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Ecuador: Record Inflation in First Year of 'Dollarization'

by Kintto LucasInter Press Service
January 10th, 2001

QUITO -- The adoption of the dollar a year ago in Ecuador has not been happily accepted by most of the population, who suffered 91 percent inflation in dollars last year, the highest annual rate in the history of the country.

Then-president Jamil Mahuad announced the adoption of the dollar as Ecuador's new currency in a message to the nation on Jan 9, 2000.

The announcement came in the midst of a severe economic, political and social crisis, under the pressure of the business community in the port city of Guayaquil - Ecuador's economic capital - in favour of dollarisation, but against the opposition of the president of the Central Bank, Pablo Better.

Mahuad's decision sparked an increase in social protests, and on Jan 21, indigenous organisations backed by junior military officers occupied Congress, triggered the president's fall and tried to set up a ''government of the people.''

But just hours afterwards, the military high command pronounced itself in favour of Vice-President Gustavo Noboa becoming the new president, and on Jan 22 Noboa confirmed that the dollarisation plan would go ahead.

Up to September, the Central Bank swapped sucres for dollars out of its reserves, at an exchange rate of 25,000 sucres to the dollar.

A year after Mahuad's initial announcement, most Ecuadoreans have not seen the hoped-for results, and are calling for a return to the sucre.

Representatives of political parties, the business world, indigenous groups and other social organisations sum up the first year of the dollarisation process as negative, pointing out that the economy has not staged a recovery.

Luis Maldonado Lince, a former president of the Federation of Exporters and a critic of the adoption of the dollar, told IPS that the new system merely drove the inflation rate up, kept interest rates high and deepened the recession.

Furthermore, ''inflation did not soar even higher simply because buying power shrunk, which kept consumption from rising in the last three months of the year,'' said Maldonado.

However, businesspersons in Guayaquil say the dollarisation process failed to bear fruit because it should have been accompanied by other essential measures.

The president of the Chamber of Small Industries of Guayaquil, Joyce de Ginata, said dollarisation would be successful when the country's public enterprises were privatised and a new pipeline was built to enable an increase in oil output.

Ginata also called for a restructuring of the bulky debt accumulated by the country's industrialists.

Sandro Coglitore, president of the National Aquaculture Chamber, said the first 12 months of the new monetary scheme were ''critical'' for that sector, since dollarisation hurt the competitiveness of exporters of shrimp and other products due to the lack of adequate measures designed to boost their activity, such as those proposed by Ginata.

According to the National Institute of Statistics and Censuses, last year's high inflation was due to the fact that the prices of goods and services gradually came into line with international prices under the dollarisation scheme.

The official forecasts for this year are not encouraging. According to the Central Bank, annualised inflation will stand at between 24 and 31 percent. This month's inflation rate is expected to be above five percent, due to the rise in fuel prices and public transport rates announced in late December.

Federico Kaune, vice-president for emerging markets at the U.S. investment bank Goldman Sachs, argued that dollarisation would work if a fiscal adjustment were carried out, including tax hikes and the privatisation of state assets.

''If that does not occur, and oil prices drop, there could be problems servicing the debt in 2002,'' he warned.

Oil exports brought in 2.04 billion dollars in revenues last year, up from 1.37 billion in 1999, the Central Bank reported.

In the view of economist Alberto Acosta, a consultant with Germany's Friedrich Ebert Foundation, the rise in oil revenues somewhat cushioned the impact of dollarisation by allowing Ecuador to hold onto foreign reserves despite the massive swap of sucres for dollars.

Another major contribution was the 1.2 billion dollars received in remittances from Ecuadoreans living abroad, which to some extent compensated the drop in exports of bananas and shrimp.

One source of relief this year will be a 20 percent reduction in debt servicing payments, which nevertheless will amount to 1.18 billion dollars, equivalent to 30 percent of the budget and 6.6 percent of Gross Domestic Product (GDP).

''The illusions created by dollarisation have come crashing down,'' said Acosta. ''Inflation is skyrocketing and interest rates in dollars stand at over 24 percent.''

He also pointed out that dollarisation led to a rigid exchange rate that dealt a blow to much of the production of tradeable goods - produced for export, or to compete with imported products - while leading to a rise in imports.

The new system ''increases social differences, and exacerbates the centralism based on the accumulation of dollars in areas where commodities are produced for export,'' Acosta added.

Although sucres have been prohibited since September, people living in rural areas continue to use them. Sales at markets in the capital are carried out in dollars, although prices continue to be set in sucres. And in Santa Clara, north of Quito, local residents are reluctant to abandon the sucre.

Rosa Lima, a vegetable vendor, said she still accepts sucres, and only takes one-dollar bills, because she fears that she will be paid in counterfeit dollars.

''We still announce our prices in sucres, because people haven't come to grips with the dollar,'' said Lima. ''Nearly everyone asks for the price in our currency, and we were better off before, because we could buy more.''

''The rabbit of dollarisation emerged from the conjurer's hat, and it was going to come out sooner or later, because there was no other solution,'' President Noboa said Monday.

The president also warned that great suffering still lay ahead before Ecuador managed to work out its problems.

''I believe that the old saying 'no pain no gain' is true,'' said Noboa. ''Central America has suffered, and that's why it's growing. This country has not suffered. Here there has been nothing, absolutely nothing in the past century that has brought suffering to the Ecuadorean people.''

Noboa confirmed that he would recieve presidents Alfonso Portillo of Guatemala and Francisco Flores of El Salvador in Quito in the first week of March. El Salvador has already adopted the dollar, and Guatemala is planning on doing so.

He also invited President Mireya Moscoso of Panama - where the dollar has been legal tender since 1904 - to the meeting.

Costa Rica, Honduras and Nicaragua are also toying with the notion of adopting the dollar.





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