Download Ecuador

The
reason why Ecuador was dollarized?
When did Ecuador become dollarize?
The effect of dollarization in Ecuador
Advantages and Disadvantages
Long term benefit?

1970’s

1980’s

1990’s

2000 Dollarization

1997-2000 President Jamil Mahuad was president
of Ecuador. The Mahuad administration propose
officially replacing the country’s currency with the US
dollar.

By January 2000 Ecuador adopted the U.S. dollar
as a legal tender.

In the spring of 2000 the Ecuadorian government
began exchanging sucres for dollars at the rate of
S/. 25,000 = $1.

Dollarization helps to limit currency and balance of
payments crises. Without a domestic currency there is no
possibility of a sharp depreciation, or of sudden capital
outflows motivated by fears of devaluation.

By rejecting the possibility of inflationary finance through
dollarization, countries might also strengthen their
financial institutions and create positive sentiment toward
investment, both domestic and international.

A closer integration with both the global and U.S.
economies would follow from lower transaction costs,
assured stability of prices in dollar terms and possibly
lower interest rates.

A dollarizing country would surrender any possibility
of having an independent monetary and exchange rate
policy, and will be constrained in the use of central
bank credit to provide lender of last resort funding to
its banking system in emergencies.

From an economic point of view, the right to issue a
country’s currency provides its government with
seigniorage revenue, which show up as central bank
profits and are transferred to the government. They are
lost to dollarizing countries and gained by the United
States as it has so far not agreed to share them.
DISADVANTAGES

No more monetary decisions

Competitive disadvantage

Unfamiliar with the currency

Brady bonds index (obtained from JP Morgan) for Ecuador
from January 1994 to September 2000.
30000
250
25000
200
20000
15000
150
10000
100
5000
50
0
-5000
0
Cot_Suc/$
Exp Pred
Exp_Res
EMbECU
Source: www.sela.org
Jan -94
Ap r-94
Jul-94
Oct-94
Jan -95
May-95
Aug -95
No v-95
Feb-96
May-96
Aug -96
No v-96
Feb-97
May-97
Aug -97
No v-97
Feb-98
May-98
Aug -98
No v-98
Feb-99
May-99
Aug -99
No v-99
Feb-00
May-00
Aug -00
Percentage
120
110
100
90
80
70
60
50
40
30
20
10
0
-10
-20
180
130
80
30
-20
Prop X/T
% Unemp
Month Infl
Month Dev
Debt/GdP
EMbECU
EMbECU Price
280
230
Source: World Bank Migration and Remittances Factbook 2008
Source: World Bank Migration and Remittances Factbook 2008

The elimination of the sucre, which had lost 300% of
its value in the 18 months preceding dollarization, has
created a long-needed sense of financial stability.

Ecuador’s GDP grew an average of 5% annually from
2000 to 2006, more than double the rate of growth.

2000 to 2006, real family income increase 14% In the
last four years (through June 2010), real salaries rose
an additional 25%.

2007 – new president Rafael Correa. Decrease in
private investment

2007 to 2009, the average growth rate fell to 3%
annually. At the same time, the 3% annual inflation
rate seen in the last 10 years shows that the control
of monetary policy has helped Ecuador become one of
the most stable currency regimes in international
markets.

As of December 2009, the urban poverty rate fell to
25 percent.

The minimum annual wage—now in a reliable currency—rose
from $67 in 2000 to $280 in 2010.

The job growth today 2.6 million people are either unemployed
or underemployed.

In order not to endanger the stability and growth brought on by
dollarization, Ecuador must get its fiscal house in order.

Banking System had benefited from the adoption of the
dollarization.

According to estimations, official dollarization has
played a significant role in improving bank liquidity and
asset quality in Ecuador.

Macroeconomic variables and financial structure
indicators show the bank liquidity, loan quality, and bank
profitability has responded to variables that are bank
specific.
Source: www.sela.org


Slide 15. Graph shows
Remittances after dollarization.
1998
1999
2000
2001
2002
Real GDP
2.1
-6.3
2.8
5.1
3.4
Exchange
Rate
6825
20243
Exports
(millions)
4202
4451
Dollarized
4927
4678
5192
ECONOMIC
INDICATORS