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FOCUS-Ecuador adopts dollar in hopes to end crisis

By Gustavo Oviedo

QUITO, Ecuador, Feb 29 (Reuters) - Ecuador's Congress approved on Tuesday a bill to adopt the U.S. dollar as its main currency as part of a controversial government plan to stabilize and spur an economy mired in its worst crisis in five decades.

``The law has been approved,'' Congress Speaker Juan Jose Pons said after the dollarization bill's 85 articles and 31 other clauses were approved on Tuesday night.

The other clauses were part of an ``Economic Transformation Law'' package which included bills creating greater job flexibility and opening up the oil, electricity and telecommunications sectors to more foreign investment.

Ecuador would not be the first Latin American nation to adopt the greenback as its currency. Panama did so almost a century ago and Argentina passed a convertibility law in 1991 that guarantees one dollar for every peso in circulation.

Now the legislation returns to President Gustavo Noboa who will sign it into law. Dollarization was first proposed on Jan. 9 by President Jamil Mahuad, who was ousted in a bloodless coup. The plan was pursued by his vice president, Noboa, after he succeeded to the presidency on Jan. 22.

``We are optimistic that the passing of this legislation could lead to some kind of agreement with the multi-lateral community and that could lead to additional talks with bond holders about restructuring the debt,'' said Whitney Kane, an emerging markets analyst at Morgan Stanley Dean Witter.

Ecuador declared a moratorium on foreign debt payments last year as total public foreign debt reached more than $13 billion, equal to its gross domestic product. The economy contracted 7.5 percent last year and the national currency, the sucre, lost two-thirds of its value.

``The legislation is significant in that it shows that the president may be able to create a constructive working environment with the (opposition) Social Christian Party going forward,'' Kane added.

Inflation hit 90.8 percent in the 12 months to the end of February, the government said on Tuesday.

U.S. government officials on Monday pledged to help Ecuador obtain credit after the South American nation adopts the dollar.

``We have every intention to support this plan through international financial organizations,'' Assistant U.S. Treasury Secretary for International Affairs Edwin Truman told reporters after meeting President Gustavo Noboa Monday to discuss the bill to dollarize Ecuador's economy.

Truman added that Washington was ``very optimistic'' about Quito's economic reforms, which it says are crucial if dollarization is to work.

The moves to cut the deficit, reduce public spending would also curry favor with the International Monetary Fund, with which Ecuador is in prolonged talks to secure a credit facility, he said on Monday.

The World Bank on Friday forecast economic growth to reach 1 percent in the Andean nation after last year's steep recession. The country is the size of Italy with 12.4 million citizens.

Ecuador had $1.26 billion in foreign reserves in its Central Bank as of last Friday. The oil, banana, shrimp and flower exporter posted a trade surplus of $1.57 billion last year versus a 1998 trade deficit of $995 million.