SAN SALVADOR — The tiny nation of El Salvador started the new year with a new official currency: the U.S. dollar--the same dollar that migrants to California and elsewhere have been sending home to families at a rate of more than $1 billion a year.
But by Thursday, after four days of chaos, Salvadorans already were nostalgic for their old money.
Counterfeit dollars turned up in ATMs. Lines backed up at supermarkets as cashiers struggled with hand calculators to convert currencies. Cash registers had no drawers for dollars.
It's all for a worthy cause, the government insists: It will strengthen the economy by lowering interest rates and attracting foreign investment. Presuming the conversion survives court challenges and the initial frustrations of its citizens, El Salvador becomes the third Latin American nation--after Ecuador and Panama--to officially adopt the greenback.
Mexico and Argentina have flirted with the idea amid high-minded talk of a hemispheric currency, much like Europe's new euro. Cuba allows U.S. bills to circulate, and Argentina's currency is pegged to the dollar.
Unlike Ecuador, Argentina and Cuba, which embraced the dollar as their economies were plunging into crisis, El Salvador's economy is simply stodgy, growing too slowly at less than 2% a year to keep up with a young population's demand for jobs.
For most of the last decade, dollars sent home by migrant workers have paved the streets and built the soccer fields in El Salvador's poor rural communities, becoming a sort of informal, parallel currency.
Supporters predict that officially introducing the dollar as legal tender in one of Latin America's most stable economies, which has maintained a fixed exchange rate for six years, will reignite growth.
But detractors argue that El Salvador is being made into an economic experiment without adequate preparation or study. That is certainly borne out by the early evidence.
Legally, two currencies circulate, according to a bill passed by the National Assembly in November over loud opposition. The new law requires that all banks freely exchange the national currency--the colon, namesake of Cristobal Colon, also known as Christopher Columbus--for dollars at the rate of 8.75 to 1, and that all financial transactions must be in foreign currencies.
However, by Tuesday, banks were refusing to give customers colons, and all prices in stores were being quoted in dollars.
At the same time, "dollarization" has made it more difficult for families that depend on money sent home by workers in the United States to cash their checks.
The foreign exchange houses that used to cash them have been put out of business by the new law, which prohibits the commissions they charged. They made about half a penny on each dollar changed, a tidy sum considering that workers living abroad sent home $1.4 billion in the first 10 months of 2000.
All Salvadorans, meanwhile, are suffering the effects of "rounding off," which is commonly understood to mean "rounding up."
"Beggars will insist on a dollar instead of 5 colones, a net increase of 75%; bus fares will go from 2 colones to $0.25, a net increase of 9%," according to one wisecrack making the rounds.
Although dollarization has been discussed here for six years, the policy was implemented so rapidly that businesses and consumers were caught off guard.
President Francisco Flores, whose Nationalist Republican Alliance includes prominent members of the business and financial communities, told a small group of journalists that he had decided to act quickly without consulting bankers or industrialists.
"A discussion of the project would have caused tremendous uncertainty, particularly the danger of devaluation," he said. "Interest rates would have soared, and there would have been dollar flight."
Adopting the dollar will introduce international competition into the financial sector, forcing Salvadoran banks to reduce their margins (the difference in the interest rate they pay depositors and the rate they charge borrowers), he predicted.
Currently, Salvadoran interest rates on loans range from 16% to 20%, giving banks margins of more than 5%, according to government economic reports.
"At the end of the day, they have a highly profitable financial sector with a stagnant economy, and that is not viable," Flores said.
Democratizing access to dollars will cut those margins, predicted Rafael Barraza, director of the Central Reserve Bank. After all, he reasoned, banks already charge interest rates as many as 6 percentage points lower on dollar loans than they do on colon borrowing.
The problem is that up to now, dollar loans have been available to only the largest corporations and wealthiest customers. As of Monday, everyone has access to dollar loans.
Barraza also hopes that more Salvadorans will have access to international lenders. Foreign banks have been reluctant to lend in El Salvador because of concerns about the stability of the currency, he said. Now, that barrier has been removed.
But in the long term, economists here and elsewhere question whether the expected benefits of faster economic growth balance the potential risks to an economy that has kept annual inflation in single digits for the last four years.
"Dollarization has caused plenty of confusion and is not going to immediately fix the country's long-term economic problems," said Javier Ibisate, dean of the economics school at the respected University of Central America in San Salvador.