Central Bank Role

 

The Central Reserve Bank of El Salvador (CRB) has committed its efforts to fulfill its mission to safeguard the stability of prices, convertibility of its currency, control and/or regulation of other monetary variables, stability and development of the Salvadoran financial system, in order to contribute to the macroeconomic stability of the country.

The Central Reserve Bank faces a new challenge in its work with the approval and effect of the Monetary Integration Law (MIL) in January 2001. The MIL modifies and abrogates some articles of the Central Reserve Bank Organic Law. It also performs new functions. Therefore, the current Central Bank legal framework, which sets forth its functions, is provided for by its Organic Law with the modifications of the MIL.

At this time, the Central Reserve Bank carries out its functions in three areas: Public Finance, Financial System and Monetary Stability.

In the area of public finance, the CRB keeps its functions as a financial agent to the government and it provides economic and financial consultancy services. In its first function, it supports the structuring and placement of the country’s debt in the international markets. This support was of great value in the successful placements carried out during 2002, and it lead to the country’s being granted the award “Best Latin America Issuer of the Year,” granted by England’s International Financial Review (IFR) in January 2003.

Additionally, it provides services of treasury, administration of current accounts, custody of securities, operations of liquidation and payment, local and international transfers and administration of liabilities. Likewise, the CRB provides consultancy to the GOES regarding economic policies, supporting it in financial programming, providing it with information on economy development of El Salvador main commercial partners. It carries out specialized economic and fiscal surveys. CRB also represents our government before international organizations such as: the International Monetary Fund (IMF), Consejo Monetario Centroamericano (CMCA, Central American Monetary Council), World Bank (WB) and others.
As for the financial system the CRB keeps on performing its functions in administration, the exchange and delivery of money and coins to the banks, it also makes payment liquidation and compensation. CRB works in the administration of liquidity reserves, fostering the strengthening and modernization of the financial system legal framework by reforming or issuing new laws. It processes liquidity and macro-prudential analysis to evaluate the Salvadoran financial system solidity. On the other hand, the Bank has actively participated in the stock market, at this time it is promoting new financial figures such as the following: assets securitization, investment funds, a methodology for evaluating financial instruments and a new Stock Market Law.

In the area of monetary stability, the Central Bank exports deteriorated dollar bills and imports new bills to keep balances available for economy liquidity and it carries on the monetary integration process consolidation.

On the other hand, CRB produces economic and financial information, which is an important input for decision-making and creates economic expectations for both companies and families. In order enforce transparency of information; the Bank has subscribed an agreement with the International Monetary Fund (IMF) to comply with its Special Data Disclosure Standards. All this led to being granted international awards due to its timely, dependable, and transparent information.

How does the Central Bank of El Salvador control the money supply?
Do they have a covenant with the Fed?

Some economists argue that a fixed exchange rate should be supported by a currency board, such as that used by Argentina in the 1990s. A currency board is an arrangement by which the central bank holds enough foreign currency to back each unit of the domestic currency. In our example, the central bank would hold one U.S. dollar (or one dollar invested in a U.S. government bond) for every peso. No matter how many pesos turned up at the central bank to be exchanged, the central bank would never run out of dollars.

Once a central bank has adopted a currency board, it might consider the natural next step: it can abandon the peso altogether and let its country use the U.S. dollar. Such a plan is called dollarization. It happens on its own in high-inflation economies, where foreign currencies offer a more reliable store of value than the domestic currency. But it can also occur as a matter of public policy, as in Panama. If a country really wants its currency to be irrevocably fixed to the dollar, the most reliable method is to make its currency the dollar. The only loss from dollarization is the seignior age revenue that a government gives up by relinquishing its control over the printing press. The U.S. government then gets the revenue that is generated by growth in the money supply.

The CIA reports that El Salvador dollarized in 2001. Now, when the Fed set monetary policy for the U.S. economy, it also set monetary policy for the economy of El Salvador.

 

 

Central Bank Role