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El Salvador: Colónes or dollars?
Latinamerica Press / May 6, 2002

By Larry Luxner

SAN SALVADOR -- At the Super Selectos department store in San Salvador's Metrocentro shopping mall, a 355-ml bottle of Clairol Herbal Essences shampoo sells for 36.75 colones -- or $4.20. A 500-gram sack of Ariel detergent goes for 8.05 colones, or 92 cents. Likewise, a twin-pack of Rayovac AA batteries costs 11.65 colones, or $1.35 if you prefer.

More than a year after the U.S. dollar's official legalization by the Salvadoran government, charts are still posted at every Super Selectos checkout counter to help customers recognize unfamiliar denominations of dollar bills and their equivalent in colones.

"The law says we have to post prices in both currencies," says store manager Lucy de Silva. "If the client demands change in colones, we give them change in colones. Some customers say they're not gringos, that 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 5.9 million people warm up to the greenback. Currency-exchange booths at San Salvador International Airport no longer dispense colones, and the colorful banknotes aren't seen much anymore at most larger businesses throughout the capital city.

At the moment, nearly 60% of the value of currency circulating in El Salvador is dollar-denominated, says Jorge Zablah, president of Fusades, a pro-business think tank. Credit-card statements, checking accounts and most other business transactions are now conducted exclusively in dollars.

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

"The constitution requires the colón to be in circulation," says Zablah. "And in order to change that, we 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 colon -- El Salvador's leftist Farabundo Martí political party (known by its Spanish acronym FMLN) filed a lawsuit, charging that the Central Bank's refusal to print more colones was in itself a violation of the constitution. That argument has since been rejected by the Supreme Court, though the controversy is far from over.

"We don't think dollarization is an alternative to resolving this country's economic problems," FMLN legislative deputy Iliana Rogel told Noticias Aliadas. "The government said dollarizing would bring stability and bring more access to credit, but in practice, our economic problems continue."

Roberto Rubio, executive director of El Salvador's Fundación Nacional para el Desarrollo (Funde), argues that while the switch from colones to dollars isn't necessarily unconstitutional, it could have been planned in a much more intelligent way.

"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 convenient. The problem, in my opinion, is that we have lost an important tool of economic policy, which is monetary policy."

Zablah is much more upbeat, noting that close to 70% of 700 businesses recently surveyed by Fusades favor dollarization.

"The main benefit is that fact that interest rates have come down," he said. "For middle-class people who own a home and have a mortgage, payments have fallen from 22% to about 15%. That's an important savings for them, and it's helping create more consumption."

Yet Rubio says such benefits have been exaggerated by the pro-dollarization lobby. He insists 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 dollarization debate comes amid concerns that the downturn in the U.S. economy following Sept. 11 is having a devastating effect on El Salvador, which earns over $2 billion a year in family remittances from the estimated two million Salvadoran immigrants living both legally and illegally in the United States.

For that very reason, says Zablah, it is in the country's long-term interest to be closely tied to the U.S. economy by having 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," he said. "Lower interest rates promote foreign investment and give lower-class Salvadorans who have savings in colónes an assurance that they won't lose their purchasing power. We feel that it's succeeding, but this is a slow process. Foreign investment is not like opening a faucet."

Adds William Pleitez, an economist with the United Nations Development Program in San Salvador: "Dollarization has been a success in eliminating the risk of devaluation, and it has cut interest rates, but mainly for new loans. It hasn't been effective in reactivating the economy."

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 very much 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 Asociación Bancaria Salvadoreña [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. They should have devalued the colón to 10 and then dollarize."

Ramón Diago, general manager of the 228-room Hotel Real Inter-Continental in San Salvador, is in a rather unique position to comment. Diago was recently transferred here from Ecuador, where rampant inflation and a collapsing economy finally led the government to shelve the nearly worthless sucre and adopt the dollar as Ecuador's national currency.

"The process takes a couple of years to get used to, especially for people who have never been in the States and have never seen a dollar," Diago said. "In Ecuador, things changed after dollarization, but unfortunately prices in dollars came before salaries in dollars. It's a very hard process for some people. But I like to be optimistic."

If dollarization succeeds in El Salvador, the concept might catch on in the rest of Central America, though Rubio said he doubts Nicaragua, Honduras or Costa Rica will shelve their córdobas, lempiras or colones anytime soon. On the other hand, Guatemala -- which currently uses the quetzal -- has already began the path to dollarization.

"They're doing it more intelligently than we are," he said. "In Guatemala, the process of dollarization is going more slowly. They allow the dollar to be a tool of exchange, but not a tool of accountability. That makes a big difference."

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