By Catherine Santos Helen Farfan Marcelo Moran

1. By Catherine Santos Helen Farfan Marcelo Moran Dollarization in El Salvador

2. What is dollarization? Official Dollarization Semi-official dollarization Unofficial dollarization

3. El Salvador

4. Facts about dollarization When do we implement dollarization in a country? The inflation rate in 2001 was around 4%. Real GDP was around 3%

5. 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.

6. El Salvador at the beginning of the 21st Century Data from 2002 indicate the cost of these basic services amounted to 41% of a minimum wage earner's salary • Telephone services were privatized in 1998, and charges have increased 37 percent since 1999. • Electricity was privatized in 1992, and prices have risen 221 percent over the last decade. • Water service, not privatized, has also seen a 33 percent increase in cost over the last three years. Data from 2002 indicate that the cost of these thre basic services amounted to 41 percent of a minimum wage earner's salary

7. 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).

8. 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?

9. Positive and Negative Effects of Dollarization Positive Effects Negative 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 • 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

10. Banking Positive Effects Negative 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 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

11. GlobalFinancialIntegration Positive Effects Negative 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 • Never attracted influx of Foreign Investment • Foreign Bank presence remains negligible • Posting some of the lowest Growth rates in the region

12. Annual Trends

13. Annual Trends

14. Annual Trends

15. The Issuing Country Choices: • Passive Acceptance • Active Encouragement • Active Resistance

16. The Issuing Country (Cont.) Advantages • May lead to increased trade • Elimination of exchange rate risk

17. The Issuing Country (Cont.) Disadvantages • Affected by shocks in other countries • Losing control of currency in circulation outside of the U.S.