Download Dollarization in El Salvador

Dollarization in El
Salvador
By
Catherine Santos
Helen Farfan
Marcelo Moran
What is dollarization?
• Official Dollarization
• Semi-official dollarization
• Unofficial dollarization
El Salvador
Facts about dollarization
• When do we implement dollarization in
a country?
• The inflation rate in 2001 was around
4%.
• Real GDP was around 3%
El Salvador at the beginning of the
21st Century
• Implementation of neoliberal economic
policies.
• External debt was manageable.
• The economy is strongly tied to the United
States.
• The real source of foreign exchange was
remittances from the U.S.
El Salvador at the beginning of the
21st Century
Service
Privatized
Change
Since
Telephone
1998
37%
1999
Electricity
1992
221%
Over the last
decade
Water
Not priv
33%
Since 2005
Data from 2002 indicate the cost of these basic
services amounted to 41% of a minimum wage
earner's salary
Gini Coefficient
•40.5% of income is
captured by the top
10% of the population
•It has the 5th highest
Gini coefficient in the
world wth a coefficient
of 52.3 (World Bank
2002).
Effects of Dollarization in El
Salvador
• Dollarization ensures that El Salvador’s fortunes will
rise & fall with America’s.
• El Salvador faced several shocks initially
– Increasing oil prices, US economy slowdown
• The effects are both positive and negative
Would El Salvador be better off having not Dollarized?
Positive and Negative Effects of
Dollarization
Positive Effects
•
•
•
•
Currency Risk Eliminated
A more stable currency
Lower Country Risk Premiums
Lower transaction costs between
former currency & the US dollar
• Gains in policy credibility
• Encourages competition
– Boosts productivity &
innovation
Negative Effects
• Predicted benefits that never
materialized
• Prices have increased rather
than dropping
• Wages only rose minimally
• Distrust of Gov’t by some of its
constituents
– Monetary Integration Law
Banking
Positive Effects
• Regulations were restructured &
tightened
• Improved transparency
• Small Banks can compete with
larger banks
• Initially Lower Interest Rates on
Mortgage and Personal Loans
• Corporate borrowing rates are
low
Negative Effects
•
•
•
•
•
•
Elimination of True Central Bank
No Lender of Last Resort
Lost control of their own money
supply
Lost income through Seigniorage
Currently Interest Rates are
almost as high as before
dollarization
Nearly impossible to reverse
Global Financial Integration
Positive Effects
• Banks have improved their
performance
– Gaining competitiveness in
the Central American Region
• Better integration into the Int’l
financial system
• Higher credibility among foreign
investors
• Easier access to cheaper Int’l
borrowing
Negative Effects
• Never attracted influx of
Foreign Investment
– Foreign Bank presence
remains negligible
• Posting some of the lowest
Growth rates in the region
Annual
Trends
Annual
Trends
Annual
Trends
The Issuing Country
Choices:
• Passive
Acceptance
• Active
Encouragement
• Active Resistance
The Issuing Country (Cont.)
Advantages
• May lead to
increased trade
• Elimination of
exchange rate risk
The Issuing Country (Cont.)
Disadvantages
• Affected by shocks in
other countries
• Losing control of
currency in circulation
outside of the U.S.