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EL SALVADOR
Colones or dollars?
Larry Luxner
5/2/2002
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A year after its implementation, the shift to the US dollar still sparks debate.

At the Super Selectos department store in San Salvador’s Metrocentro shopping mall, a 355-milliliter bottle of shampoo sells for 36.75 colones — or US$4.20. A 500-gram sack of detergent goes for 8.05 colones, or $0.92 and a twin-pack of AA batteries costs 11.65 colones, or $1.35.

More than a year after the Salvadoran government made the US dollar legal tender (LP, Feb. 5, 2001), charts are still posted at every Super Selectos checkout counter to help customers recognize unfamiliar denominations of US bills and their equivalent in colones.

"The law says we have to post prices in both currencies," store manager Lucy de Silva said. "If the client demands change in colones, we give them change in colones. Some customers say they’re not gringos and they shouldn’t have to pay in dollars. But most of our customers do pay in dollars."

Soon, all of them will be doing so.

The once-proud colón, officially pegged at 8.75 to the dollar, is quickly becoming an endangered species as more and more of El Salvador’s 6.1 million people warm up to the greenback. Currency-exchange booths at San Salvador International Airport no longer dispense colones, and the colorful bank notes are rarely seen at most large businesses in the capital.

US dollars constitute nearly 60 percent of the value of currency circulating in El Salvador, according to Jorge Zablah, president of the Salvadoran Development Foundation (FUSADES), a pro-business think tank. Credit-card statements, checking account transactions and most other business deals are now conducted exclusively in dollars.

Unlike Panama, which never had its own currency and has been using dollars for 100 years, El Salvador will not completely give up the colón — at least not yet.

"The constitution requires the colón to be in circulation," Zablah said. "In order to change that, we would need to change the constitution, and that requires two assemblies."

On Jan. 15, 2001, just 15 days after President Francisco Flores enacted the Monetary Integration Law granting the dollar the same legal status as the colón, the Farabundo Martí Front for National Liberation (FMLN) filed suit, charging that the Central Bank’s refusal to print more colones violated the constitution.

While the Supreme Court has rejected that argument, the controversy is far from over.

"We don’t think dollarization is an alternative to resolving this country’s economic problems," FMLN Rep. Iliana Rogel said. "The government said dollarizing would bring stability and more access to credit, but our economic problems have continued."

Roberto Rubio, executive director of El Salvador’s National Foundation for Development (FUNDE), said that while the switch from colones to dollars is not necessarily unconstitutional, it could have been better planned.

"When dollarization began, El Salvador’s fiscal deficit was rising, and there was little indication that the deficit would be controlled," he said. "The timing was not good. We have lost an important tool of economic policy, which is monetary policy."

According to Zablah, however, nearly 70 percent of 700 businesses recently surveyed by FUSADES favor use of the dollar.

"The main benefit is that interest rates have come down," he said. "For middle-class people who own a home and have mortgage, payments have fallen from 22 percent to about 15 percent. That’s an important savings for them, and it’s helping to increase consumer spending."

Rubio, however, said such benefits have been exaggerated and that the drop in interest rates has meant little to El Salvador’s impoverished majority.

"Throughout our history, the Central Bank has been weak," he said. "What the state needed was more control, not less."

The debate over the dollar comes amid concerns that the downturn in the US economy after the Sept. 11 terrorist attacks is having a devastating effect on El Salvador, which receives more than $2 billion a year in family remittances from the estimated 2 million Salvadorans in the United States.

For that reason, Zablah said, it is in the country’s long-term interest to be closely linked to the US economy through a common currency.

"El Salvador chose to dollarize because we thought it would give investors a certainty that their money wasn’t going to be devalued. Lower interest rates promote foreign investment and give lower-income Salvadorans, who have savings in colones, the assurance that they won’t lose their purchasing power. We feel that it’s succeeding, but it’s a slow process," he said.

"Dollarization has eliminated the risk of devaluation and cut interest rates, but mainly for new loans. It hasn’t been effective in reactivating the economy," said William Pleitez, a UN Development Program economist in San Salvador.

It may also take awhile for dollars to be accepted by shopkeepers and farmers in El Salvador’s towns and villages, where the colón is still alive and well.

"If the colón had been set at 10 to the dollar, it would have been very easy to do the math," said Claudio de Rosa, executive director of the Salvadoran Banking Association. "Now, if you go into a small store and buy something with dollars, they might not have change, and it’s confusing."

Ramón Diago, general manager of the 228-room Hotel Real Inter-Continental in San Salvador, recently arrived from Ecuador, where rampant inflation and a collapsing economy finally led the government to shelve the sucre and adopt the dollar as Ecuador’s national currency (LP, Dec. 4, 2000).

"The process takes a couple of years to get used to, especially for people who have never seen a dollar," Diago said. "In Ecuador, things changed after dollarization, but unfortunately prices in dollars came before salaries in dollars."

If dollarization succeeds in El Salvador, the concept might catch on in the rest of Central America, although Rubio said he doubts that Nicaragua, Honduras or Costa Rica will shelve their currencies soon. Guatemala, however, has already set out on the path to dollarization.


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