Ecuador Defends Dollar Plan But Doubts Remain

Reuters Photo

By Gustavo Oviedo

QUITO, Ecuador (Reuters) - Ecuadorean President Jamil Mahuad's government defended Monday a surprise decision to adopt the U.S. dollar as its currency, saying it would give its out-of-control economy the anchor it sorely needs.

``This is going to return confidence to the country, stop speculation over the exchange rate and stop the rapid increase in prices,'' Finance Minister Alfredo Arizaga said at a press conference.

But after months of ongoing crisis and repeated promises to bring the currency to heel, analysts and investors remained skeptical of whether ``dollarization'' will revive Ecuador's economy and if it is even possible to implement.

Dollarization ``is not a cure for countries in crisis,'' said analyst Ernesto Martinez-Alas, an analyst with Moody's Investors Service. ``It is not doable without reserves.''

Facing chronic protests and increasing pressure to resign, Mahuad said Sunday the South American country of 12.4 million people would abandon its battered sucre currency for the dollar, making the changeover at 25,000 sucres to the dollar.

Officials said Mahuad spent Monday ironing out the bill which he will send to Congress this week.

The move toward a dollar economy met a mixed reception as markets scrambled to understand how the new system would work with only piecemeal information from the government.

``The economy could recover enough to begin that long-awaited economic reactivation,'' said Antonio Acosta, director of Banco del Pichincha.

Ecuador's sucre and bonds both firmed slightly Monday in international markets.

The already blighted economy took a turn for the worse in 1998 after El Nino storms battered its Pacific coast, leaving billions of dollars in damage to crops and infrastructure. Weak world prices for oil -- its biggest source of income -- left the country in dire straits and helped usher its historic default last year on its Brady and Eurobond debt.

The country closed off 1999 with a debt load almost equal to its economic output, an expected economic contraction of 7.3 percent and inflation of 60.7 percent -- the worst in Latin America the second year running.

Minister of Production Juan Falconi said inflation would decrease to 6-7 percent in 2000 after adopting the dollar -- in stark contrast to current forecasts of 65 percent for 2000.

``The Central Bank will stop issuing (the local currency) and there will be no more devaluation, and inflation will decrease from the tremendous levels we've had in the last years to international levels,'' he told reporters.

Dollarization Is ``Best Alternative''

Finance Minister Arizaga said dollarization was the ``best alternative'' to the free-floating exchange rate which allowed the sucre to depreciate 17 percent in the first week of 2000, after tumbling 67 percent in 1999.

``There will be a progressive process in which the sucre will be pulled out of circulation and dollars will become the currency,'' he explained.

Other Latin American countries have adopted the dollar or pegged their currency to it before with mixed results.

For all practical purposes Panama is run on dollars and Argentina pegged its peso one-to-one with the U.S. dollar in 1991 through a system called ``convertibility,'' which backs every peso in circulation with a dollar in reserves.

The system ended years of hyperinflation, but has likewise been blamed for high unemployment and exporting difficulties.

Ecuador's Central Bank said it had $900 million in liquid reserves, more than enough to cover the $400 million worth of sucres in circulation.

Arizaga said a dollar economy would also allow Ecuador to jettison a long-awaited deal with the International Monetary Fund to give the cash-hungry country access to $250 million.

In turn, the IMF said it was ready to provide Ecuador with technical help in its changeover to the more stable greenback and said a mission would leave for Quito this week.

Yet local business leaders wondered whether the plan was also a way for Mahuad to bolster his nosediving popularity.

``The move's orientation is correct, but we are surprised by the way it has been quickly thrown together. What Mahuad is looking for here is to remain in power,'' said Joaquin Zeballos, president of the Chamber of Commerce of Guayaquil.

A recent poll showed 92 percent of the population was unhappy with the 50-year-old, Harvard-educated lawyer's 17-months in office, and 53 percent believe he should quit before his term ends in 2003.

Presidential spokesman Carlos Larreategui denied the move was a last grasp for power. ``It would be wrong to see this important move to save the economy and the future of the country as a political lifejacket,'' he said.

Mahuad, a former mayor of Quito, also announced Sunday that his cabinet had submitted their resignations to allow him greater freedom to maneuver.

Mahuad did not say when the country would actually make the switch to dollars, but said he has ``sufficient support'' in Congress to push the measure through.

Mahuad declared a state of emergency Thursday to deal with protests last week and more expected marches and strikes this week. The decree gives him special powers to deploy police and troops to control the crowds.

Earlier Stories

• Protest Pressure Piles Up on Ecuador's Mahuad (January 7)
• Ecuadoreans Demand Unpopular President Quit (January 6)
• Ecuador Declares Emergency With Economy in Crisis (January 6)