ECONOMY-ECUADOR: Good-Bye Sucre, Hello Dollar

By IPS Correspondents Reprint | | Print |

Kintto Lucas

QUITO, Sep 8 2000 (IPS) - Ecuador loses the ‘sucre’ as its national currency Saturday, and from then on all commercial transactions will be conducted in dollars.

People will have up to Mar 9, 2001 to swap their bills and coins in sucres for United States dollars in the Central Bank and three commercial banks.

On Jan 9, then-president Jamil Mahuad announced the dollarisation of the economy. And in April, the government of President Gustavo Noboa adopted the dollar as the official currency replacing the sucre.

The measure triggered a heated debate — which is still raging — on the possible benefits and risks.

The sucre was created in 1884 by president José Plácido Caamaño in homage to liberator Antonio José de Sucre. Five, 10, 20 and 50- cent coins were minted in London. The value of the sucre was on par with the U.S. dollar, and sucres were similar in terms of size, quality, and quantity of silver to the U.S. currency.

During the second decade of the 20th century, a new 720- thousandth silver coin was minted to replace the 900-thousandth coin, which implied a devaluation, since each sucre now cost five dollars.

Further devaluations led the country to change its standard in 1937 and definitively adopt fiduciary fiat money, replacing the silver sucre with a nickel sucre, while the value dropped from five to eight sucres to the dollar.

Over the years, Ecuador’s currency continued to depreciate. But in 1971, an exchange rate of 25 sucres to the dollar was set. That rate held constant until 1982, throughout Ecuador’s oil boom. The currency was once again devalued, however, in 1982.

Last January, Mahuad adopted the dollar as the national currency, setting an exchange rate of 25,000 sucres to the dollar.

The Central Bank will trade sucres for dollars until Saturday. Then, left without its hard currency reserves, the institution will cease to exist as a financial body and issuer of currency, and will become an agent of the restructuring of the banking sector and of fiscal reorganisation.

The loss of the sucre means “losing a symbol that identifies the country, and is thus a form of losing identity,” according to analyst Cecilia Velasco.

The dollarisation of the economy has also caused concern due to the rise in inflation, which is projected to exceed 110 percent this year, compared to 60 percent last year — which means Ecuadoreans could begin to suffer runaway inflation in dollars.

The local polling firm Cedatos reported in May that 69 percent of those surveyed were unhappy with the dollarisation of the economy, 81 percent said they were earning less than they did before the measure was adopted, and 85 percent said their buying power had declined.

One of the reasons that could explain problems such as counterfeit dollars detected on the market is the lack of small change in dollars, which is to be resolved by the emission of a new sucre, in the form of coins, to serve as fractions of a dollar.

According to Central Bank authorities, it is cheaper to mint new coins than to import pennies, nickels, dimes or quarters. That means on Saturday, the new sucres will begin to circulate to serve as small change in dollars, but without the characteristics of the national currency.

But on the eve of the elimination of the sucre, the new coins had not yet arrived, and businesses had no coins with which to provide change.

Central Bank authorities report that 92 percent of all sucres have already been exchanged for dollars. But in many regions, especially rural areas, sucres continue to circulate.

A study released by the Central Bank last December warned that the dollarisation of the economy could cause economic chaos in this Andean nation of 11.5 million, because the conditions for successfully implementing the measure simply did not exist.

The report’s authors cautioned against the risk of a dollarised economy governing some sectors while a parallel economy in sucres continued operating in others, which they said would cause chaos.

Economist Alberto Acosta said dollarisation would limit the government’s ability to use monetary policy as a tool to ward off the effects of eventual global financial meltdowns or devaluations in neighbouring countries, which would cripple the competitiveness of local producers.

If a relatively strong economy like Argentina’s “went from six percent unemployment to 18 percent with the currency board (that pegged the peso to the dollar) — which is not a one-way route with no return — in Ecuador the effects will be much more negative,” he warned.

Unemployment in Ecuador currently stands at 18 percent, and under-employment at 54 percent, Acosta pointed out, adding that if those rates increase, “social chaos” will reign.

Representatives of social organisations and associations of exporters and professionals set up an Alternative Forum that hammered out a proposal to replace the dollarisation of the economy.

The initiative consists of pegging a new sucre to the dollar and restoring the Central Bank’s functions of issuing currency and governing monetary policy.

The president of the Ecuadorean Federation of Exporters (Fedexport), Luis Maldonado, told IPS that dollarisation would only accentuate the vulnerability of local productive sectors.

“Stability has not arrived, and inflation is rising as never before, but this time it is in dollars,” said Maldonado.

Germán Rojas resigned in May as director of the National Institute of Statistics and Censuses after he was allegedly pressured, by finance ministry authorities and Ricardo Noboa, the president’s brother and the director of the National Modernisation Council, not to divulge the real inflation rate.

Acosta forecast at that time that dollarisation would bring a rigid exchange policy that would hurt local exporters, while fomenting imports.

The new system “will fuel social differences and exacerbate centralism, based on an accumulation of dollars in commodity- exporting zones,” he said.

But President Noboa maintained that in the next few months, dollarisation would stabilise prices — a claim backed by business associations in Guayaquil, the country’s economic capital, who lobbied for the measure in the first place.