President Jamil Mahuad of Ecuador called today for replacing the national currency with the U.S. dollar in an attempted quick fix of his country's worst economic crisis on record.
If Mahuad succeeds in replacing the sucre with the dollar--in the face of what promises to be a political battle--Ecuador would become the second Latin American country, after Panama, to use the U.S. currency as its own in the interests of financial stability.
Mahuad, already embattled over Ecuador's poor economic performance, said that if the Central Bank refuses to move on his plan, he will seek to dissolve its board of directors. In that atmosphere, his call generated accusations that he may be using it as a political tool to quell a public outcry--including unrest in the streets--over the dramatic slide of the sucre, which has lost more than 60 percent of its value against the dollar since mid-December.
Some analysts suggested Mahuad's move may further imperil the country's fragile economy as Ecuador spends what little reserves it has to buy back sucres at 25,000 to the dollar over the next year, putting it at risk of economic collapse if investors panic and take their money out of the country.
"There is no doubt this is being done not based on economic reasoning but on political reasoning," said Federico Kaune, senior economist for Goldman Sachs in New York. "The problem is, the Ecuadoran economy doesn't have the kind of fundamentals needed to successfully complete dollarization."
The decision by Mahuad, who has been under intense pressure from powerful trade union and industry groups to resign for his handling of the crisis, prompted Central Bank President Pablo Better to announce his resignation, according to financial sources and media reports in Quito. The remaining four directors were meeting into the evening to cast their verdict on dollarization. But with Mahuad appearing to shore up support in Congress, sources said it appeared likely they will either comply or be dismissed in favor of economists in favor of the plan.
"In short, I think we're seeing enough momentum for dollarization right now that it may actually happen," said Gustavo Arteta, a Quito-based financial expert.
On Sunday evening, Mahuad made a vague national address that talked about the need to replace the currency, but it was not immediately interpreted to mean he planned to try dollarization. Today, however, aides clarified his position, specifying that the plan will involve the exchange of 25,000 sucres for one dollar. Juan Falconi, the production minister, said sucres in circulation will be bought back over the next year and only small denomination sucre coins will be used, just as coins in the national currency are used in Panama.
Finance Minister Alfredo Arizaga said in a television interview today that Ecuador has $400 million worth of sucres in circulation and holds foreign cash reserves worth $900 million. That ratio means there will be no problem in swapping sucres for dollars, he said.
Although it may stop the slide of the sucre, the conversion rate suggested by the government would dramatically decrease the value of salaries in Ecuador. The minimum wage, for instance, would stand at under $30 a month, compared to more than double that amount in dollars only six months ago.
Still, it was clear that something had to be done. Economists had predicted that the sucre could continue its free fall, bringing hyperinflation to a country whose economy shrank by 7 percent and had inflation of 60 percent in 1999.
CAPTION: A student points a gun at Ecuadoran police during demonstrations near Quito's Central University demanding President Jamil Mahuad's resignation.