Duarte resists US pressure to devalue Salvador's currency
San Salvador — President Jos'e Napole'on Duarte, concerned about further erosion of his political support, is resisting pressure from the United States Agency for International Development to devalue the Salvadorean currency, according to government officials and members of the ruling Christian Democratic Party. Senior AID officials admit that they have counseled President Duarte to devalue the currency, the colon, but deny that they are pressuring him.
A top AID official here says that the agency is not hostile to the Duarte government and that it is here to give its opinion to the government. ``We're telling them you have problems with the economy. That you have to look at that. That you can't ignore it,'' says the AID official. ``In the last analysis it is going to be his [Duarte's] call.''
Still, AID is influential in El Salvador. AID disburses the bulk of the more than $300 million in US economic aid that goes to the country. The aid accounts for one-third of all dollars going into the nation's Central Reserve Bank.
The Agency for International Development, which is part of the US State Department, is known for its work in development throughout the world. But in El Salvador one of its main functions is to deliver economic support funds that help keep the Salvadorean economy afloat. Most analysts agree that AID plays a major role in determining El Salvador's economic policy.
In backing a devaluation, AID economists say the Salvadorean economy has the following problems:
A large fiscal deficit.
High rates of inflation, by Salvadorean standards. AID says the rate is at 36 percent a year, more than double the 1984 rate.
Huge monetary expansion since late 1984.
No growth in exports.
The remedy to these problems, according to AID, is another currency devaluation. This would allow El Salvador's exports to become more competitive on the world market. Increased exports, says AID, would provide the Duarte government with greater tax revenues and reduce the fiscal deficit. AID also says a devalued colon would make Salvadorean labor cheaper and would make the country more attractive to investors.
But Duarte's concern about the political costs of devaluation appear to have outweighed AID's economic arguments.
``The President doesn't even want to talk about it,'' one business leader says. ``He burned himself with the last package [of economic austerity measures put through in January] and his popularity went down. He regrets it and is still very bitter about it.''
The austerity plan consisted of a currency devaluation and an increase in taxes aimed at reducing the large government deficit and slowing inflation, which jumped almost 20 percent in a year.
AID unsuccessfully pushed devaluation from October 1983 until mid-1985. Then Duarte carried out a partial devaluation by moving the exchange rate for many exports and imports onto the parallel market, which was higher than the official rate of exchange.
In November 1985, pressures increased for a complete ``unification of exchange rates,'' and Duarte announced a complete devaluation. Prices of certain imported goods shot up, increasing discontent with the government and spurring the formation of a broad-based labor coalition that opposed the government's economic policies.
After the experience with the January devaluation, an influential Christian Democrat says, ``There's no way [Duarte] will be convinced [to devalue]. He's learned from getting hit the first time.''
Members of Duarte's ruling party say that another devaluation now would be political suicide.
``With a new devaluation, and all the publicity about it that the left and the right would create, we would be hurt badly,'' says a member of the party's executive committee. ``We could lose the [1988 assembly and 1989 presidential] elections.''
Another top Christian Democrat says a devaluation would aid the left-wing guerrillas. ``The large fiscal deficit has to be corrected. But correct the deficit and lose the war?'' he asks. ``It's not just an economy, but a political economy. AID talks about all the variables, but forgets the most important one -- the war.''
For the moment, devaluation appears to be off. But informed sources say that this was just AID's first low-key try. They say that there will be increased pressure to devalue at the end of the year when the country will have its year-end cash-flow problem. By then, the government may be inclined to devalue as it did last year.