Dollarization Erica Vega Marlene Mata

Dollarization  Adopting a foreign currency of choice in a country in parallel to or instead of the domestic currency. For example Ecuador's adoption of the US dollar as their own currency. Dollarization does not only occur with the US dollar. Other foreign currencies can be use by other countries for official dollarization.

Foreign Currencies Adopted by Other Countries  European- Euro  New Zealand- Dollar  Swiss- Franc  Indian- Rupee  Australian-Dollar  US- Dollar

Types of Dollarization  Unofficial: Individuals prefer large transactions and savings in dollars. While using domestic currency in small transactions.  Official: Government completely replaces local currency with foreign currency.

Why Dollarization?  Promotes fiscal discipline and greater financial stability  Protect themselves against high inflation in the domestic currency

Dollarized Countries CountryYear Panama1904 Argentina1999 Ecuador2000 El Salvador2001

Ecuador’s Economy  Highly dependent of its production and exports of raw products such as; Bananas Cocoa Coffee Shrimp Oil (primary export)

Primary Export-Oil  Finance new public services  Infrastructure  Ecuador's dependency on oil left the nation at the mercy of fluctuations in world market prices.

Problems  The collapse of oil prices sent Ecuador’s economy into a crisis. Suffered from inflation Increased debt services Uncompetitive industries  In order to weight out the collapse of oil prices the Government began to borrow large amounts of money

Natural Disasters  El Nino phenomenon along with other natural disasters had a negative effect on key exports such as; Shrimp Bananas  Also damaging their agricultural economy and parts of their infrastructure

Internal/External Factors  Asian economic meltdown affected oil prices  Collapse of the Brazilian economy  Political and Social instability within the country  Corruption within the Political Elites

Ecuador’s Crisis  The sucre (Ecuador’s currency) fell into hyper-inflation  The country defaulted on its foreign debt  The entire banking sector collapsed Ecuadorians rushed to put their accounts into a more stable currency such as the US dollar Leading to the President’s decision to officially replace the country’s currency with the US dollar

Conversion  In 2000 the Ecuadorian Government began exchanging sucres for dollars at the rate of S/25,000 = $1  By the end of the year the sucre disappeared completely from circulation

Government’s Actions  Began a policy of currency devaluation to “inflate away” the country’s internal debt and lower product prices.  Increase competition on the foreign market  Involvement with the IMF Reduce fiscal deficit Implement structure reforms for banking systems Regain access to private capital markets

Ecuador's Economic Growth

Hidden Problems  However strong macroeconomic figures hide serious problems in the micro-economy. Jobs are hard to find The cost of living is high Obtaining credit is expensive Interest rates of around 20%

Economic Indicators Real GDP Exchange Rate Dollarized Exports (millions)

Advantages of Dollarization  Stabilizes inflation  Stabilizes overall economy  Sustains the buying power  Significant economic growth

Disadvantages  Government can no longer make its own monetary decisions  Monetary policy is made by the Federal Reserve Board  Decisions made by the Fed might not be at country’s best interest  Competitive disadvantage to its trading partners because it cannot make its goods cheaper by devaluating its currency  People can be unfamiliar with the currency making it easier for counterfeiting

Conclusion  Dollarization does nothing to resolve core problems that are affecting Ecuador's economy:  Lack of infrastructure  Massive internal and external debt  Continued political instability  Corruption