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- Newsgroups: misc.activism.progressive
- Path: sparky!uunet!wupost!mont!pencil.cs.missouri.edu!rich
- From: rich@pencil.cs.missouri.edu (Rich Winkel)
- Subject: El Salvador: Proceso 528: Economy
- Message-ID: <1992Sep6.214336.18431@mont.cs.missouri.edu>
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- Organization: PACH
- Date: Sun, 6 Sep 1992 21:43:36 GMT
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-
- /** reg.elsalvador: 165.0 **/
- ** Topic: Proceso 528: Economy **
- ** Written 11:39 am Sep 5, 1992 by cidai@huracan.cr in cdp:reg.elsalvador **
- From: cidai@huracan.cr (Centro de Informacion Documentacion y Apoyo a la Invest. - UCAJSC)
- Subject: Proceso 528: Economy
-
- Center for Information, Documentation and Research Support (CIDAI)
- Central American University (UCA)
- San Salvador, El Salvador
-
- PROCESO 528
- September 2, 1992
-
- ECONOMY:
- Inconsistent economic measures
-
- One of the most important aspects of the government's economic
- stabilization measures is reducing the rate of inflation.
- Nevertheless, in an attempt to reduce the budget gap -another major
- component of the stabilization strategy- measures have been adopted
- which will inevitably provoke higher prices. Concretely, the
- implementation of the Value-Added Tax (VAT), along with increased
- electricity and transportation rates, will have a considerable
- impact on prices and family budgets. In this context, the Central
- Reserve Bank has announced that it will release $20 million into
- the exchange market in order to stop the increasing exchange rate
- and, thereby, help slow price increases.
- These economic policies reflect inconsistencies which could
- slow down attempts to reduce inflation, stabilize the foreign trade
- sector and reduce poverty. The measures contained in the different
- policies are not sufficiently coherent among themselves to
- guarantee that the goals of economic stabilization can be achieved
- simultaneously.
- It is obvious that the new VAT and higher electricity and
- transportation rates will speed up inflation. In an attempt to
- reduce the budget gap, the government has shown itself willing to
- sacrifice part of the goals it won in the area of price stability.
- In addition, containing inflation is being attempted through market
- forces such as injecting dollars into the market, although this
- only means postponing the adjustment in the exchange rate necessary
- to reduce the trade deficit.
-
- Contradictions in the stabilization measures
-
- Since taking power, ARENA has been incapable of achieving much
- progress toward reducing the budget gap. The consolidated deficit
- of the central government for 1989-1991 was 4.4% of the GNP, while
- during the 1985-88 period (before ARENA's economic program went
- into effect) it was about 3.4% of the GNP. Furthermore, according
- to official figures, the rate of price increases has slowed during
- the current administration. Between 1990 and 1991, the inflation
- rate dropped from 19.3% to 9.8%.
- Nonetheless, attempts to close the budget gap by creating
- taxes which force them up, although making it possible to stabilize
- public finances, will eventually produce negative progress in
- efforts to stabilize prices. Additionally, the recent tax reforms
- only reproduce the regressive character of the nation's tax
- structure (cf. Proceso 526), and this will have further harmful
- effects on the most disadvantaged sectors.
- With regard to the exchange rate, it must be noted that, as we
- can see in Table 1, it has gone up by 2.6% over the last few
- months. However, the greatest jump occurred in the last half of
- June, in the case of markets run by exchange houses and commercial
- banks, and between July 2 and 3 for the Central Reserve Bank. It is
- clear that pressures to increase the exchange rate were felt first
- in the marketplace and then in the Central Reserve Bank, where the
- rate shot up even higher, from 8.30:1 to 8.41:1 between July 2
- and 3.
- This suggests that the foreign exchange market is mostly
- determined by the market consisting of exchange houses and
- commercial banks; the Central Bank, given the tendencies of the
- market, appears to play a secondary role with little effect on
- determining exchange rates. Evidence of this is the Bank's need to
- intervene in the market by offering $20 million for sale, with the
- hope of stabilizing the exchange rate at 8.52:1.
- The reasons given by the Central Bank for releasing these
- funds are related to the need to guarantee a stable exchange rate
- for the importation of medicines, other essential products and
- agricultural-industrial inputs. Here the government appears to be
- at a crossroads, for the measure denotes its unwillingness to
- permit higher exchange rates leading to greater inflation.
- Nevertheless, the government's Development Plan establishes that
- one of the ways to stabilize prices is through the foreign trade
- sector, for which a higher exchange rate would be necessary in
- order to make Salvadoran exports more competitive.
-
- TABLE 1
- EXCHANGE RATES IN COLONES PER DOLLAR
-
- -----------------------------------------------------------------
- June July August
- 1 15 22 30 2 3 15 28 10 20
- -----------------------------------------------------------------
- CRB 8.22 8.23 8.25 8.30 8.30 8.41 8.44 8.43 8.43 8.44
- EH 8.23 8.26 8.32 8.41 8.43 8.44 8.45 8.44 8.45 8.48
- CB 8.24 8.25 8.29 8.38 8.41 8.42 8.43 8.42 8.43 8.45
- -----------------------------------------------------------------
- Source: Central Reserve Bank.
- CRB: Central Reserve Bank
- EH: Exchange Houses
- CB: Commercial Banks
-
- A higher exchange rate could produce much higher prices. This
- can be inferred from the figures provided by Tables 1 and 2, which
- show an increase in June-July exchange rates simultaneous with a
- rising Consumer Price Index, which showed the highest rates of the
- year. On this point, the government seems to be more favorably
- inclined toward controlling prices than toward reducing the trade
- deficit.
-
- TABLE 2
- CONSUMER PRICE INDEX (base 1978=100)
- -----------------------------------------------------------------
- Jan Feb Mar Apr May Jun Jul
- -----------------------------------------------------------------
- General Index 860.1 862.4 868.2 877.3 881.2 891.6 909
- Annual variation 8.4 8.3 7.5 8.1 6.7 7.1 6.6
- Period variation 0.6 0.3 0.7 1.0 0.4 1.2 1.9
- -----------------------------------------------------------------
- Source: FUSADES. Weekly Economic Report No. 34, 1992.
-
- This scenario depicts a lack of concern (or at least a lack of
- attention) about stabilizing the foreign trade sector. The
- extraordinary current influx of foreign exchange in the form of
- family remittances, loans and donations is what is allowing the
- government to maintain the exchange rate stable, which is important
- in controlling the rhythm of inflation. Yet this is what makes the
- government neglect the need to promote a diversified productive
- structure which is capable of expanding exports. This contradiction
- could become extremely harmful once foreign resources trickle off.
-
- Other recent tax reforms
-
- Other tax measures have been implemented which equally
- contribute to accelerated inflation and reflect contradictions in
- government economic policies.
- In the first place, tariffs on powdered milk imports have gone
- up; in the second place, specific taxes on domestic beer and
- cigarettes have been reduced. In the first case, the reason given
- was the need to protect the local dairy industry from foreign
- competition, but the fact is that the measure made powdered milk
- more expensive and thereby increased the price index for basic
- foods. In the second case, the purpose was to pass legislation
- favoring domestic industries in order to help them overcome their
- unequal footing in competition with their counterparts overseas.
- However, it is significant that the measure renounced the
- possibility of obtaining greater tax revenues from beer and
- cigarettes precisely at a time when other reforms aimed at
- increasing revenues are going into effect.
-
- Final Considerations
-
- The goal of stabilizing prices is in danger with these new
- fiscal and tariff measures, while stabilizing the foreign trade
- sector continues to be postponed in order to contain inflation.
- The inconsistency seen in the government's economic
- stabilization measures endanger any progress made to date. The most
- recent measures show that, in the government's current economic
- strategy, economic stabilization in the public and foreign trade
- sectors requires sacrificing the only achievement truly made to
- date: reduced inflation.
- The measures carried out so far are irreversible, and
- therefore other policies to redirect the economy must conform to
- the needs inherent in the current stage of stabilization. There is
- a particular need to address the negative effects on the poor of
- the tax reforms and the increased exchange rate required by the
- stabilization of the foreign sector. In this context, the
- government must begin implementing not only social compensation
- programs, but also a strategy to generate income among the most
- disadvantaged sectors which is, at the same time, consistent with
- the transformation of the productive structure. To this end, it is
- key that stabilization measures and policies for redirecting the
- economy be closely linked.
- Compensating the new price increases will be easier and more
- effective if efforts are made to involve the most disadvantaged in
- those productive sectors defined as a priority in transforming the
- nation's productive structure. This would favor economic
- stabilization in all its aspects, as well as economic growth and
- the war on poverty.
-
-
- ** End of text from cdp:reg.elsalvador **
-
-