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

Remittances From 1999 to 2008

Remittances from The U.S.

Inflation for the Consumer from 1998 to 2007

Source: EL salvador’s federal reserve bank

Conclusion Dollarization Good Bad In the long run