Transcript Dollarization

Dollarization
Erica Vega
Marlene Mata
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.
Foreign Currencies Adopted by Other
Countries






European- Euro
New Zealand- Dollar
Swiss- Franc
Indian- Rupee
Australian-Dollar
US- Dollar
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.
Why Dollarization?


Promotes fiscal discipline and greater
financial stability
Protect themselves against high inflation in
the domestic currency
Dollarized Countries
Country
Year
Panama
1904
Argentina
1999
Ecuador
2000
El Salvador
2001
Ecuador’s Economy

Highly dependent of its production and
exports of raw products such as;





Bananas
Cocoa
Coffee
Shrimp
Oil (primary export)
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.
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
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
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
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
Conversion

In 2000 the Ecuadorian Government began
exchanging sucres for dollars at the rate of
S/25,000 = $1

By the end of the year the sucre disappeared
completely from circulation
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
Ecuador's Economic Growth
Economic Growth %
8
6
4
2
0
-2
1999
2000
2001
2002
-4
-6
-8
-10
Year
2003
2004
2005
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%
Economic Indicators
1998
Real GDP
Exchange Rate
2.1
1999 2000 2001 2002
-6.3
6825 20243
Exports (millions) 4202
2.8
5.1
3.4
Dollarized
4451 4927 4678 5192
Advantages of Dollarization




Stabilizes inflation
Stabilizes overall economy
Sustains the buying power
Significant economic growth
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
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