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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.

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Dollarization In El Salvador

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  1. Dollarization In El Salvador Nelson Sandeep Kumar

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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%

  7. 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%

  8. 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

  9. Dollarization Background Benefits Include: • Increased economic growth rate • Elimination of exchange rate risk • Increase in foreign investments • Lower interest rates

  10. 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

  11. 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

  12. Dollarization Agreement President Francisco Florez (ARENA) FMLN- Previously the Guerrilla

  13. 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

  14. 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

  15. 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

  16. INFlATION: ÍNDICE DE PRECIOS AL CONSUMIDOR 1/Base Diciembre de 1992 = 100Variación Anual

  17. Remittances From 1999 to 2008

  18. Remittances from The U.S.

  19. Inflation for the Consumer from 1998 to 2007

  20. Source: EL salvador’s federal reserve bank

  21. Conclusion Dollarization Good Bad In the long run

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