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Sent: Sunday, March 19, 2000 6:13 PM
Subject: MLL: Ecuador adopts U.S. dollar as national currency
Miami Herald, March 10th
Ecuador adopts U.S. dollar as national currency
BY JANE BUSSEY
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Launching a controversial experiment that will be closely watched across
Latin America, Ecuador's President Gustavo Noboa signed a bill into law
Thursday making the U.S. dollar his nation's currency.
The move triggered immediate support from the powerful International Monetary
Fund and other international agencies, which announced $2 billion in loans, a
financial lifeline to help the South American country foot the bill for
switching to dollars and for rebuilding its shattered economy.
Under the dollarization plan, the country's currency, the sucre, will be
phased out and replaced by dollars over a six-month period, starting April 1.
The central bank will no longer print sucres, although it will mint sucre
coins. Loans, deposits, government bonds and all other financial instruments
will be converted to dollars, a massive undertaking.
The move to the dollar has already cost Jamil Mahuad the presidency and has
the support of less than one Ecuadorean in four, according to local opinion
polls. Labor unions and indigenous groups announced a series of strikes and
protests, including a nationwide shutdown scheduled for March 21. Protests in
January triggered a short-lived military coup that forced Mahuad from office
and left the presidency in the hands of Noboa.
Ecuador's poor have seen their living standard slip drastically because of
inflation and devaluation and expect a further deterioration under this
dollarization package, which also includes a series of austerity measures and
plans for privatization of state-run companies.
Despite the opposition, Ecuadorean officials see dollarization as the only
way to tame runaway inflation, reverse the economy's downward spiral and
restore confidence to the nation. Inflation could hit 90 percent this year
and the economy shrank by 7.5 percent last year, the worst economic
performance in the hemisphere.
``Dollarization is like trying to lose weight by wiring your jaw shut,''
conceded Ramiro Crespo, president of Analytica Securities, a Quito
broker-dealer. ``It is a desperate measure. But there is a greater sense of
tranquillity now because before, under Mahuad, with the constant
devaluations, there was too much uncertainty.''
Although the Federal Reserve and the U.S. Treasury have repeatedly warned
countries that they dollarize at their own risk, a series of American
officials, including Peter Romero, the acting assistant secretary of state
for Western Hemispheric Affairs, have traveled to Quito in recent weeks,
visits that Ecuadoreans interpreted as a show of support from Washington.
The Treasury Department had no comment on the dollarization law, but issued a
statement saying it ``welcomed'' the IMF announcement that it would be
lending Ecuador $300 million over the next three years, in part to implement
the dollarization progrma. The World Bank will lend Ecuador $425 million, the
Inter-American Development Bank will extend $620 million in credits and $700
million will come from the Andean Development Corporation.
Not everyone is mourning the passing of the sucre, whose value has plunged in
about 18 months from 6,000 to $1 to the current rate of 25,000 to $1.
Dollarization has generated a group of outspoken supporters in capitals
around the hemisphere and the appeal of the stable dollar in troubled Latin
American countries is not disputed.
Supporters of dollarization insist that it stops reckless spending and
economic mismanagement because countries can no longer print money to finance
deficit spending. Argentina, Mexico and El Salvador have also talked of
dollarization, and the experience in Ecuador is being closely watched.
But the measure remains highly controversial because it makes it impossible
for countries to control their own domestic economic policies, such as
setting interest rates -- one of the most powerful tools to speed up or slow
down economies. In the future, Ecuador will have to follow interest rates set
by the U.S. Federal Reserve, even if Ecuador's economy is moving in the
opposite direction of the U.S. economy.
``This is a bad idea whose time has come,'' said Walter Molano, director of
research at BCP Securities in Greenwich, Conn.
The news of the huge lending by international agencies underscored that
bailing out Ecuador's ailing economy will be an expensive proposition. The
loan announcement comes one day after a panel recommended that the IMF halt
its huge loans to bail out countries. This loan will be Ecuador's ninth IMF
rescue package in 17 years.
``Is this the final answer?'' asked Martin Schubert, president of European
Inter-American Finance Corp. in Miami. ``I doubt it.''
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