- On January 1, 2001, the US dollar became legal tender in El Salvador
- The immediate impact was to double the cost of goods virtually overnight
- A loss of currency control has made it more difficult for coffee producers to compete on the international market
LITTLE SURPRISE was attached to the dollarisation of El Salvador’s economy at the turn of the 21st century.
Even at its inception more than 100 years earlier, the value of the colón – El Salvador’s official currency between 1892 and 2001 – was pegged to the US dollar.
But what policymakers might not have realised at the time was the profound and far-reaching effects that full dollarisation would have, particularly for the country’s coffee producers.
Despite stabilising El Salvador’s currency in the short-term, it made everything more expensive practically overnight, from farming equipment to agrochemicals. And, today, many claim that they have lost their ability to compete with other coffee origins as a result.
“We have had this issue with buyers in some parts of the world,” explains Rafael Silva, the owner of Sicafe, a specialty coffee producer, roaster, and exporter based in El Salvador, “where for instance, their currency suffers and as a result, they try to push us on price, because we become expensive relative to what is happening to their own prices.”
This is because a weaker currency allows a country to sell exports more cheaply, while incentivising consumption of locally produced goods, as imports become more expensive. Both of these outcomes often lead to higher employment, faster GDP growth, and stronger economic recovery.
The fallout for coffee producers in a dollarised economy is that they are often less able to compete on the export market, as neighbouring countries or other coffee producing nations can adjust their exchange rates to be more competitive in times of oversupply or when the C market bottoms out – which is precisely what happened in the early 2000s, and again in 2019/2020.
But Rafael tells me it was the initial adjustment phase which proved most difficult. “The big challenge in terms of cost came in the early days of adopting the dollar,” he says. “Things that used to cost 1 colón, suddenly cost $1 instead – effectively double.”
Why the dollar?
El Salvador’s decision to dollarise is an interesting case. Unlike other countries that have dollarised, El Salvador wasn’t suffering any severe economic woes, such as hyperinflation, at the time.
Rather, it was coffee, or more specifically, its trade, which was one of the main drivers.
The US already knew that tying the success of economies in Central and South America to its own economic fortunes would give them a strong trading position in the region, as they sought to control more and more of the supply of valuable goods leaving the western hemisphere.
Coffee was one such product from this region that was already highly sought after in the US and Europe.
The trade factor would remain a critical reason for El Salvador’s later adoption of the dollar. Throughout the 19th century, up until today, the US remains El Salvador’s largest trading partner, importing upwards of 40% of all of the coffee grown in El Salvador.
This economic dynamic, the power struggles that followed colonialism, a devastating civil war, and constant and relentless interference from the US government produced a climate of vanishingly rare moments of stability or predictable linear growth.
El Salvador made the first move to unofficially dollarise soon after the end of the civil war in 1992, tightening ties with the US economy in order to secure foreign investment and drive growth, as stable inflation, established export markets, and the dawn of peace time made it a safer bet. On January 1, 2001, the dollar became legal tender.
‘Not ones to complain’
Countries that dollarise have essentially accepted that they will lose economic autonomy in monetary policy.
They outsource their monetary decision making to the US federal reserve, meaning that they are being towed along by global market forces and their effect on the US. High inflation in the US equals high inflation in El Salvador, for example.
Aside from this fact, however, one of the main problems with changing currency overnight is adjusting the per unit value of everything in the economy to match the new currency.
For the buyer and the seller to both feel comfortable that neither was going to be ripped off, there must be a clear understanding of the value of the money and the value of the asset or service.
This is very important among rural and farming communities. Coffee producers usually rely on one harvest each year. This means that an entire year’s worth of income is earned in a few months, and households must plan carefully how they intend to spend that money over the course of the period until the next harvest.
You can easily imagine how difficult it must be if suddenly the currency that you own and must rely on for the upcoming months is no longer valid, or has changed dramatically in value.
That said, now that the initial storm has settled and the coffee industry has had time to adapt, Rafael says things are not as bad as some make out.
“Not one to complain, the people of El Salvador have adapted and are getting on with it,” he says. “The dollar is a lot more stable than the Salvadoran colón ever was. And because of this, we have a lot more stable economy.”
While El Salvador continues to try to find ways to provide opportunity to its people, maintain peace, and ensure economic stability, its story is another one for the coffee world to consider carefully.
It is incumbent upon the coffee community to take these histories and their economic consequences into consideration when working with producers in these countries. The coffee depends on it.
Producer & Roaster Forum (PRF) is the world’s largest coffee farmer-focused event in the world.
It connects producers with coffee industry professionals from around the world across two days of talks, workshops, cuppings, and networking opportunities.
Next year’s instalment will be held in El Salvador between March 16 and 17.