The Greenback Goes South: Dollarization in Ecuador

Dollarization is the practice of using a foreign currency, in this case the US dollar, in parallel or instead of a nation’s own currency. The main advantage for a country’s using the dollar is that by doing so, financial stability is increased and inflation is reduced. A country whose economy depends on a small group of exports that are highly sensitive to outside events, is a perfect candidate for dollarization. Ecuador is a perfect example.

The Ecuador economy depends on stable prices for its three main exports: oil, bananas and shrimp. The value of a set quantity of each of these three products can fluctuate wildly. An oil glut, poor weather and an El Nino event can cause prices to crash, hurting confidence in the country – and its currency. Can, and did… time after time, and Ecuadorians were being stretched to their limits.

The main reason dollarization is not practiced is political. A country’s currency, like a flag or a national airline, is a symbol of sovereignty. Giving up on your currency is, well, almost treasonous. Yet Ecuadorian President Jamil Mahuad was willing to take that risk as the year 2000 began. As many expected, a wave of protest swept Mahuad out of office. His replacement, former Vice President Gustavo Noboa, then did something quite unexpected – and quite brave as well. Knowing that dollarization was a good idea and seeing it as really the only cure for the many ills facing the Ecuadorian economy, Noboa pressed ahead with Mahuad’s dollarization program.

By the end of 2000, US dollars were being used in corporate transactions and at street level. The Noboa administration used the dollarization program as the centerpiece of an economic restructuring program, allowing Ecuador to work out financial security arrangements with the IMF (International Monetary Fund). Inflation began to drop, money sent out of the country started trickling back, and a helpful rise in oil prices over the next 5+ years made everything go that much smoother.

Dollarization has been a boon for American tourists visiting Ecuador, as they no longer have to exchange money or wonder about the posted value of products and services. Though Ecuador continues to mint its own coins, they are denominated in fractions of a dollar up to 50 cents. This helped preserve national pride, especially among those on the lower end of the economic ladder. Buying Ecuadorian coins is a simple matter, and curiously, the US “Sacagawea” golden dollar coin is very popular in Ecuador.