Monetary and Credit Policies
Between 1979 and 1982, El Salvador experienced a 23 percent
fall in real per capita GDP, a 35 percent decline in export
earnings, and a sharp rise in its unemployment rate to an
estimated 27 percent. External and internal imbalance convinced
the government to stabilize the situation under the guidance of
the IMF. The government targeted monetary growth and other areas
and, according to the IMF, accomplished most of its goals. In
1986, after a moderate reactivation of the economy in 1984 and
1985, the government adopted a short-term adjustment program to
correct remaining internal and external imbalances. This program
included the following changes: unification of the exchange rate,
exchange and import restrictions, a more aggressive export
promotion program, new fiscal revenue-generating mechanisms,
agrarian reforms, a macroeconomic and external debt management
committee, and strict monetary policies to curb the country's
accelerating inflation rate, a major goal of government policy.
The rate of inflation in El Salvador was determined largely
by the conduct of monetary policy and by variations in exchange
rates and wages. Because of a net decline in capital formation
and a major devaluation of the colon, inflation doubled during
the 1980s relative to the 1965-80 period. El Salvador maintained
an average annual inflation rate of 14.9 percent between 1980 and
1986, compared with 7 percent per year between 1965 and 1980.
Throughout the 1980s, the government employed monetary
aggregate targets, price controls, wage controls, and exchange
rate freezes as mechanisms to avoid accelerated price increases.
On January 1, 1981, following a surge in wholesale and consumer
price inflation, the government decreed a price freeze on basic
goods and services. Efforts by the Regulatory Supply Institute
(Instituto Regulador de Abastecimientos--IRA) to control prices
through market intervention had failed to arrest the price rises
for certain necessities, and prices seemed to be out of control.
The government's price freeze, in 1981 was accompanied by an
intended six-month wage freeze, which actually lasted until the
end of 1983. Over the 1981-83 period, real wages dropped by 29
percent in the private sector and 26 percent in the public
In response to the increase in the number of transactions
occurring in the parallel market as a result of the unofficial
depreciation of the colon, 1985 price controls were relaxed. The
result was a sudden increase in consumer price inflation from 12
percent to 22 percent, which by the end of 1985 had accelerated
to a 32 percent annual rate.
When El Salvador unified its exchange rate in 1986, the price
of some goods, such as oil derivatives, increased by 50 percent,
while others, such as foodstuffs and clothing, held constant.
Since 1986 some price controls have been lifted, allowing prices
to reflect market forces. In 1986 inflation rose to 30 percent by
year's end but declined to 27 percent in 1987. Continued wage
controls through government intervention in employer-labor wage
negotiations, an officially fixed exchange rate since 1986, and
slow monetary growth ostensibly tamed the country's high
inflation rate. Overall, the major results of the government's
anti-inflation program were slower price inflation and real wage
losses for workers.
The Central Reserve Bank of El Salvador (Banco Central de
Reserva de El Salvador--BCR) set interest rates and rationed
credit, generally targeting available capital for high-priority
government projects. The Central Reserve Bank also regulated--and
often executed directly--transactions involving foreign exchange,
under a 1980 regulation to curb capital flight and control
monetary supply. Small businesses, especially export businesses,
were granted a majority portion of the credit, often at
preferential low interest rates.
The Salvadoran government pursued restrictive monetary
policies during 1987 to satisfy IMF recommendations for improving
the Salvadoran balance of payments and for controlling inflation.
By restricting credit to the private sector and to public
enterprises, the government had hoped to curb demand, which in
turn would have reduced imports and saved precious foreign
exchange. In fact, despite the government's austerity program,
imports increased by 9 percent in 1987. Furthermore, the
government hoped to slow the monetary expansion that had tripled
the money supply between 1979 and 1986 to 15 percent during 1987.
The government provided credit to the industrial sector
through the National Industrial Development Bank (Banco Nacional
de Fomento Industrial--Banafi), which was created in 1981 to
replace the former Salvadoran Institute of Industrial Development
(Instituto Salvadoreno de Fomento Industrial--Insafi). Banafi
provided credit to promising new industries that were not able to
obtain credit from other sources.
Data as of November 1988