Mahuad Dollarizes Ecuador to Fight Crisis

By Gustavo Oviedo

QUITO, Ecuador (Reuters) - Ecuadorean President Jamil Mahuad, besieged by protests to force his resignation, announced on Sunday the dollarization of the economy and that all ministers had submitted their resignations to allow him greater freedom of maneuver.

``After a two-month analysis I have reached the conclusion that the dollarization system...is the way out for us and whereby we must proceed,'' he told the nation in a speech broadcast on television.

In the same broadcast, he said the cabinet ``has submitted its collective resignation''.

Mahuad said the government will apply an exchange rate of 25,000 sucres per dollar.

He said he had congressional backing for the dollarization, but did not say when the measure would take effect.

Mahuad did not elaborate on the dollarization but the measure basically entails the conversion of sucre-denominated salaries, financial and trade deals into dollars.

The Central Bank ruled out on Wednesday the possibility of dollarizing the economy of this poor Andean nation of 12.4 million people with unemployment running at 17 percent.

However, Mahuad said: ``Ecuador does not need shy measures, but to go to the core of the problems and propose transforming solutions'' and instructed the Central Bank to implement his plan.

The International Monetary Fund No. 2 official Stanley Fischer said Friday in Washington that talks with Ecuador on a 12-month loan agreement were making progress, but recommended: ''It will be important to try to stabilize the currency.''

The embattled Ecuadorean currency ended Friday at 25,100 per dollar, 17 percent lower in the first working week of 2000. It had nose-dived 67 percent through a disastrous 1999.

Mahuad's center-right party Popular Democracy is the largest force in congress but it does not have the majority.

But his government held intense contacts with opposition forces through the day seeking backing for the dollarization.

The economy is believed to have shrunk 7.3 percent last year, while 1999 inflation was 60.7 percent, the highest in Latin America for the second year in a row. The Central Bank on Saturday revised its 2000 inflation target to 65 percent from the 50 percent estimated previously.

Mahuad, a former mayor of Quito, has been struggling to keep the economy afloat and stop the currency from sinking but over recent days has been facing strong pressure from unions and opposition to quit.

Workers from state oil firm Petroecuador have announced an indefinite strike from Jan. 17, giving Mahuad another headache on top of a trade union day of protest on Thursday, another due Jan. 12, and rallies by indigenous groups on Jan. 15.

Economic woes were compounded by destructive El Nino storms in 1998 and weak prices for oil and bananas, which along with shrimp and flowers are among the country's most important exports.