Medellín, Colombia – President Daniel Noboa on March 18 issued an executive order to ratify the U.S. dollar as the official currency of Ecuador, less than a month ahead of the second round of presidential elections.
In an interview with W Radio, Noboa said that the order is partially due to the increased hype around electronic money systems, including the proposed “ecuadollar,” originally proposed by Andrés Arauz, a former minister in the Rafael Correa administration.
The decree suggests that Congress legislate reforms saying that the Central Bank should not issue any forms of currency other than the U.S. dollar.
In January 2000, the then President Jamil Mahuah adopted the U.S. dollar as a currency in Ecuador, in a process called dollarization. This process, in January of this year, reached 25 years of use, surviving eight governments.
It was first adopted in January 2000 in the middle of a financial crisis as the banks closed, and Ecuadorians couldn’t take out money. This led to the lack of trust in the local currency, the sucre.
Due to the devaluation of the sucre, the cost of living increased exponentially. Ecuadorians couldn’t afford necessities such as bread and bus passage due to hyperinflation, and lack of rise in wages.
Michael Connolly, an economist and professor at the University of Miami, published a report analysing dollarization in Ecuador from 2000-2024.
Connolly explains that the dollarization conversion was implemented at a rate of 25,000 sucres per dollar, to avoid exhausting existing dollar reserves.
The decision to dollarize was desperate. However, it was successful due to the loans from international creditors who continued their support of the process.
Since 2001, GDP growth per annum has grown from an average of 2.5% pre-dollarization to 3.6% post dollarization, according to Connolly’s research. Inflation saw similarly positive results, decreasing from an average of 39.5% to 3.2% per annum.
Risks of dollarization, as Connolly explores, included the rise in criminality, as it attracted drug cartels that use dollars. This has in turn increased the homicide rate in Ecuador; currently Ecuador has a homicide rate nine times higher than the global average.
Rafael Correa, left wing president from 2007-2017, pushed back against dollarization, saying that it was “a bad idea.” However, he did not attempt to de-dollarize the economy. Correa was anti-dollarization due to his belief that it only benefitted the rich. Correa’s policies tried to cut off Ecuador from the global market, which is not compatible with dollarization.
Twenty five years on, Noboa has now issued an order to ratify the U.S. dollar as the country’s sole currency. His goal is to maintain the financial stability brought by initial dollarization, which brought inflation in Ecuador down to the lowest in the region. The decree also states that the aim is to preserve the integrity of dollarization.
According to the central bank of Ecuador, dollarization has “generated monetary and financial stability despite the external shocks that have affected the country over the last two decades,” reports Xinhua Net News.
Primicias spoke to economist Pablo Lucio Paredes, who says that dollarization is not solving any problems, but making them worse. He proposes that the best solution is to eliminate the Central Bank.
Featured image credits: FreeRange Stock, https://creativecommons.org/publicdomain/zero/1.0/
