Caribbean & Central America - February 2013 (ISSN 1741-4458)

The truce between El Salvador’s mara street gangs might be the national issue attracting most interest at home and abroad right now but there is an issue that is at once more complex and potentially more serious that nobody wants to discuss. With just over one year until presidential elections on 16 March 2014, the two main candidates, Salvador Sánchez Cerén of the left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN), and Norman Quijano of the right-wing Alianza Republicana Nacionalista (Arena), are happy to expatiate on most issues, but there is an elephant in the room – dollarisation.

Last January marked the twelfth anniversary since El Salvador opted to replace the colón with the US dollar and the issue remains as controversial today as it was then. The president of the central bank, Carlos Acevedo, is a fierce advocate of de-dollarising. Acevedo famously marked the tenth anniversary of the adoption of the greenback by comparing El Salvador’s economy to the Titanic: “The ship is sinking, but the music is still playing, people are still drinking champagne and eating caviar: perhaps we haven’t grasped the fact that the catastrophe is upon us,” he said back then. The iceberg that punctured the fatal holes, in Acevedo’s view, was dollarisation.

Acevedo opted for a far more prosaic metaphor to mark the twelfth anniversary, but his lament remained the same. He said dollarisation was “a sack of unfulfilled promises.” The promises he alludes to are low interest levels; low inflation; increased foreign investment; higher growth; and the protection of the economy from external volatility. Acevedo argues, buttressed by “the accumulation of 12 years of empirical evidence”, that dollarisation has failed to deliver: GDP has fallen; the trade deficit has widened; inflation has risen; and El Salvador remains as susceptible to external shocks as ever.

The bald statistics bear him out. Between 1990 and 1999, the decade before dollarisation, the economy grew by an average of 5% a year; in the following decade, 2001-2010, the decade afterwards, the economy grew by an average of just 2%. The years since then have actually been below this: 1.4% in 2010 and 2011, the lowest rate of growth in the region, and estimated growth of 1.2% in 2012.

At the start of the last decade inflation was just over 2%; since then, Acevedo says, it has averaged 3.8% and hit 5.1% in 2011. Far from shielding the economy from global economic downturns, he argued, dollarisation had made it more vulnerable: after the 2008 downturn, the economy contracted by 3% in 2009. Interest rates, he said had fallen from 14% to 8% within 18 months of dollarisation but, he argued, LIBOR also fell by much the same from 6.5% to 1.5% over the same period.

Making dollarisation the scapegoat for all of El Salvador’s ills is, of course, invidious. For one thing, there is insecurity which has played a big part in deterring investment: after a comparatively low-key decade after the end of the 12 year civil war in 1992, for instance, an increase in violent crime coincided with the adoption of the US dollar, as mara gangs became more involved with the drug trade.

Between a rock and a hard place

Reversing dollarisation would be far from a pain-free exercise. Acevedo, in fairness, did not attempt to conceal this fact. Indeed, he argued that the reluctance of the presidential candidates to countenance de-dollarising was precisely because it would be tantamount to committing political hara-kiri; he said the upshot would probably resemble events in Argentina after the 2001 default – “a traumatic period with social, macroeconomic and political costs”. The big fear would be that Salvadoreans would make a run on the banks, withdrawing US dollars before they were converted to colones or an alternative currency.

Acevedo said there would be “two or three years of crisis, but in the long-term we would be better off”. All the potential benefits would consequently be felt by the following government: the electoral system, he implied, conspires against politicians having a vision for what is best for the country, or at least taking the long view.

It is no surprise that Quijano would oppose de-dollarising – he recently said it would be “the worst thing we could do” – but Sánchez Cerén is a more interesting case. The FMLN was virulently opposed to dollarisation and has long been in favour of restoring the colón. Sánchez Cerén is not talking about resurrecting the colón from central bank vaults or dusting off money-printing machines now though. Last December he said “We are not thinking of de-dollarising at the moment, because I don’t think the country is ready for it.” The FMLN party hierarchy has echoed these words.

Acevedo has argued, however, that the next presidential candidate might ultimately have no choice in the matter. If the low growth rate persists, he argues, the state of the public finances could become a time bomb, not least because the government cannot provide the necessary stimulus measures because of its lack of control over monetary policy. He told the national daily Contrapunto that “the next government will be forced to consider the possibility of de-dollarisation to allow for a monetary policy that provides greater flexibility of public finance, and so it will be able to return to printing money and adjusting interest rates to stimulate the economy.”

• Gang truce

The first four municipalities to enlist in the second stage of the mara gang truce, under which ‘sanctuary’ municipalities free of crime are created, have now been named. The four municipalities to embrace the initiative so far are Santa Tecla, the capital of the department of La Libertad; Quezaltepeque, another municipality in La Libertad; Ilopango, in the department of San Salvador; and Sonsonate, the capital of the eponymous department in western El Salvador. The mayors of three of the municipalities hail from the right-wing opposition party Alianza Republicana Nacionalista (Arena).