EL SALVADOR ADOPTS DOLLARIZATION SCHEME TO BOOST THE ECONOMY.
The Salvadoran legislature approved a bill proposed in November by President Francisco Flores to allow the free circulation of the US dollar alongside the national currency, the colon. Most of the private sector approved of the measure as did the US government and major international financial institutions. The move has stimulated renewed interest in dollarization elsewhere in Central America.
Flores proposed the monetary reform (Ley de Integracion Monetaria) on Nov. 22 as part of an economic-revitalization and poverty-eradication plan--the Plan de la Nacion.
He stressed the value of a stable currency in attracting foreign investment but said the greatest impact of the dollarization scheme would be felt in middle- and low-income housing, where mortgage seekers would now have access to affordable interest rates and longer periods of repayment. Until now, he said, only large businesses with access to foreign credit have had that advantage.
Consumers paying off car loans or credit-card debt would find their interest rates and monthly payments immediately reduced, Flores said.
Along with the expected boost in investment, the government will pump its own funds into the economy. In addition to regular budget allocations for such investments, the government plans to spend more than US$418 million in infrastructure improvements during the remainder of Flores' term. The funds will go to highway construction.
Flores also plans to modernize the educational system, opening new schools that focus on information and other developing technologies. Also in the works are plans for streamlining the justice system, protecting the environment, and investing in the coffee industry.
Measure receives international support
Flores' announcement came after consultations with representatives of the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB) in Washington, DC. Juan Jose Daboub, technical secretary of the presidency, said the plan was not "pulled out of a sleeve," but had been under study for five years.
During the administration of President Armando Calderon Sol (1994-1999), then Treasury Minister Enrique Hinds proposed studying dollarization. He said the large quantity of dollars circulating in El Salvador--mostly from remittances from Salvadorans living in the US--gave El Salvador a special advantage. Dollarization would stabilize prices during economic crises and attract foreign capital, he said.
In 1999, much of the private sector, including manufacturing and agriculture, rejected dollarization, as did a former economy minister, Arturo Zablah, who called the idea "irresponsible."
Until now, neither the US nor the IMF encouraged dollarization in Latin America. When the subject came up in Argentina in 1999...
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