[progchat_action] El Salvador: Dollarisation Backfires
 
Date: Sun, 10 Feb 2008 10:11:10 -0600 (CST)


El Salvador: Dollarisation Backfires, Fuelling Price Hikes

By Razl Gutiirrez
Inter Press Service
February 5, 2008

San Salvador - When he dollarised the Salvadoran economy in January 2001,
then President Francisco Flores predicted that the move would lower interest
rates and curb inflation. Now, however, there is wide agreement that what
actually happened was nothing of the sort, and that instead, prices have
increased by up to 100 percent.

Economists and social activists indicate that although adopting the dollar
as the national currency had some initial advantages, these have faded away,
while other predicted benefits never materialised. In their view, the change
has been detrimental to ordinary Salvadorans.

"What used to cost two colones (the local currency) now costs a dollar.
Twenty-five colones used to be enough to buy all my provisions, but now with
10 dollars I can only buy a couple of things," complained Blanca Flores, who
hawks newspapers at a bus stop for want of a better job.

Alberto Ventura, who owns a taxicab, said his income has "plummeted."
"Before, lots of people took taxis. Now they don't any more, because they
can't afford it on their pay," he said.

"Everything has been dollarised, except for wages," he told IPS. "The cost
of basic products and services has risen considerably, and wages have only
risen minimally."

Dollarisation was implemented seven years ago, after it was announced in
mid-November 2000 by Flores' rightwing Nationalist Republican Alliance
(ARENA) administration (1999-2004).

The measure was passed in parliament on Nov. 30, 2000 with the support of
the National Conciliation, Christian Democrat and National Action parties
after very little debate, which angered the opposition.

The Monetary Integration Law (LIM) established both the colon and the dollar
as legal tender, but a few months later the Central Reserve Bank took the
colon out of circulation, leaving only the dollar as the national currency.
This decision was viewed by many analysts as a violation of the LIM and of
the constitution itself.

The colon, named in honour of Christopher Columbus (Cristsbal Colsn), had
been El Salvador's currency since 1892, when it replaced the peso.

The LIM stipulated that one dollar would be equivalent to 8.75 colones, an
exchange rate that had been maintained for several years prior to 2001.
According to the government, the aim was for El Salvador to join the process
of global economic integration and to preserve economic stability, in order
to attract foreign investment.

Roberto Rubio, head of the non-governmental National Development Foundation
(FUNDE), regretted the lack of studies to measure the "impact of
dollarisation."

According to Rubio, at first dollarisation had positive effects, such as
lower interest rates on mortgages and personal loans, but these advantages
have waned and now interest rates are almost as high as they were before
dollarisation.

Nor did the country attract foreign investment. According to Central Bank
statistics, the total influx of foreign capital between 2002 and 2004 was
less than 512 million dollars, while between 2005 and 2006 it was only 204
million dollars.

However, Rubio said he was certain that "dollarisation has been an important
factor in raising prices," even when the effect of higher oil prices is
fully taken into account.

Experts and civil society leaders have complained that some credit card
companies are charging "outrageous" interest rates of between 30 and 50
percent a year, and that banks, while announcing lower interest rates,
charge multiple commissions which drive up the cost of their loans.

Armando Flores, head of the Consumer Defence Centre (CDC), said
dollarisation caused prices to rise significantly, partly through rounding
up prices when they were converted into dollars. "Adding an extra few cents
of a dollar to prices hurts consumers more" than when prices were in
colones, he said.

The government's response to higher inflation and spiralling interest rates
was "laissez faire," he added. The increase of the real cost of living in
2007 was far higher than the official index of five percent.

A research study by the CDC, based on government figures, found that the
cost of the urban basic basket of goods rose from 140 dollars a month in
November 2006 to 162 dollars in November 2007. In rural areas, the increase
was 23.4 percent.

For instance, the price of red beans, a staple food in the Salvadoran diet,
rose from 50 to 85 cents of a dollar per pound between December 2006 and the
same month in 2007. Over the same period, the price of a pound of rice
increased from 32 to 45 cents of a dollar.

Catholic priest Vmctor Martmnez said that the change of currency had only
benefited a few, to the detriment of rural and urban communities where, in
his view, there has been "greater poverty since dollarisation," along with
"an increase in crime levels."

"I think it has had an extremely negative impact, especially on the poor,"
said Martmnez, the parish priest of the church of San Antonio Abad, in San
Salvador.

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