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Diving into Dollarization: Exploring the Use of the US Dollar in Central America

Victor Anaya explores the widespread use of the US dollar in Central America, where it serves as the official currency, is pegged to local currencies, or is informally accepted in business transactions. He examines the benefits and drawbacks of dollarization, and highlights the experiences of Panama, El Salvador, and Belize.

Around one in three countries peg their currency to the US dollar, while 11 nations are fully “dollarized,” meaning they use it as the official currency.

Two countries in Central America – El Salvador and Panama – are among those 11, while Belize has its own dollar pegged at a rate of 2:1 to the US dollar. Almost everywhere else welcomes the mighty greenback, and business owners will often be quick to quote prices in US dollars to non-locals if those prices aren’t already listed in the local currency.

The decision to dollarize an economy is often associated with economic turmoil. That is not always the case, though, with El Salvador and Panama being prime examples.

Dollarization comes with a range of benefits and drawbacks, which we discuss below. But first, let’s delve deeper into what dollarization means.

A closer look at dollarization

Formal dollarization means following the US Central Reserve bank on all matters of monetary policy. The United States issues and controls the supply of banknotes, although dollarized countries can and do produce their own coins, which can be valuable collector’s items.

In practical terms, formal dollarization has only taken place in Latin America and the Caribbean. Different countries have different reasons for adopting the US dollar as their own, but it usually applies to small economies close to much larger countries. It can also be very useful for countries with a large tourism sector.

Related to dollarization is the concept of currency pegging. This when a currency is directly or indirectly linked to the value of the US dollar and follows its fortunes both up and down. This is the case in Belize, where the Belizean dollar is kept at 0.5 to the USD.

There are many advantages to dollarization for developing economies

First, it provides often much-needed stability to volatile economies. While many regional currencies can fluctuate against major denominations, the US dollar remains relatively stable. This eliminates forex problems for companies dealing with or in dollarized economies, meaning they can invest with confidence.

Also, dollarization means that international investors will essentially be dealing with the US Central Reserve rather than with the local national bank. For smaller countries, this is a real boon in terms of respectability. While government interference may still happen, monetary policy remains separate from political concerns.

Dollarization also makes it easier for foreign firms to invest. This is key at a time when Latin America and Caribbean has seen an increase in foreign direct investment since the pandemic. It’s also easier for employees. Many companies in the region pay their employees in dollars and remote work means non-Central American employees can base themselves anywhere. If they’re receiving their pay in dollars, they’re good to go in the region. Headhunters in Latin America often highlight the convenience of paying international workers in a single currency such as the dollar.

But there are notable drawbacks

Dollarization means a loss of sovereignty as the country’s central bank can no longer control interest rates. That means the country is effectively dependent on fiscal decision-making outside its own borders. If the dollar rises or falls in comparison to the country’s neighbors, there are fewer options for controlling prices. This is why it’s crucial for businesses to stay informed about economic trends and changes. One way to do this is by keeping up with annual reports. For instance, you can learn more about the process of annual report submission and its importance for small businesses.

There may also be political ramifications stemming from outsourcing currency control. Some citizens could see it as an unacceptable loss of national sovereignty. Additionally, in emergency cases such as the Noriega crisis in 1987, assets can be easily frozen without the capability to issue money nationally.

Moreover, in adopting the dollar, the initial adjustment period often involves a general increase in prices. This can cause a significant impact on local people.

Dollarization in Central America


Panama has the longest history of dollarization, making the switch in 1904. After separation from Colombia, Panama had a lot of new territory but no currency. The US government stepped in to issue the dollar in the new country. Panama and the USA were inextricably linked for many years due to the canal, so a currency union was logical.

While dollars are the most common currency in Panama, it has also retained the Balboa, which is still in circulation. However, all major deals and agreements are made in US dollars as it is the primary currency.

El Salvador

El Salvador dollarized in 2001, receiving mixed opinions at first. Two decades later, the long-term effects on the country are still a subject of debate. While there has been relative stability, foreign investment grew more slowly after dollarization than before. Exports lag far behind imports in El Salvador, with remittances making up the trade difference.

Like Panama, El Salvador also uses the dollar alongside another currency. In El Salvador’s case, the parallel legal tender is bitcoin (BTC), in a world-first experiment with digital currency. The success of this initiative is yet unclear. Initial reports, though, indicate early teething problems.


The Belizean dollar (BZD) is separate from the US dollar, but the aforementioned hard peg of 2 BZD to 1 USD means that the country is essentially dollarized. Dollarization is both popular and successful for the Belizean economy.

For Belize, a country reliant on tourism for income, this helps it stay competitively priced for North American visitors. It also means that foreign tourists don’t have to worry about exchanging money or working out prices.

Costa Rica and others

Although Costa Rica doesn’t officially use the dollar, it is widely accepted as de facto legal tender within the country. This is also true of most of the rest of the region, where most businesses will accept dollars, even small stores.

In more international areas of Costa Rica, Nicaragua, and Guatemala, especially, it is common to see prices listed in dollars alongside colones, cordobas, and quetzales. So, for visitors to the region, arriving with US dollars is a good idea.


In conclusion, the US dollar is widely used in Central America for practical and economic reasons. As the region continues to grow as a popular tourist/expat destination, and attract foreign investment, accepting US dollars remains a convenient practice.

Victor Anaya is the co-founder and CEO of Serviap Global, a company that provides EOR and recruitment services around the world.

Victor Anaya

Victor Anaya

Victor Anaya is the co-founder and CEO of Serviap Global, a company that provides EOR and recruitment services around the world. Serviap Global is a family-run business that started out in Mexico, before expanding in Latin America and later beyond the region. Today the company assists clients with overseas hiring in over 100 countries worldwide. That includes offering services directly in Costa Rica, Guatemala, Panama, and El Salvador, as well as working with trusted partners in Belize, Honduras, and Nicaragua.