Research of a trade financing facility for Central America : balance of trade, payments and real exchange rates in the Central American Common Market, 1965-1984

To outline this condition, this paper describes (1) recent developments in the current accounts of each country"s balance of payments; (2) trade imbalances and trade restrictions within the Central American Common Market (CACM)(analyses are made with and without Nicaragua); as well as (3) the evolution of nominal and real exchange rates (1965-84). As overvalued exchange rates led to the trade imbalances, policies are suggested for bringing these rates to more realistic levels. The Camara de Compensacion Centroamericana, a clearinghouse created in 1961 to institute a a centralized system of settlements among member countries, is examined, as are current intraregional debt and financing needs for clearing payments. A proposal by the Central American Market Council to fund imbalances from debtor banks" cash reserves, creditor central banks, and international sources is critiqued; it is recommended that A.I.D. not fund the proposal, which would support only CACM while the need is rather for general export promotion. Alternative solutions are briefly given. Analyses are accompanied by extensive statistical data.