The recent announcement by the Central Bank of Nicaragua, mandating that all prices for goods and services be quoted in córdobas and that payments with credit and debit cards be denominated exclusively in the local currency, reflects a policy goal set nearly a decade ago by the monetary authority: the de-dollarization of the economy.
Essentially, dollarization is the result of rational decisions by individuals to protect their savings and assets. In contexts of economic or political uncertainty, holding a foreign currency like the U.S. dollar provides greater security against potential devaluation, inflation, or instability. Countries with market distortions and volatility have sometimes allowed dollarization, and a few have even adopted the dollar as legal tender. However, the inability to control the supply of dollars limits governments’ capacity to manage monetary and fiscal policies, explaining the incentive for these countries to try to reverse the process.
In Nicaragua, the level of dollarization resulted from a combination of economic, political, and social factors. During the 1980s, the country experienced one of the highest hyperinflations in global history, caused by a series of failed economic policies implemented by the Sandinista regime. Excessive printing of córdobas to finance large fiscal deficits, high public debt, and economic instability led to a significant loss in the córdoba’s value, prompting citizens to seek shelter in the dollar.
After the electoral defeat of the Sandinistas in 1990, it took nearly two decades for Nicaragua to restore its economy. During this period, democratic governments eradicated hyperinflation, stabilized the economy, reformed public finances, liberalized trade, and secured the forgiveness of the massive external debt inherited from the 1980s.
Despite almost two decades of stabilization, the country could not return to the income and welfare levels of the 1970s, and the use of the dollar had become deeply entrenched in Nicaraguan society. Successive governments accepted the use of the dollar to preserve economic stability and attract foreign investment.
Under the current regime, the central bank has implemented various measures aimed at reducing dollarization with the objective of gaining greater monetary autonomy, influence interest rates and money supply, finance public spending through monetary expansion if necessary, and benefit from seigniorage—the ability to generate income from a costless liability (the local currency).
The de-dollarization effort began when the central bank retook the reduction of the crawling peg, culminating in its elimination in 2024. Simultaneously, several measures were introduced to reduce the dollar’s prevalence, such as improving banknotes and issuing higher denominations, increasing capital requirements to banks on dollar-denominated loans to clients with local currency income, changing the calculation of bank reserves from weekly to daily, and issuing very short-term central bank securities as a kind of remunerated bank’s reserve requirements in córdobas.
However, these actions did not yield the desired results. Thus, now instead of creating an environment that encourages greater use of the córdoba relative to the dollar, the central bank has imposed the exclusive use of córdobas for prices of good and services and credit and debit card transactions, as though monetary credibility could be established by decree. This tactic suggests that the necessary trust for Nicaraguans to voluntarily adopt the local currency has not been achieved.
If the regime continues to restrict dollar usage through imposition rather than incentives, additional coercive measures could follow. These might include limits on dollar-denominated loans, excluding dollar deposits from the Deposit Guarantee Fund, controlling interest rates on dollar deposits, mandating the full payout of family remittances in córdobas, and suspending dollar-indexing mechanisms for the domestic currency.
Although the regime’s macroeconomic management has shown some order and the economy has grown in recent years, driven by increasing family remittances, the lack of transparency, arbitrariness, erosion of the rule of law, and political repression undermine the credibility necessary for a successful de-dollarization process. History shows that monetary credibility cannot be imposed; it must be built through trust in institutions and predictable policies.
The regime faces the challenge of balancing authoritarian imposition with the need to foster economic and financial credibility. Without structural reforms and a more stable political environment, de-dollarization risks becoming an exercise in control without achieving sustainable, real effects.