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U.S. currency expert Hanke says Ecuador plan a cinch

By Stephen Brown

BUENOS AIRES, Jan 12 (Reuters) - U.S. currency expert Prof. Steve Hanke, fresh from arranging Montenegro's currency switch to the German mark, said Tuesday it would be a ``no brainer'' for Ecuador to adopt the dollar as a ``parallel currency.''

``Technically there are no problems whatsoever,'' Hanke, a professor of applied economics at Johns Hopkins University in Baltimore and a famous advocate of currency board systems, told Reuters in a telephone interview.

Ecuador's President Jamil Mahuad, facing calls to quit over economic disarray and a tumbling currency, took financial markets by surprise Sunday when he said his poor Andean country would ditch the sucre and adopt the dollar.

Hanke, who travelled to Ecuador in 1995 to advise on its currency and spoke Tuesday to its Washington embassy, outlined a plan for a ``parallel or competitive currency system.''

Argentina has used such a system since 1991 to wipe out the hyperinflation of the 1980s and assure economic stability. Hong Kong is another famous case, and Hanke introduced a mark-linked board in Bulgaria in 1997 which he said ``works like a charm.''

Hanke is something of an evangelist of currency boards, tying cash in circulation to reserves, imposing a fiscal straitjacket and depriving central banks of independent monetary policy.

His critics say he does not always take into account the situation on the ground of countries where he advocates such systems. He urged Indonesia to introduce a board in 1998 as its currency crashed. The U.S. Treasury and IMF both said it could not work until broader economic conditions were ripe.

But Hanke said that if it was viable in the Balkan state of Montenegro, where the budget deficit was over 20 percent of the economy, it was easily viable for the poor Andean nation, whose 1999 deficit was about 4.0 percent of gross domestic product.

Ecuador, a nation of 12.4 million people with the highest inflation rate in Latin America and worrying unemployment and poverty levels, saw the sucre tumble 67 percent against the dollar in 1999 and 17 percent more in the first week of 2000.

The government said Tuesday it would dollarize by using part of its $1.251 billion in reserves to replace about $423 million worth of sucres in circulation, fixing the sucre exchange rate at 25,000 to the dollar.

Another $700 million in sucre checking and savings accounts in banks would automatically be converted to dollars.

Hanke advised keeping the sucre legal but freezing the sucre supply and legislating ``so that the Central Bank did not have the authority to issue any more sucre liabilities.''

``Then you would legalize the use of the dollar and let the sucre and the dollar float freely against each other without interference, so you would have a parallel or competitive currency system,'' said Hanke.

He did the same in the Yugoslav state of Montenegro last year, advising President Milo Djukanovic on how to establish a monetary system to head off the threat of hyperinflation.

He said Montenegro achieved this ``without any massive external support, any IMF advice or anything like that.''

So far, Ecuador has received pledges of moral support alone from Washington and the International Monetary Fund for what the State Department called a ``bold'' currency plan.

Ecuador had been close to reaching a deal with the IMF for a $250 million credit line, but Mahuad was forced into drastic action by strikes and protests calling for his resignation. He declared a state of emergency in Ecuador last week.

Economists say the big question mark over Mahuad's scheme is whether his minority government can get political support to push through legislation needed for such radical plans.

An opinion poll out Monday in Ecuador suggested that while unions and indigenous groups plan to push ahead with protests starting Wednesday, 59 percent of people back dollarization.

After sacking his Central Bank chief Pablo Better, Mahuad also got the support of the remaining board members.

``As I am reading the tea leaves today, it looks like they probably have the votes to do it,'' said Hanke. ``I had great doubts whether the political feasibility would be there, but it's looking to me like it's clearly there now.''

Hanke said the currency boards he advocates now exist in 15 countries and he forecast that most if not all of Latin America would introduce currency boards or dollarize in a few years.

He said Central American countries were turning onto the idea, Argentina has already in place its Convertibility system and others would inevitably follow suit.

``You saw how this Convertibility system in Argentina has focused their attention on the budget,'' he said. ``If you didn't have that, these guys would be running all over the place down there. God only knows what they would be doing.''