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Dollarization
Erica Vega
Marlene Mata
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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.
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Foreign Currencies Adopted by Other Countries
European- Euro New Zealand- Dollar Swiss- Franc Indian- Rupee Australian-Dollar US- Dollar
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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.
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Why Dollarization? Promotes fiscal discipline and greater
financial stability Protect themselves against high inflation in
the domestic currency
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Dollarized Countries
Country Year
Panama 1904
Argentina 1999
Ecuador 2000
El Salvador 2001
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Ecuador’s Economy Highly dependent of its production and
exports of raw products such as; Bananas Cocoa Coffee Shrimp Oil (primary export)
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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.
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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
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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
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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
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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
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Conversion In 2000 the Ecuadorian Government began
exchanging sucres for dollars at the rate ofS/25,000 = $1
By the end of the year the sucre disappeared completely from circulation
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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
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Ecuador's Economic Growth
-10
-8
-6
-4
-2
0
2
4
6
8
1999 2000 2001 2002 2003 2004 2005
Year
Eco
no
mic
Gro
wth
%
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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%
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Economic Indicators 1998 1999 2000 2001 2002
Real GDP 2.1 -6.3 2.8 5.1 3.4
Exchange Rate 6825 20243 Dollarized
Exports (millions) 4202 4451 4927 4678 5192
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Advantages of Dollarization Stabilizes inflation Stabilizes overall economy Sustains the buying power Significant economic growth
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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
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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