2003: The supremacy of politics

An evaluation of politics

The year 2003 began for El Salvador with a combination of factors that promoted a contradictory number of expectations. In the context of the elections that were celebrated in March, many Salvadorans expected the political parties to end with the main social problems of the country. On the other hand, the year began with the strike of the public health system. The hopes of those who were optimistic enough to believe in the resolution of the crucial problems of the society vanished. There were also those who felt pessimistic about the confrontation of the actors involved in these conflicts. This article will try to analyze the behavior and the actions of the leading actors of the political system, and the role of those institutions that represent the national political life.

An irritating confrontation
It is enough to examine the discourses of the different actors to have an idea about the intense confrontation between the political sectors during the year 2003. This situation was enough to end with the hopes of the most optimistic people, as the different opinion polls have revealed. The strike of the workers who opposed themselves to the privatization of the public health system was the main scenery of this situation. The right wing and the left wing confronted each other in this context. The left wing was accused of being the main instigator of the strike, and that its objective was to create a governmental for the up-coming elections. ARENA was accused of an alleged attempt to intensify the patrimonial state in favor of its most important members.
Because of the results of the elections, it can be said that the Salvadorans punished the governmental party for trying to commercialize the health system, for its poor performance in the social area and for its evident connection with the interests of the business elite. In the context that defined the defeat of ARENA, the FMLN chose to radicalize its ideas for the presidential elections. The designation of Schafick Handal as the presidential candidate is a sample of the secure attitude adopted by the maximum leaders of the left wing.

This reality made it seem as if the most important issue of the political life was the confrontation between the two leading opposing forces. ARENA saw its main adversary in the FMLN, which represented a constant threat against its position in the Executive power. In the meantime, the FMLN kept seeing this sector of the right wing as the main responsible for the national problems. In this radicalized scenery, and in the beginning of a very violent electoral campaign, the central-wing parties that see themselves as the preachers of the political moderation between the left wing and the right wing did not have much influence on the public opinion.

However, after the results of the municipal elections were revealed, the FMLN seemed more concerned about improving its image. The left wing began to think in the solution of certain social problems from the Legislative Assembly. As a sample of the former idea, the FMLN made a pact with the PCN (a party that had collaborated with ARENA in the past) to resolve the strike of the public health system and the problems of the farmers, among other objectives. With those initiatives, the FMLN tried to portray the image of a party that cared about the governmental affairs, in order to gain public credibility. This is an important change because so far the left wing seemed to have only a negative attitude towards the congress. The opposition did not seem to make specific proposals to resolve the most common problems.

However, after March, the FMLN showed a very different face. The party’s aggressive attitude helped to discuss the need to include in the national political agenda the social and the economic problems of the Salvadorans. From a totally self-pleasing discourse, some of the sectors of ARENA –even its future presidential candidate- began to talk about the social problems that the party still had to resolve. Even President Flores seemed defensive, demanding more solidarity from his party. At the same time, ARENA seemed to blame Flores for his stubbornness and for not responding often enough to the social demands of the citizenry.

On the other hand, the social offensive of the FMLN and its pact with the PCN irritated the right wing. This issue is important because the different groups of the right wing believe that they have to follow the same purposes. That is why the National Conciliation Party (PCN) was usually described as the appendix of ARENA. However, the brief alliance between the FMLN and the PCN not only made them wonder if this country was about to overcome the old myths of the opposition between the left and the right wing. They also saw this relationship as the birth of different interests among the right wing. The PCN supported the small business company owners with its proposals to reactivate the agricultural sector. And put its finger right on the weak spot of an ARENA that was more concerned about the interests of the business elite, especially those sectors dedicated to the importation and exportation business, and to the financial operations.
The discussions and the threats about an internal break-up that was caused by the results of the legislative and the municipal elections of March 2003 confirm the hypothesis of a relative identity crisis inside the right wing. Even if it is true that with the designation of Elias Antonio Saca as the presidential candidate of ARENA it seemed as if the scar between those sectors had been healed, soon reality showed a completely opposite sight of what had happened. A little while after that, the alleged artisan of the successful opinion polls and the mood of the members of ARENA had to abandon his position due to the confrontations connected with the official posture about the problems with the farmers.

Nevertheless, those difficulties were not an obstacle for the successful campaign launched by ARENA in 2003. In addition, as it usually happens, several sectors of the private business companies and some of the news media supported the position of ARENA by adopting a recalcitrant anti-Communist position. A number of different proposals were presented with the alleged objective of promoting a national project capable to resolve the most crucial problems of the Salvadorans, and without putting at risk the status quo that favors the market

The pre-campaign
On May 1st, the elected legislature started its operations. Far from ending, the electoral confrontation increased. The political parties began a new stage of the electoral battle because of the up-coming presidential elections. Those who saw themselves as the winners began to prepare everything to attack. The social issues were the talk of the day. The President talked about the family economy, the increase of the minimum wage, and an initiative to reduce the prices of both the electric energy and the telephone services.

As for the Legislative Assembly, it can be said that this institution reconsidered the social concerns of the Salvadorans. Several projects connected were born in the parliament during 2003. The initiatives were destined to examine the structural problems: public health, education, and the reduction of the debt contracted by the agricultural sector, among other topics. This activity created displeasure and political confrontations with President Flores, who was not pleased by the fact that the opposition was “invading those fields that belonged to the Executive power”. In this context, the President decided to promote the “Iron Fist Plan”, a decision that was questioned by the opposition.

The campaign of ARENA
The different presidential candidates were chosen in this context. However, a little while later, ARENA changed the perspective of the pre-campaign issues. The communication services of the President saw in the violence issue (thousands of gang members) a possibility to win the sympathy of the electorate. It was publicly announced that this issue was going to be an electoral affair. Ever since then, all of the official sectors announced their wish to fight against the juvenile criminality.

In this context, even if it is true that the opinion polls reveal that ARENA ended the year 2003 with a high probability of wining the elections, the problems between the different sectors of the party have not come to an end yet. By the end of 2003, Elias Antonio Saca
-because of his comfortable position in the public opinion polls- managed to keep the party united. It seems that the unhappy sectors of his party still long to convince the financial sector to consider their vindication. In this sense, the internal cohesion of ARENA remained firm in the pre-electoral context thanks in part to the fear and the hate against the FMLN, and because the FMLN was not able to gain the trust of the Salvadorans.

The campaign of the FMLN
The FMLN launched its pre-electoral campaign with a solid advantage: the acceptance of the Salvadoran electorate. Happy with the positive electoral results, the leaders of the party occupied an enviable position; it seemed as if their recent internal confrontations had been left behind. Carlos Rivas Zamora was the elected Mayor of San Salvador, and this was an evident proof that the FMLN was meant to conquer the electoral field even after the departure of certain emblematic figures, as in the case of Hector Silva. At least that was the approach that the leaders of this party used to convince its militants that they should support the candidacy of Schafik Handal.

It is still too soon to know if the bet made by the leaders of the FMLN was the right one. The only thing that can be said is that, by the end of 2003, according to the different opinion polls, the left-wing party had already thrown away the trust of the citizenry, the trust that the party had gained before and after the elections of March. It seemed as if the Salvadorans had seen in the presidential candidate –known by his past as a communist leader- an evident proof the will to de perpetuate the lack of action. The results of the March 2004 presidential elections will reveal if those who evaluated the future of the left-wing party in this sense were right. In any case, it is necessary to say that several militants from the FMLN used the same argument to defy its leaders. The candidacy of Oscar Ortiz was a sign of protest.

During 2003, the left-wing party experienced a fluctuating movement in the different opinion polls. The party that occupied a comfortable position in the electoral preferences now ends the year below ARENA. The strategy of the leaders of the FMLN is to think that the deterioration of the life standards, the decline of ARENA after three administrations, and the internal contradictions of the official party will be enough to increase the votes in favor of the FMLN.

The other parties
The rest of the parties –CDU, PDC, and the PCN- made a double bet. They expected that both the defeat of ARENA (in March) and the radical attitude of the FMLN would be the factors that would make them look as the leading option for the country’s transformation. That is why during the first months of 2003 there were quite a few attempts to establish an electoral pact between these parties. However, despite their good intentions, the year 2003 ended with a coalition between the PDC-CDU, and with the PCN going solo.

According to the public opinion polls, the “third option parties” will not be considered as such. The PCN will have to fight harder to remain as a party. The coalition, on the other hand, will probably be forgotten. The person who will face most of the negative effects of an electoral debacle will be, without a doubt, Hector Silva. For many years, Silva remained as the favorite politician of the Salvadoran population, strong enough to become the next president. However, after he left the FMLN, his political career seemed to be going nowhere. In case that this thought becomes a fact after the elections, it will also become one more evidence of the strength that the FMLN and ARENA have.

The institutions did not pass the test
Throughout the year 2003, the institutions once again proved that they are not capable to respond to the aspirations of the Salvadorans. An analysis of the diagnosis made by several private organizations about the dysfunctional aspects of the national political life seems enough to understand the dimensions of the problem. The Salvadoran Foundation for the Economic and the Social Development (FUSADES) reports the negative perception that many Salvadorans have about the legislators. According to FUSADES, “The Salvadoran population has an negative opinion about the performance of the Legislative Assembly and about the way that democracy works. (...) One of the aspects that they criticized is that those who represent the society do not respond to the claims and to the aspirations of the electorate”

A deficient Legislative Assembly
The Salvadoran population does not have a positive image of the Legislative Assembly, according to the different opinion polls that have been published throughout the last year. One of the negative aspects of the system is that the decisions of the legislators are not close to the issues that concern the citizenry. In an opinion poll performed by the IUDOP in May of 2003, an 82.9% of the Salvadorans considered that the laws promulgated by the former legislature were not aimed to benefit the citizens. On the other hand, a 79.3% of those interviewed said that they felt that their interests were not actually represented by that organ of the State.

In the beginning of the present legislative period, and according to the opinion polls, the Salvadoran population chose to wait and see how qualified the performance of the new legislature was. According to the opinion poll of the IUDOP, a 57.1% of the population thought that the Legislative Assembly would improve its performance with the new composition of the Legislative Organ. At the same time, three out of every ten Salvadorans thought that the laws that favor the population should be approved, at the time that a 27.3% of those interviewed expected that the fight against corruption would become a priority for the Congress.

By the end of 2003, it is not very clear what is the perception that the Salvadorans have about the performance of the legislators. However, the lack of opinion polls about this particular issue is no impediment to formulate a hypothesis. In the first place, there are enough elements to affirm that the Legislative Assembly has deceived the Salvadorans once again. The electoral context has been an obstacle for the daily coexistence of the legislators. Even if no one has heard about any corruption cases inside that institution, the same cannot be said about the actions of several important employees of the Assembly. In several occasions, the press has revealed that certain employees of the Assembly had the bad habit of modifying the laws after they had been approved. The responsibility of the legislators in this issue is not the result of presumptions, but the result of the passive attitude that has been adopted to look for the guilty ones.

The Assembly has been part of the corruption that affects the other public institutions. There have been debates about the corruption in the ANDA (The National Administration of Aqueducts and Sewage), and the revelations about the alleged responsibility of a former member of that institution who once occupied a prominent position inside ARENA. On the other hand, certain politicians of the FMLN have also been allegedly involved in the case of the garbage disposal system in the municipalities of San Salvador. However, the coverage of these controversial cases has not made the work of the congressmen any more respectable. The reason is that these issues have not been handled seriously. They made it seem as if their objective was to discredit the reputation of its adversaries, or to defend the actions of their own people. As far as the combat against corruption goes, the Legislative Assembly, because of its disastrous performance in the most controversial cases, left the Salvadoran citizens thirsty for justice.

This leads us to examine the issue connected with the capacity that the legislative organ has to control the other institutions of the State. And there is no doubt that this topic is still one of the tasks that remains to be seen. The congressmen did not seem to be competent enough to control the performance of the different ministries. The 2002 performance reports of these ministries are still inside the warehouse of the Legislative Assembly. This incapacity of the legislative power to control this kind of situations is also evident in the relations between this organ and the Executive power.

In this sense, the relations between these institutions have been tumultuous and have been accentuated by a lack of mutual respect. The best example is the Minister of the Internal Revenue Service, Juan Jose Daboub, because his declarations against the legislators are no longer a secret. When Daboub reflected about the behavior of the congressmen, and when he reacted about the fact that the general budget of the nation had not been approved, he made the following statement: “this is a passive attitude, a conspiracy, who knows what they are up to!” According to the minister, the congressmen of the opposition “manipulate the Revenue Commission in a demagogic manner”.

An authoritarian Executive Power
The arrogance and authoritarian attitude that can be reflected in the statement of the Minister of the Internal Revenue Service that was formerly quoted is not only a small example of the general tonic that determined the relation between the Executive organ and the Legislative Assembly. President Flores was the main detractor of this institution. He did not only insist on mining the credibility of the opposition, but he also treated the Legislative Assembly as if it were a pariah. The different organisms that promote and defend the human rights were also the victims of the President’s contempt. His declarations about the approval of the Anti-Gang Law are an example of the formerly discussed ideas. In this occasion, and shielded by the alleged support of the population to the police actions against the young gang members, did not hesitate to accuse those who did not approve of his law project about how they “favored” delinquency.

Without a doubt, President Flores is a clear example of a person who is not willing to fully adjust to the requirements of the performance of a democratic system. Back when, thanks to the collaboration of the PCN, his party had more power to make the decisions inside the Legislative Assembly, he ignored the opposition. He did not even discussed with them his most controversial decisions, those decisions that had a critical effect over the lives of the Salvadorans. His arrogance towards the opposition was clear during the earthquakes of January and February of 2001, and after the sudden approval of the dollarization project of the economy.

That is why when he is in control of the situation, Flores behaves as an authoritarian chief of a tribe that overlooks his adversaries. His disdain for the opposition, especially for the FMLN, says plenty about his adhesion to the democratic principles. His legislative majority once established arrogance as the interaction mechanism created to deal with the rest of the politicians. Flores has demonstrated that he does not understand what a dialogue is, especially a dialogue with his detractors.

The economic balance

The economic balance
A global and an objective view to the economic performance of El Salvador in 2003 allows us to see the up-coming challenges of 2004. How can we describe the economic activity of El Salvador? Did it meet the expectations of the government? What were the prevailing policies in the economic strategy of the Executive Power?

The results of the economic policies implemented in 2003 confirm the Neoliberal profile of the government. The concern for the macroeconomic stability and the search to rubricate new free trade agreements has prevailed in the agenda of ARENA. However, the same cannot be said about the Salvadoran microeconomic activity. Three years after the dollarization process of the Salvadoran economy was imposed, no one has been able to demonstrate in what way this measure has improved the economic growth or how it has attracted the attention of the foreign investors.

On the other hand, the fiscal policy implemented by the government has shown us its limitations. The present risks are already pointing at the obstacles of the next year. The fiscal health of the country will suffer a severe deterioration.

The commercial policy seems to be the sharpest edge of the government. The year 2003 will be remembered by the efforts that were made to rubricate the free trade agreement with the United States. During the whole year, the ministry of Economy technically became a virtual “ministry of commerce” because it concentrated most of its efforts in the materialization of the treaty. To do this in only one year is a record for this kind of negotiations. The deal was completed by December 17th. In this context, the main governmental aspiration has been fulfilled, now it only has to be ratified by the legislative assemblies of the different governments.

Production
In 2003, the economy grew very slow because of a passive internal demand. During the first semester of the year, the construction sector and the services area grew by 1.45%, while the industrial and the agricultural sector both collapsed. For the second semester, the main indicators seemed to contract. In July, the Index of the Economic Activity Volume (IVAE, in Spanish) fell by 0.41% as a consequence of the recession of the financial services’ sector (-5.2%), the transportation services (-4.3%), and the manufacturing industry (-1.2%). The gross result, according to the preliminary information of the Central Bank of Reserve (BCR, in Spanish), was that by the end of the year the GNP had increased by 2.0%, this percentage was much higher in 2002.

Therefore, the perspective of the country’s productive sector for 2003 was a generalized stagnation effect. In fact, this tendency has been steady since the year 2000. In that year, the GNP grew by 2.2% but it was reduced in 2001 (1.7%) because of the impact of the earthquakes and other factors. In 2002 the GNP increased (2.1%), and it finally remained steady in 2003 (2.0%).

According to the report of the Economic Commission for Latin America and the Caribbean (CEPAL, in Spanish), published in Santiago de Chile, the Salvadoran Economy, despite the fact that it has a positive growth rate of 2.0%, the product per capita percentage has not increased in four years. This report indicates that the slight growth can be explained by the increasing external demand through the expansion of the maquila exportations. Nevertheless, according to the CEPAL we cannot get out of the economic stagnation because during the last years there has been a systematic deterioration in the terms of exchange, which dropped by 1.3% in 2003, by 0.8% in 2002, and by 3.1% in 2001.

These reasons are not compatible with the declarations of Luz Maria de Portillo, the President of the Central Bank of Reserve of El Salvador. She thinks that the positive growth of 2003 is due to the growth of the exportation level, the increasing amount of family remittances, the dynamism of some sectors, the low inflation rates, the reduction of the fiscal deficit, and the financing of the banking system to the productive activities that have better financial conditions.
The sectors that contributed the most with the expansion of the GNP of 2003 were the industrial, the commercial, and the financial sector. However, the agricultural sector fell by 0.6% due to the slow recuperation of the prices of coffee and sugar in the international markets. For 2004, according to the BCR, there are better perspectives to support growth. Since the world’s economy is expected to improve, new opportunities will come along with the Free Trade Agreement with the United States and the access to other markets will improve. According to the BCR, the increasing number of family remittances, the investments on infrastructure, a better agricultural production, and the low inflation level are also positive signs.

The performance level of the Salvadoran economy is located in the line of the international surroundings. According to the International Monetary Fund (FMI, in Spanish), in 2003 the United States’ economy grew by approximately 2.6%; and the Latin American economy grew by 1.1%. The same organism calculates that, in the cases of the United States and Latin America, the economic growth for 2004 will reach approximately between 3.6% and 3.9%, respectively. The external perspectives are, therefore, a little more positive.

However, when it comes to examine the internal factors, such as the investments, it can be observed that the public investment decreased in 2003 by the time that the program destined to repair the damages of the earthquakes of 2001 ended. On the other hand, the private investment increased in a modest fashion, that is why this was only a slight improvement because of the up-coming natural declination that surrounds an electoral environment.

Prices and salaries
As for the inflation rates of 2003, according to the information of the BCR, the inflation process was reduced in El Salvador from 2.8% to 2.6%. According to this institution, this indicator can be explained through the fact that the dollarization of the economy has had positive effects over inflation. Despite a more considerable growth of the prices in the last couple of months, inflation kept a low level, and this somehow helped to maintain the interest rates. In September, the prices grew by 0.1%, and the annual inflation rate reached a level of 2.1%. The largest increase of the prices was allegedly the increase of the prices in the health and the transportation sector,

Nevertheless, the prices’ activity is not an indicator of a higher level of purchasing power. The strength of that inflation level seems to be based in a “macro-economic stability” at the expense of the family’s micro-economy. This means that such variable has somehow deteriorated the income of the workers using the excuse that the objective is not to generate inflationary pressures. The strategy has been to keep the salaries at its lowest levels and make sporadic increases to create a facade and without actually increasing the real purchasing power of the people.

This idea can be verified by just taking a quick look at the evolution of the minimum salary levels of El Salvador. It was not until May 22nd of 2003 that the minimum salary was increased after five years. However, such increase was so small that it did not resolve the problem of the purchasing power level to buy the basic food basket. The government of ARENA has not used the salary’s policy as an instrument to generate a new and an equitable distribution of the income.

This is how the consensus reached in 2003 was aimed to increase through a decree the minimum wages that, until this date, had been established at a level of $144 per month, a Pyrrhic increase. The rural sector was literally left out of the direct benefits of this economic policy. The salaries of both the sectors of commerce and services were to be increased by 10%; that is why there is a new minimum monthly salary of $158.40. In addition, for the industrial sector the proposal was to increase the minimum salary by 7.5%, that is $154.90 per month. For the maquilas, the proposal of the private business companies originally intended not to modify the minimum salary; however, with the negotiation, the salary was increased by 5% and now the minimum wage for this sector is $154.60 per month. In addition, some agreements were made about a group of economic measures to lower the cost of living and to create jobs.

The former different increases show the privileges of certain business sectors, such as the ones of the maquila industry, which characterizes itself for paying low wages and for rendering a small number of benefits for the workers. This can be added to the fact that the contribution of the maquilas to the national investment at the long-term is not very high due to the volatile nature of this kind of business. The salary for the agricultural field workers, however, was not increased. The excuse was that the agricultural sector is not able to face a wage increase because of the crisis that it is going through. This perspective can be contrasted with the vision of the external sector, which points at the fact that the agricultural sector qualifies to be included to compete with other sectors in the Free Trade Agreement with the United States.

All of these ideas show the burdens of a policy that keeps rural poverty as part of an endogenous vicious circle. Even if the minimum salary of the industry is able to cover the value of the country’s urban Basic Food Basket (CBA, in Spanish), that minimum salary is not enough to cover the expenses on clothing, housing, and recreation.

The 2003 Human Development Report indicates how the calculation of the CBA suffers of a number of serious deficiencies (is not realistic) because it is behind the times. The products that integrate the CBA were determined through an income and expenses poll that took place in 1991, and it is natural if to this point (12 years later) the alimentation patterns have changed. In this sense, the purchasing power of the agricultural salary is much lower than other salaries because it is not enough to get neither the rural nor the urban CBA. According to the report of the National Foundation for Development (FUNDE) presented on October 27th, 2003, in order that the agricultural salary manages to cover the value of the rural CBA, this should be increased by approximately 30%.

 

Minimum salaries for 2003

Source: Ministry of Work and Social Prevision

As for the real minimum salaries, they have continuously made people lose their purchasing power. The real minimum salaries behave similarly to the economy: they grew in an annual average of 2.4% during the first five years of the nineties, and then they decreased –2.3% in the following years, creating as gross result a growth close to 0.1% for the whole period. This reflects that the economic growth has not made an impact on a considerable sector of the workers.

The external sector
According to the Central Bank of Reserve (BCR, in Spanish), the Salvadoran balance of payments closed the year 2003 with a surplus of $266 million. This has been the consequence of a gross balance between a deficit of $617 million in the regular account and a surplus of $883 million in the capital account. These pieces of information reflect the strong external dependency of the Salvadoran economy.

This is the reason why it does not sound so positive to hear the BCR say that the exportation grew by 6.3% during 2003, when the importation activity has increased twice as much. According to the bank, the new markets have promoted the peak reached by the exportation activities. These new markets have been created by the free trade agreements with Mexico, the Dominican Republic, Chile, and Panama. What seems to be clear is that the small and the medium companies will not be able to take advantage of this opportunity. The large business companies do take advantage of this chance. This is reflected in the growth levels of the maquila industry, which is one of the most important sectors in the exportation business, and has created sources of employment in this field.

On the other hand, in the annual report of activities of the Ministry of Economy it was clear that “closing the deal for the Free Trade Agreement with the United States is a great achievement for the country’s commercial sector in 2003”. This agreement was finally negotiated on December 17th, 2003. The country allegedly obtained favorable asymmetries of 5, 10, 15, and even 20 years for the different national productive sectors.

Among the sectors that might receive the benefits of the agreement there is the poultry farming sector, and products such as the dairy products, sugar, textile and clothing. However, the piggeries were affected. For the industrial and the agricultural sectors, the benefits that they already had were kept with the Initiative of the Caribbean Basin (ICC, in Spanish). According to the Ministry of Economy, in the case of the sugar, with the Free Trade Agreement the exportation percentage of the sector will increase by 24 extra tons.

For Minister Lacayo, this successful deal means “we will sweeten the holidays for the North American people”. However, according to North American sources such as the Washington Post, with the closed deal of the Free Trade Agreement with the United States, contrary to the vision of the Salvadoran government, the true winner of the agreement is North America itself. When the basic aspects of the agreement are analyzed, this newspaper accepts that “the American exporters will receive the benefits (…) and even too many benefits; the agreement is evidently in favor of the United States”. While the markets of the four Central American countries that have signed the agreement to this date (El Salvador, Guatemala, Honduras, and Nicaragua) with the United States will be completely open to the American exporters that provide financial, telecommunications, and technological services. The protections to the American sugar and textile industries will be kept for a permanent period because they are not competitive enough.

This is how the results that might be expected from the Free Trade Agreement with the United States for 2004 do not seem to be promising in any way. As for the Free Trade Agreement with Canada, the process had been frozen because of all the attention that was paid to the United States; however, the plans of the Flores administration, according to the balances, are to conclude it by the first trimester of 2004.

As for the foreign investments, mostly the investments made on the maquila, they have kept a positive level of growth. According to the Ministry of Economy, today there are 16 areas with maquilas operating in the country. The level of industrial areas grew 64% in relation to 2002, and in the country alone there are 1,173,000 square meters of construction.

In reference to the family remittances, they have continued to grow and therefore the country depends even more on them each day that goes by. The family remittances sent by those Salvadorans who live abroad represent 14% of GNP, and promote the private consumption. According to the Ministry of Economy, the family remittances will reach approximately $2,050 million. The government has said that this is the result of the extension of the benefits brought along by the TPS and the economic growth that the United States reported in the third quarter of the year.

On the other hand, during 2003, despite a higher deficit of the balance of trade, the regular account seems to have improved slightly; however, this is due to the considerable growth of the family remittances. Between January and August, the deficit of the balance of trade increased approximately 12% in reference to the same period of the last year, since the importation level grew more than the exportations. During this period, the exportation level grew 6% leaded mainly by the exportations of the maquila (7.6%) and the traditional products (2.5%).

The importation level grew 13.6% due to the increasing number of external purchases of consumption goods and petroleum. This was reflected in a deficit of the balance of trade of $1,738 million. The compensation came with a balance of remittances of $1,355.4 million (between January and August, the family remittances covered 80% of the deficit of the balance of trade). During this period, the family remittances sent by the Salvadorans who live abroad increased by 4.9% and were equivalent to 64% of the value of the exportations. By the end of the year, the amount of remittances might increase and reach an amount close to $2,032 million, that is 13.5% of the GNP. Adding this to an adequate flow of income provided by tourism would allow the country, according to the BCR, to reach a deficit of the regular account close to a 2.3% of the GNP.

The external debt of El Salvador is kept at an acceptable level. However, it is getting closer to the limits of what is considered “manageable”. The estimated balance of the external debt for 2003 is $3,800 million, an amount equivalent to 1.2 years of exportations, and to 25.7% of the GNP. In the last years, the external debt has increased as the result of a higher fiscal deficit.

El Salvador is also in danger to lose the present level of investment. By the end of 2003, Moody’s Investors Service Agency examined the debt that El Salvador had. This analysis evaluated the governmental capacity and the capacity of the BCR to face future events of financial nervousness, and if these institutions would actually be able to provide support to a banking system that has to operate within the limits defined by a dollarized economy. A few years ago, the formerly mentioned agency stated that El Salvador was able to absorb a certain level of investment due to its successful transition to an economic and a political stability after 12 years of civil war. However, the deterioration of the country’s fiscal accounts and the low level of international reserves are factors that would be put against the qualification of the country. The Standard and Poor’s and the Fitch Rating Services have repeatedly announced their opinion during 2003 with a speculative category, and have kept the outlook in a stable position; however, according to the information of January 2004 the outlook is now negative.

In the year 2003, the international reserves have had a slight recuperation, as a consequence of the adequate flow of the currency provided by the remittances, tourism, and the exportations. So far, the reserve’s balance has approximately increased 7.5%. The predictions are that by the end of 2003 there might be a balance of reserves of $1,700 million, the equivalent to 3.8 months of importation activities.

The public sector
In the field of the fiscal matters, the 2003 revenue was higher than the one of the last years. By October, the Non Financial Public Sector (SPNF, in Spanish) had a regular income of $1,921 million. Out of that amount, a 75.1% came from the tax contributions, 11.5% came from the social security contributions, a 9.0% did not come from the taxes, and a 4.4% came from the surplus of the operation. By the end of the third trimester of the year, the foreign donations added up to a total of $41 million.

By the end of the third trimester, the yearly regular expenses of the SPNF added up to $1,698 million. The consumption expenses represented the highest proportion of the regular expenses (74%), followed by the payment of interests (15.8%) and the regular transactions (10.2%). The expenses of the capital were $388 million, out of which $382 million came from the gross investments, and the rest came from the transactions of capital. It is important to notice that most of the expenses made by the State, as it has been typical in the past, are connected with the regular expenses (81.4%).

By October, the regular savings of the SPNF were approximately $223 million. This, according to the Ministry of Hacienda (The Internal Revenue Service), was approximately 1.5% of the estimated GNP for 2003. At the same time, the global deficit (including donations) was $122 million, a little more than 0.8% of the estimated GNP for 2003.

In this year, the PNUD, ANEP, and FUSADES expressed the need to make some important changes regarding the fiscal matters in order to make the debt of the State sustainable for the long-term. According to the information provided by the Central Bank of Reserve (BCR, in Spanish), the total debt of the Central Government had, by October of 2003, a balance of $5,655 million. A 68% of this amount has to do with the external debt, and the remaining 32% are financed with the internal debt. It is important to say that this debt represents approximately a 37% of the estimated GNP for 2003. In other words, almost two fifths of the GNP are destined to pay for the debts that the State presently has. In the last years, the government has managed to turn the short-term debt into a long-term debt, looking for a larger margin of time to achieve an economic reactivation capable to turn the country’s debt into a sustainable element.

In this context, in order to create a sustainable economic reactivation it is necessary that the government plays a key role. However, the structuring of the general budget of the nation does not fully contemplate the importance of those areas that promote the economic development. By the end of the third trimester of the year, the State had spent almost two thirds of the budget ($1,812.9 million). Only $177.5 million, which represented 9.8% of the budget, was dedicated to the economic administration of the country. According to the law proposal for the national budget of 2004, it seems that the tendency in the different administrative areas is the long-term. An amount of $283.7 million has been destined to promote the country’s economic development in 2004. This amount only represents 10.2% of the State’s total budget. As it can be noticed, the present government is contracting a considerable debt, and it is not generating the necessary conditions to reactivate the economy and face the future obligations of the State.

 

The budget in the administrative areas by the third trimester of 2003

(In millions of dollars)

Source: www.mh.gob.sv

The monetary and the financial sector
The dollarization process of the Salvadoran economy became more intense in 2003. By the end of the year 2002, the amount of circulating colones added up to a total of $61.2 million. By October of 2003, the amount of circulating colones in the economy was equivalent to $40.6 million. As it can be noticed, during the first nine months of the year, an amount equivalent to $20.6 million has been subtracted. In other words, the amount of circulating colones has been reduced by 33.7% between December of 2002 and October of 2003.

In the banking system’s market, the pondered average interest rates show the following characteristics:
- For the short-term loans (less than a year), the active interest rate tends to be low.
- In the early 2003, the banks charged an approximate rate of 6.7%.
- By October and after the slight reductions made during the former months, the rate can be placed in a 6.51%. It is important to notice that by August, such rate suddenly increased from 6.56% (July) to 6.94%. Later on, the same rate had a steep fall.
- For the long-term loans (for more than one year) the interest rate reached its peek in the month of May with a value of 8.38%, and in October it became 7.57%.

The behavior of the country’s credit line is following the variations of the active interest rates. By the end of September of 2003, the total balance of the granted credits practically grew by 9.0%, in relation to September of 2002. This is an interest feature, since after the implementation of the dollarization (in January of 2001) the market of credits did not immediately improve itself, as it was expected. It was only by the end of 2002 that the credit demand of the economic agents was intensified, generating positive growth rates. The banks with the highest amount of loans are the Banco Agricola, Banco Cuscatlan, and the Banco Salvadoreño. The credits granted by those banks represent 67.9% of the credits granted by the national banking system.

By October of 2003, the total value of the credits granted by the national banking system added up to $3,851.5 million. The economic sectors that to that date had received the highest level of credit were the following: the commercial area (27%), the manufacturing industry (19.3%), and the sector of services (10.8%). The mining sector and the quarries had the lowest level of credit with only 0.03% from the total number of credits granted by the banking system.

ABANSA stated that the tendency to make overdue payments had been considerably reduced during 2003. By September, out of the total number of granted credits, only 3.1% were overdue. This tendency is important, especially if one takes into consideration that the reduction of the number of overdue payments is fundamental in a economy where the economic transactions are made with dollars. This reduction is important because right before the dollarization of the economy a 7.33% of the credits of the banking system were connected with overdue payments. This was a strong observation that the financial analysts had made in the past, in case that the government had plans to dollarize the economy. In the present, the overdue payment of the credits connected with the leading banks of the country represent more than half of the existing overdue payment of credits in the banking system at a national level.

The total balance of the term deposits did not follow a regular pattern during the year. From January to June, the deposits (in the long, the medium, and the small term) increased by 9.0%. Between June and October, the total number of these deposits added up to $2,985 million, an amount much smaller than the one that closed the year 2002 ($3,004.2 million).

Ever since the beginning of the second semester of the year, some of the international rating companies put their eyes in El Salvador. This is the result of two things: the situation of the country’s public finances and the pre-electoral environment. Both of these aspects have been combined to analyze the country’s level of risk, and the rating is not good enough to attract the foreign investment. However, Fitch Ratings of Central America considers that this kind of classification is fundamentally due to the country’s pre-electoral environment.


Perspectives
For the next year, the economy is expected to improve. The government stated that in 2004 the GNP is expected to grow between 2.5% and 3.5%. The improvement of the economy is fundamentally based on the hopes that the present government has to ratify a Free Trade Agreement between the Central American region and the United States. However, for many analysts, an improved economy will begin to show after the first semester of the year, since it is necessary that both Legislative Assembly of El Salvador and the Congress of the United States ratify the treaty in the first months of 2004.

The number of Salvadoran exportations are expected to increase with the agreement, especially the exportations of non-traditional products, which seem relatively more dynamic than the traditional products. It is expected that, once the trade agreement is ratified, the Central American products can be well accepted in the American market.

As for the monetary sector, the remittances are expected to represent in 2004 a 14.1% of the GNP, that is, an amount higher than $2,000 million. These calculations are based on the fact that during the last years the amount of dollars that comes to the country is getting higher and higher. It is necessary to realize that those resources are extremely important for the national economy, since they provide the country with a certain volume of money for the national and the international transactions. A sudden reduction of the amount of money that comes to the country could create a number of serious problems connected with the flow of cash in the short term, and certain national financial problems.

Inflation is also expected to increase by 2% or 3% during 2004. This is connected with the flow of remittances. It is necessary to remember that with the Monetary Integration Law the BCR does not control the total amount of currency of the country. The fluctuation of the prices is somehow attached to the development of the monetary policy of the Federal Reserve of the United States, that is why the variation tendency of the prices could be similar to the behavior that it has in that part of North America. The prices of some products might be the same in both markets if there is a commercial openness between Central America and the United States.

For 2004, the Internal Revenue Service expects to close the year with a fiscal deficit of 1.1% of the GNP. This is a very ambitious goal, especially if it is considered that this calculation does not contemplate the necessary changes that have to take place in the taxation system of the country, and it does not reflect about the expenses made to pay for the pensions either. In this context, many social sectors have asked the government to maintain a strict fiscal discipline, which, in order to be effective, should generate a number of substantial changes in the taxation system and the policy of expenses.

As for the fiscal matters, the external debt is expected to reach a 34.8% of the GNP in 2004. The debt represents an alarming figure and tends to get closer to parameters that the international institutions use to detect economic dangers. That is why several analysts agree that it is necessary to make some changes, so we do not have to sacrifice the financial stability that the country presents to the international community.

For the first semester of 2004, the presidential elections are expected to create uncertainties for the economic agents. The economic variables are also expected to behave in a similar fashion, according to the tendencies observed during 2003, especially the ones of the last semester.

The society