazil tests real-world applications, the project’s scale and ambition could shape regional standards, influence cross-border payment solutions, and offer a roadmap for other nations considering their own central bank digital currencies.

Risks of Digital Dollarization in the Caribbean

As Caribbean nations explore digital finance and Central Bank Digital Currencies (CBDCs), the increasing presence of foreign digital currencies—particularly stablecoins and potential U.S. digital dollar initiatives—raises concerns about digital dollarization. This phenomenon, where local economies become overly reliant on foreign digital currencies, can undermine monetary sovereignty and weaken central banks’ ability to manage inflation, interest rates, and capital flows. Without careful regulation and regional cooperation, the shift to digital finance could unintentionally increase economic vulnerability across the Caribbean.

  • Loss of Monetary Policy Control:Dependence on foreign digital currencies can erode a central bank’s ability to manage inflation, interest rates, and currency stability.
  • Financial System DisruptionLocal banks and payment systems may lose relevance if consumers and businesses shift to widely accepted foreign digital alternatives.
  • Increased Exposure to External ShocksCaribbean economies could become more vulnerable to U.S. policy changes, regulatory shifts, or global financial market volatility.

Digital dollarization—where foreign digital currencies like stablecoins or a future U.S. digital dollar become widely adopted in Caribbean economies—presents several economic and policy risks. While such currencies may offer convenience and stability, over-reliance on them can undermine local monetary systems, reduce regulatory control, and expose economies to external shocks. Below is a focused analysis of the key risks involved

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Central Bank Digital Currencies in Latin America
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