ECONOMY-EL SALVADOR:
Dollarization Backfires,
Fuelling Price Hikes
By Raúl Gutiérrez
SAN SALVADOR, Feb 5 (IPS)
- When he dollarized 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
materialized. 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
dollarized, except for
wages," he told IPS.
"The cost of basic
products and services
has risen considerably,
and wages have only
risen minimally."
Dollarization 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 (Cristóbal
Colón), 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 dollarization."
According to Rubio, at
first dollarization 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
dollarization.
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 "dollarization
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
dollarization 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 Víctor
Martínez 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
dollarization," along
with "an increase in
crime levels."
"I think it has had an
extremely negative
impact, especially on
the poor," said Martínez,
the parish priest of the
church of San Antonio
Abad, in San Salvador. |
