Ecuador's Dollar Survived a Hostile President. That's the Lesson

By Daniel Okafor

Ecuador's currency has held for 26 years without a single currency crisis, even though a president spent a decade trying to hollow it out. That record matters now. Dollarization is back on the agenda in Latin America and in Washington, D.C., where interest in promoting the greenback has revived, according to Fortune.

Ecuador is the natural experiment. It shows how a dollarized system performs under a hostile government. The answer: better than most would bet.

How bad was the collapse that led to dollarization?

The numbers are stark. The sucre traded at 6,825 per dollar at the end of 1998. By the end of 1999 it had plunged to 20,243 — a loss of two-thirds of its value in one year. In the first week of 2000 it shed another 27.7% and hit an all-time low of 28,000 to the dollar.

On January 9, 2000, President Jamil Mahuad announced Ecuador would replace the sucre with the dollar at 25,000 sucres per dollar. President Bill Clinton and Treasury Secretary Lawrence Summers had encouraged the move.

It worked. Inflation dropped sharply. Deposits flowed back into banks. Growth turned positive, with exports leading. Ecuador gained a system immune to currency crises.

What did Rafael Correa actually do?

Correa, who holds a PhD in economics from the University of Illinois, opposed dollarization before it was adopted and before he took office. As president, from January 2007 to May 2017, he called it "an immense error" and "monetary suicide." Yet he never moved to undo it openly. He knew an attempt would trigger bank runs, economic collapse, and perhaps his own impeachment. So he repeatedly assured voters that abandoning the dollar would be catastrophic and was not on his agenda.

Below the surface, his actions told a different story. In his first year he scrapped Ecuador's oil reserve fund, which together with the dollar had delivered the country's first run of concurrent fiscal surpluses since oil pumping began. That same year he:

• Closed the economy to foreign capital
• Selectively defaulted on foreign debt despite record oil revenues
• Imposed an exit tax on every dollar leaving the country
• Sharply raised import tariffs
• Forced private banks to repatriate 45% of their liquidity and park it at the central bank

He also launched a central bank electronic money program, billed as financial inclusion. Because the central bank, not private banks, issued the balances, the government could have paid its bills in digital credits not fully backed by dollars. The public wanted nothing to do with it, and the program was shut down.

The most serious breach came last. The central bank began lending directly to the treasury — in effect printing unbacked "ecuadollars." Central bank financing of the government peaked at about 10% of GDP, according to the IMF, with the heaviest lending in 2009–2014. The loans were of questionable legality and ran contrary to the tenets of a dollarized system.

Why does the regime still stand?

Dollarization enjoys roughly 90% approval in Ecuador today. It is the longest-lived Ecuadorian currency regime since independence in May 1830. It has outlasted every constitution. Even a decade of sabotage from the presidency could not dislodge it.

The damage persists in softer forms. The central bank still sets interest rates and directs bank lending toward favored sectors, so the full benefits of dollarization go unrealized. Remaining capital controls cut Ecuador off from the world's deepest pool of international dollar liquidity.

What does this mean for the rest of Latin America?

Correa was convicted of bribery in the Sobornos case and sentenced to eight years in prison. He lives in Belgium, outside the reach of that sentence. His tenure is the stress test other countries should study.

The lesson for Venezuela, Argentina, and any government weighing dollarization is blunt, per Fortune: the dollar does its job. Ecuador has stayed immune from the plague of a currency crisis for 26 years while sustaining respectable growth, low inflation, and surging exports. Politicians can wound a dollarized system at the edges. They cannot kill it while the public holds the currency — and knows what the alternative cost.