Transcript Dollarization In El Salvador

Dollarization In El
Salvador
Nelson
Sandeep Kumar
Introduction
 One benefit of a global economy is the ability to help
other countries
 Reasons may be for personal benefit or goodwill
 One way is through Dollarization
Introduction
 Some countries will use foreign currency in an attempt
to help their economy
 Some countries who have done this include Ecuador,
Panama, and El Salvador
 We will be covering the Dollarization of El Salvador
Economic Background
 Population of 7,066,403
 Smallest country in the American Continent
 El Salvador is the third largest economy in that region,
behind Costa Rica and Panama
 GDP per capita is $5,800
 Still considered a developing country
Economic Background
 National currency was the Colon
 had a permanent exchange rate of 8.75 to the dollar
 Is among the 10 poorest countries in Latin America
 Approximately 2.4 million people live below poverty
line (30.7%)
 GDP is lower then neighbors
 6% of population is unemployed
Economic Background
 The also suffer heavy underemployment
 Natural disaster like earthquakes and hurricane have
hurt the economy
 Also face inequality in distribution of income
 In 1999, The richest 20% received 45% of the income and
the poorest 20% only got 5.6%
Economic Background
 Have experienced mixed results from changes in fiscal
policies
 GDP has been growing an average of 2.8% annually since
1996
 Inflation has averaged 3% annually since 1997
 depends greatly on exports and remittances
 In 2005, 16% lived in extreme poverty, without
remittances this figure would be 37%
Dollarization Background
 Dollarization happens when foreign currency is used in
conjunction with or instead of the domestic currency
 Can occur in 3 different instances
 Unofficially
 Semiofficially
 Officially
 The term refers to any currency, not just U.S. Dollars
Dollarization Background
Benefits Include:
- Increased economic growth rate
- Elimination of exchange rate risk
- Increase in foreign investments
- Lower interest rates
Dollarization Background
More Benefits
- Greater inflow of foreign capital into the economy
- Promotes fiscal discipline, and efficient financial
system, and the adoption of financial reforms
- Stabilized inflation
Dollarization Background
Drawbacks Include
- Loss of control of interest rates and money supply
- Restrictions on last resort lending
- elimination of the government’s ability to generate
seigniorage (revenue from issuing domestic money)
- Being tied to another country’s economy even in bad
times
Dollarization Agreement
 President Francisco Florez (ARENA)
 FMLN- Previously the Guerrilla
Currency Effects on The poor
 Prices for consumer goods and services were rounded
up
$1 dollar=8.75 colones
1 U.S. Penny=0.11 salvadorean cents
Conversion problems and no change back
EX. before dollarization bus fare 2.00 colones
2.00 colones x 1.00 dollar/8.75 colones=0.228 dollar
Legal Minimum Wages
 $0.80 cents an hour
 $6.41 Daily
 $192 Monthly
 That’s if you have a job and earn the minimum wages
Local Supermarket Products
 4 pounds bag of beans=$4.39
 Colgate 360 toothbrush=$1.95 each
 2 x 160 grams of Tuna cans= $3.57

Source: superselectos.com
INFlATION: ÍNDICE DE PRECIOS AL
CONSUMIDOR 1/
Base Diciembre de 1992 = 100
Variación Anual
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1.5
3.1
-0.5
5.5
0.9
2.8
2.4
5.7
3.3
5.6
4.7
1.3
2.6
0.2
4.8
1.4
2.7
2.6
5.3
3.8
4.8
5.8
1.5
2
0.5
4.9
1.7
2.4
3
4.8
4
5.1
6
2.7
0.1
1.1
5
2
2
3.9
4.4
4.2
4.4
6.8
3.5
-1
2.4
4.5
1.8
1.9
4.8
4.4
3.6
3.9
8.4
3.2
-1.2
3.6
3.5
2.3
1.6
4.6
4.3
4.4
3.7
9
2.8
-1.1
2.9
3.6
2.5
1
5.3
4.1
5.6
3.2
9.6
2.2
0.1
3.4
3.5
1.8
1.7
5.2
4.2
4.7
3.6
9.9
1.5
1.5
3.3
3.3
1.4
2.1
5.4
4.4
4.2
4.3
8.7
1.9
2
2.7
2.3
2.5
2.3
5.5
5.9
1.9
5.4
7.4
4.3
-0.7
3.4
3
1.4
2.6
5.4
4.6
3.9
6.2
4.2
-1
4.3
1.4
2.8
2.5
5.4
4.3
4.9
4.9
Remittances From 1999 to 2008
Million Dollars
Yearly Remitances From The U.S.
4000
2000
0
1
2
3
4
5
Year
6
7
8
9
Remittances from The U.S.
2008 Montly Remitances
400
338.4
300
275.5
353.4
334.4
332.1
305.7
298.3
304.7
250
200
150
100
50
Au
gu
st
Se
pt
em
be
r
Ju
ly
Ju
ne
Au
gu
st
Ap
ri l
ar
ch
M
Fe
br
ua
ry
ry
0
Ja
nu
a
Million Dollars
350
338.5
Inflation for the Consumer from 1998 to 2007
Inflation Mean
10.000
8.000
6.000
4.000
2.000
0.000
1
2
3
4
5
Year
6
7
8
9
10
Million Dollars
El Salvador's Trade Deficit
0
-1000
1
2
3
4
5
6
7
8
-2000
-3000 -2163-2189-2626
-3024-3271
-4000
-3964
-4019
-5000
-4697
Year
Source: EL salvador’s federal reserve bank
Conclusion
 Dollarization
 Good
 Bad
In the long run