Dollarization backfires in El Salvador, fueling price hikes

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 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 honor 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 Defense Center (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 spiraling 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 a month in November 2006 to $162 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.