We had an earlier discussion of dollarization. This article is
relevant.
ECONOMY-ECUADOR: 'Dollarisation' Brings Inflation, Pessimism
By Kintto Lucas
QUITO, May 19 (IPS) - The official adoption of the dollar as
Ecuador's currency on Apr 1 has triggered inflation and led to
even broader opposition towards the government's economic policy.
A wide range of sectors fear runaway inflation in dollars, just
four months before the projected elimination of the local
currency, the sucre.
Inflation stood at 10.21 percent in April, up from 5.5 percent
in April 1999, according to the National Institute of Censuses and
Statistics (INEC). Cumulative inflation for the past 12 months
stands at 88.88 percent, compared to 56.1 percent from May 1998 to
April 1999.
In a survey released Friday, the local polling firm Cedatos
found that 69 percent of respondents were opposed to the
''dollarisation'' of the economy, 81 percent said they were
earning less than before the adoption of the dollar, and 85
percent said their buying power had shrunk.
Social movements, exporters, professionals and other sectors
set up an Alternative Forum Thursday, which has already drawn up a
proposal to replace the dollarisation of the economy.
The initiative would consist of pegging a new sucre to the
dollar and reactivating the Central Bank as the entity that issues
the local currency and governs monetary policy. Thus, the current
exchange rate of 25,000 sucres to the dollar would be replaced by
parity between the new sucre and the dollar, and a national
currency would continue to circulate.
Luis Maldonado, the president of the Ecuadorean Federation of
Exporters (Fedexport), told IPS that dollarisation would compound
the vulnerability of productive sectors. ''Stability has not
arrived, and inflation is soaring as never before - but now it is
in dollars,'' he complained.
Maldonado said the Forum's request is a serious proposal
designed to replace the model which the government of Gustavo
Noboa is attempting to implement. ''The economic fundamentalists
want us to believe that there is no longer any way out, but that
is not true,'' he maintained.
According to the dollarisation plan, the Central Bank must
change all of the sucres circulating in the market for dollars
from its reserves, at an exchange rate of 25,000 sucres per
dollar, by September.
Then, with no foreign reserves left, the Central Bank would
disappear as a financial body and the currency issuer, to become
one of the entities involved in restructuring the banking sector.
Once that occurs, the sucre would disappear, and all business,
in goods as well as services, would be conducted in dollars.
The solution suggested by the Alternative Forum is urgently
needed by the country, because ''the false hopes raised by
dollarisation have come crashing down,'' asserted economist
Alberto Acosta.
''What was announced, amidst a bargain sale of populist
marvels, turned out to be a nightmare,'' said Acosta. ''Inflation
is soaring and interest rates in dollars are even higher than
those of the pre-dollarisation era.''
INEC director Germ n Rojas resigned after he was allegedly
pressured not to reveal the real inflation rate.
Rojas said he had been pressured by the president's brother
Ricardo Noboa - the director of the National Council of
Modernisation, in charge of the privatisation process - as well as
by finance ministry authorities.
Acosta also said dollarisation would lead to a rigid exchange
rate in the future, which would deal a blow to those who produce
exportable goods, while driving up imports.
The new system ''will widen the social gap and exacerbate
centralism, based on the accumulation of dollars in zones that
export raw materials,'' he argued.
The Alternative Forum proposes putting a halt to the bleeding
out of foreign reserves, which ''they want to turn over to
insolvent banks,'' according to a high-level Central Bank official
consulted by IPS.
According to the informant, who preferred to remain anonymous,
if the current policy goes forward, the country will ''run the
risk of not having enough monetary reserves to change all of the
sucres for dollars.''
According to official reports, the foreign reserves shrank in
the space of just one week - from May 5 to May 12 - from 928 to
896 million dollars.
But the Central Bank source said that at that rate, the
reserves must now stand at just over 700 million dollars.
''The idea is to swiftly exhaust the reserves by shelling out
the money to the banks so there will be no backtracking in the
dollarisation process,'' he maintained. ''They want to put us in a
straightjacket.''
Another of the proposals allegedly being discussed by the
Superintendency of Banks to bail out the crisis-stricken financial
system is for the still solvent banks to grant credit to bankrupt
entities with a guarantee from the Central Bank.
That measure would make it unnecessary to use the foreign
reserves, and thus avoid the risk that the reserves might not
stretch far enough to purchase all of the sucres in circulation.
But the banks that do not have problems are not keen on lending
to those which are on the verge of bankruptcy. ''In order to do
that, they are demanding that the privatisations serve as a
guarantee, because the guarantee of a bank that is about to
disappear, like the Central Bank, makes no sense,'' said the
anonymous source.
In the Santa Clara market, meanwhile, one of the biggest
markets in Quito, people complained that they did not want the
sucre to disappear.
''A country where the president says on TV that he wears a
beard without a mustache to imitate Abraham Lincoln, and who
'kills' the sucre to impose a currency with which we are not even
familiar is shameful,'' said vegetable vendor Rosa Lima.
She added that she would only take sucres or one dollar bills,
because she was afraid of receiving counterfeit dollars, such as
those detected in recent weeks.
The counterfeit bills ''even get by the banks. A friend of mine
was paid with two false bills when she went to cash a check. How
could they not get by us?'' she wondered.
President Noboa, meanwhile, hopes the agreement signed with the
IMF will help guarantee the success of the dollarisation plan.
According to the latest letter of intent, the IMF has made a 300
million dollar stand-by loan available, of which 120 million
dollars have already been disbursed.
Meanwhile, the Ecuadorean government plans to eliminate
subsidies keeping down fuel and electricity prices, restructure
the banking system and privatise the power, oil and telephone
companies.
The president announced Friday that by the end of the month,
the first step - the elimination of subsidies - would be taken
towards privatisation, which will mean a 50, 100 and 230 percent
rise in the cost of gas, fuel and electricity respectively.
Against the current backdrop of economic instability, social
unrest and widespread opposition to dollarisation, the rise in
fuel and utility rates could trigger an even stronger popular
uprising than the one which brought down president Jamil Mahuad in
January. (END/IPS/tra-so/kl/mj/sw/00)
Origin: Montevideo/ECONOMY-ECUADOR/
----
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Michael Perelman
Economics Department
California State University
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