From: rich@pencil.cs.missouri.edu (Rich Winkel)
Subject: Proceso 538: Restrictive Monetary Policies
Followup-To: alt.activism.d
Originator: rich@pencil.cs.missouri.edu
Organization: PACH
Date: Tue, 17 Nov 1992 09:06:46 GMT

/** reg.elsalvador: 123.0 **/
** Topic: Proceso 538: Economy **
** Written 10:40 am  Nov 14, 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 538: Economy

Center for Information, Documentation and Research Support (CIDAI)
Central American University (UCA)
San Salvador, El Salvador
 
PROCESO 538
November 11, 1992
 
ECONOMY:
Restrictive monetary policies
 
     When the ARENA government took office in June 1989, its
policies sought economic stabilization in order to implement a
process of redirecting the economy. Three years later, the strategy
of stabilizing the economy continues, while redirecting the
productive apparatus continues to be postponed.
     One of the principal grounds for questioning ARENA's Economic
Development Plan is precisely its lack of ability to sustain
macroeconomic stabilization. However, the government cannot be
accused of ignoring this problem. The Central Reserve Bank (BCR)
has implemented measures "to maintain economic stability," which
has only highlighted the scope of the problems faced by the
nation's economy in attempting to achieve economic growth with
stability. For the moment, economic indicators such as inflation,
the external sector and public finances reveal an alarming
situation.
     According to BCR president Roberto Orellana Milla, the budget
deficit reached about 1.1 billion colones by the end of October; in
addition, annual inflation reached 17% for the month of October.
The government's Monetary and Financial Program establishes a
maximum limit of 12%.
     Furthermore, according to figures calculated on the basis of
BCR information, the trade deficit between January and July grew by
36.8%. This represents a $6 million drop in exports (1.6%) and a
$155 million increase in imports (19.18%).
     At the same time, the goal of reducing inflation while
stabilizing the exchange rate led the BCR to take measures to
reduce the monetary supply which, according to Orellana, has
increased as a result of BCR financing of the budget deficit.
     Between July and October, a total of one billion colones were
withdrawn from the financial system, a fact which has not been
overlooked by the productive sector. The BCR's contingency measures
have reduced available credit to such an extent that a number of
business sectors have warned than many productive activities are in
danger, and that investments have dropped significantly. These
expressions of concern were voiced recently by the Chamber of
Commerce (CCIES), the Chamber of Construction (CASALCO) and other
business groups.
     According to CASALCO, the recent implementation of the Value-
Added Tax and the BCR's restrictive credit policies are hurting the
construction industry. CASALCO says that the VAT has paralyzed
estimated advance payments on public sector construction projects,
since the Ministry of the Treasury is refusing to pay the portion
corresponding to the VAT in each estimation. The builders also say
that credit is lacking for construction projects in general, and
this situation has worsened since the beginning of October.
     The CCIES has also expressed its opposition to the Central
Bank's measures, since they neutralize the effects of financial
liberalization. The BCR has forced the financial system to purchase
bonds, and has increased legal paperwork. The goal of stabilizing
the rate of inflation and the exchange rate could provoke
speculation of unforeseeable inflationary consequences, says the
CCIES, and reducing the money supply will prevent credit from
flowing to productive sectors which need it.
     In a newspaper article published on November 9, "a number of
productive sectors" feel that reducing the availability of credit
was an "abrupt and drastic measure" and has affected even those
bank loans which were signed and sealed. This, according to the
unnamed interviewees, is affecting productive projects already
underway and has resulted in a "critical and chaotic" situation.
     Also on November 9, the BCR published a communique in which it
explained and justified its measures taken to restrict the money
supply. According to the BCR, "the combined effect of excessive
liquidity and expectations provoked by the VAT was an increase in
annual inflation a rate of 17%, and an annual depreciation in the
exchange rate of 7.5%." The BCR explained, therefore, that it has
taken contingency measures "initially consisting of placing
voluntary 'Monetary Stabilization Certificates' on the market, but
the resources brought in by those certificates were insufficient to
neutralize the excess liquidity, [and therefore we] made 'Monetary
Stabilization Bonds' obligatory [for purchase by the financial
system]." As the president of the BCR had stated earlier, the
greatest cause of excess liquidity was the Bank's decision to
underwrite the budget deficit.
     According to the BCR, the decision to reduce the monetary
supply is temporary, since it only "aims to equal levels of credit
deposits established by the monetary and financial program, which
are sufficient to achieve the goal of economic growth." According
to the BCR, stability and growth are not contradictory, but
instead, "stability is indispensable in order to create conditions
which favor savings and investment."
     Under current conditions, this is only a half-truth, since the
BCR is trying to achieve economic stabilization by contracting
credit for investment in a context which is unfavorable for
sustained macroeconomic stability. The most recent results have
confirmed this.
     One of the greatest problems currently faced by the economy is
the low level of exports. We have already mentioned the need for a
selective industrial policy (cf. Proceso 518) and, in general, a
more effective policy of promoting exports.
     Therefore, in order to maintain the stability of domestic
prices, is would be best to stabilize the exchange rate. But we
must not forget that this situation cannot be sustained
indefinitely, since (as we now see) the availability of credit for
investment could be reduced, and such credit is necessary to
increase national production and promote the overvaluation of the
national currency, which will make exports less competitive on the
international market.
     In ARENA's Development Plan, expanding exports is fundamental,
and President Cristiani acknowledged this fact when asserting that
exports are being promoted by opening new duty-free trade zones. So
far this year, however, exports have dropped compared to last year,
and these duty-free trade zones do not automatically translate into
decent jobs. In this context, a growth in production, employment
and income will depend on the government's efforts to intervene in
the marketplace in order to favor selected export activities, more
than on macroeconomic stability.
 

** End of text from cdp:reg.elsalvador **