Official dollarization--replacing domestically issued currency with the U.S. dollar as a country's official currency--has been widely discussed in Latin America since January 1999. At that time Carlos Menem, who was then Argentina's president, announced that his government was considering official dollarization, to insulate it from selling pressure on its currency following Brazil's devaluation shortly before.
Like Argentina, Ecuador experienced selling pressure on its currency, the sucre, after Brazil devalued. Whereas Argentina did not devalue, Ecuador did on March 2, 1999. The same day, eight troubled Ecuadorean banks closed. On March 11, the government froze deposits in the entire banking system. During the rest of 1999, the sucre depreciated more or less continuously against the dollar, from about 7,000 per dollar at the start of the year to about 21,000 per dollar at the end of the year. The economy went into a deep recession, shrinking an estimated 7 percent. Strikes and protests against the government became frequent. All this created interest in dollarization as a way of reviving the economy. Interest was especially strong in Guayaquil, which is Ecuador's largest city, main port, and financial center.
As the recession has worsened in Ecuador, its trade with the United States has significantly decreased. U.S. imports from Ecuador increased slightly in 1999 over 1998. However, American exports to Ecuador have dropped precipitously. Through November 1999, U.S. exports to Ecuador are 41.7 percent lower than the same eleven month period of 1998.
During the first week of January 2000 the sucre depreciated from about 21,000 per dollar to as much as 29,000 per dollar (offered rate) before recovering to 24,000-25,000 per dollar. On January 9, President Jamil Mahuad proposed official dollarization. The general idea of dollarization appeared popular, according to some opinion polls, but the exchange rate of 25,000 sucres per dollar that President Mahuad chose angered many people, such as those who had deposited sucres in banks when the exchange rate was 6,000 per dollar. A march paralyzed the capital of Quito on January 21 and protestors took over the Ecuadorean Congress building, without resistance from soldiers guarding the building. President Mahuad fled the presidential palace. An interim three-man junta lasted just one day before giving way to a new government headed by former vice-president Gustavo Noboa. President Noboa, who is from Guayaquil, has indicated that he supports dollarization, and his newly appointed finance minister, Jorge Guzmán, is known as an advocate of dollarization.
As of late January 2000 it is still unclear whether and how fast Ecuador will become officially dollarized. A package of laws linking dollarization with other reforms will be delivered to the Ecuadorean Congress soon. President Noboa's party has a large number of seats but not a majority in the Congress.
Ecuador is already heavily dollarized unofficially: more than 80 percent of financial assets are in dollars. If Ecuador becomes officially dollarized it will be the largest independent country to do so. Its population is 12.6 million and its GDP in 1997, before the severe depreciation of the sucre, was $18.8 billion.
To address the issue of official dollarization, Senator Connie Mack (R-FL) has introduced the International Monetary Stability Act. The Act would allow the Secretary of the Treasury to certify officially dollarized countries as eligible to receive rebates of seigniorage, or currency profit, from the United States. Seigniorage is revenue generated by issuing currency. For example, although a $1 bill costs only 3 cents to print, the U.S. government can use it to buy $1 worth of goods. Without rebates of seigniorage, countries that officially dollarize would lose this revenue, for they would no longer issue their own currency.
Ecuadorean officials have indicated that the prospect of a rebate of seigniorage from the United States under the International Monetary Stability Act has favorably influenced their consideration of dollarization.
Macroeconomic Indicators for Ecuador
| 1998 | 1999 | |||||||
| Real GDP growth (% per year) * | 1.5 | -7 | ||||||
| Inflation (%) | 36.1 | 60.7 | ||||||
| Unemployment Rate (%)* | 11.5 | 14 | ||||||
| Net foreign reserves (millions of dollars) | 1,698 | 1,276 | ||||||
| Monetary base (millions of sucres) | 5,689,447 | 13,410,226 | ||||||
| Interbank interest rate (%) | 49.51 | 152.43 | ||||||
| Exchange rate (sucres per dollar) | 6,825 | 19,750 | ||||||
| Exports (millions of dollars) | 1,687 | 842 (thru 11/99) | ||||||
| Imports (millions of dollars) | 1,755 | 1,662 (thru 11/99) | ||||||
| Goverment budget balance (% of GDP) | -4 | -5.5 | ||||||
| Sources: U.S. Department of State, FY 2000 Country
Commercial Guide: Ecuador; International Monetary Fund, International
Financial Statistics, December 1999; U.S. Department of Commerce, International
Trade Commission Dataweb; Banco Central del Ecuador Web site.
Note: * U.S. Embassy projections based on Central Bank and other public sources. |
||||||||
This note was prepared by Kurt Schuler, Senior Economist to the
Chairman, and Joseph Pasetti, Staff Assistant. It expresses their views
only. For information, contact Kurt Schuler at (202) 224-0379.
