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EL SALVADOR: High Marks for Dollarisation Questioned

Raúl Gutiérrez

SAN SALVADOR, Feb 2 2007 (IPS) - Six years after adopting the U.S. dollar as legal tender for all transactions in El Salvador, the government claims that dollarisation has brought economic benefits. But both the facts and perceptions say otherwise.

When former Salvadoran President Francisco Flores (1999-2004) announced the dollarisation of the economy in November 2000, nearly everyone was perplexed. The surprise measure stirred up doubts even in business circles, and the public reacted warily.

The media was immediately flooded with official speeches extolling the benefits of adopting what was called the world’s most powerful currency.

Jan. 1 marked the sixth anniversary of the entry into effect of the law forcing Salvadorans to use money with U.S. insignias and wording in English. Officials continue to affirm that adopting the dollar gave a boost to the economy, brought stability, lowered bank interest rates, and benefited the population at large.

Economic analysts, social activists and small retailers, however, say the law has benefited only a few, while prices of goods and service have shot up, to the detriment of most people’s pocketbooks and buying power.

According to executive director of the Consumer Defence Centre (CDC) Armando Flores, “the big winner was the financial sector,” because banks had taken out loans abroad, and since the colón (the former national currency) was under threat of devaluation, their credits were becoming more expensive as they needed more money to honour their debts.

“Dollarisation has worsened the economic crisis; far from having the effects promised by government publicity, the opposite has occurred. The measure has been disastrous for lower-income families,” Flores said.

Dollarisation was implemented hastily. President Flores announced the decision in mid-November 2000, and immediately sent the draft Law of Monetary Integration (LIM) to Congress. On Nov. 30, deputies of the governing rightist Nationalist Republican Alliance (ARENA) party and its rightwing allies, the National Conciliation (PCN), Christian Democrat and National Action parties, approved it at an all-night session.

The colón had been in circulation since 1892, when it replaced the peso as the national currency in honour of Christopher Columbus (Colón), on the fourth centennial of the “discovery” of America.

The LIM established the dollar as legal tender alongside the colón, but after one year the Central Reserve Bank withdrew all colóns from circulation, leaving the U.S. dollar as the only currency. This was considered by many a violation of the constitution and of the LIM itself.

The LIM was promoted as a tool to effectively integrate El Salvador into the global economy, reduce interest rates, control inflation and draw foreign investment.

These putative benefits remain intangible to María Rodríguez, a fruit and vegetable vendor in the community market of the municipality of Ayutuxtepeque, on the outskirts of San Salvador. “Nowadays everything is more expensive, we can’t afford anything, goods have gone up a lot in price” since dollarisation, she said. She has worked at the same trade since she was eight years old.

Rodríguez, accompanied by her 12-year-old daughter Marlene, said that before dollarisation she could buy a crate of tomatoes for the equivalent of eight dollars, but now they cost up to 30 dollars. A hundredweight of onions used to cost 100 colones (11.40 dollars), and now they cost at least 50 dollars.

“The economic situation is getting more critical every day, and that prompts many people to emigrate to the United States, where they work as informal vendors, or turn to crime or prostitution,” the CDC’s Flores told IPS.

“Official figures underestimate inflation. I am convinced that the economic situation is worse than government statistics reflect,” he added.

A study by the CDC based on official figures found that between 1997 and 2001, total cumulative inflation amounted to 10.8 percent, while from 2002 to 2006 it leapt to 19.9 percent. “In recent years, prices have increased faster than salaries,” the consumer defence activist emphasised.

The minimum wage for workers at “maquiladoras” – export assembly plants located in free zones – was raised by six dollars a month in the last four years.

The study also found that in June 2003, the basket of basic goods and services (food, transport, housing, clothing and education) for an average family of four cost 3.9 textile sector minimum monthly wages, or 589 dollars. Three and a half years later, it costs 4.3 minimum monthly wages, or 675 dollars.

In a survey carried out last year by the University Institute of Public Opinion (IUDOP), 55.2 percent of interviewees considered that the higher cost of living was caused by dollarisation.

Statistics from the non-governmental Central American Resource Centre (CRECEN) indicate that on average, 700 Salvadorans a day leave the country in search of decent work and salaries, mainly bound for the United States, the country of residence of 2.3 million out of the total of 2.5 million who live abroad.

In 2006, Salvadoran emigrants sent 3.3 billion dollars in remittances to their relatives back home, equivalent to over 17 percent of gross domestic product (GDP) according to the Central Reserve Bank. Remittances have nearly doubled in the last six years, from 1.75 billion dollars in 2000.

The former head of the National Association of Private Enterprise (ANEP), Héctor Vidal, admitted that interest rates came down after dollarisation, but only by three percentage points. “Bankers hit the jackpot, taking advantage of the generosity of the government’s own policy,” levying new commissions and charging more for existing ones, with the end result that the cost of money remained almost the same, he said.

“When a bank announces an interest rate of seven percent, by the time the various commissions are paid, the final rate could be up to 15 percent,” he said. Meanwhile passive interest rates, paid by banks to savers and depositors, have fallen from five percent to 0.25 percent.

Vidal said the other official forecasts have not been fulfilled either, because international investments have not grown as much as expected.

According to El Salvador’s Investment Promotion Agency (PROESA), between 2001 and 2003 investments stood at 279 million dollars a year. Although investment increased to 424 million dollars in 2005, it was down again in 2006, as only 172 million dollars were invested between January and September.

El Salvador has one of the lowest foreign investment rates in Central America.

“It was a disaster in terms of economic policy, and a legal injustice which should not have happened in a society which is supposedly building up its institutions. The legacy of (former President) Flores is atrocious,” Vidal said.

Meanwhile, María Rodríguez complains that the dollar has hurt her business, because sales are down and she has “to sell produce much more dearly than before.”