The experience of a dual exchange market with a simultaneous unofficial market in El Salvador

Because of economic and non-economic factors, the situation of the external sector in El Salvador has reached critical levels. Under persistent trade deficits, capital flight, and a continuous reduction in international reserves, the authorities instituted in August 1982, for the first time, a dual exchange rate system: an official market where the value of the dollar remained the same, and a parallel market where the exchange rate was set by the commercial banks. Among the goals of this innovation were a reduction in imports, an increase in foreign exchange receipts, a restoration of balance of payments equilibrium, and the avoidance of a sudden rise in prices.We analyze the overvaluation of the exchange rate, evolution of exports and imports, and the fiscal revenues derived from transactions in the parallel system. An econometric model measures the impact of overvalued exchange rates on imports and exports, and the effects of the parallel market on the price level. (Abstract shortened with permission of author.)