Dollarization and Semi-Dollarization in Ecuador

Over the 1980s and 1990s, GDP growth had stagnated because of oil export price volatility and natural disasters, the sacrifice of capital formation to heavy external public debt service, and incomplete and uneven structural reform. The exchange rate depreciation that proved continually necessary to sustain the net-export surplus and limit external debt accumulation induced Ecuadorians to dollarize spontaneously. The 1998 shocks affected real economic activity--hence bank loan portfolios, and widened the fiscal and current acccount deficits. The external imbalance led to exchange rate depreciation. Dollar-denominated bank loans whose borrowers lacked dollar income increasingly turned non-performing. At the same time, the depreciation swelled the locla currency value of dollar deposit liabilities. Many depositors, fearing that banks had become unsafe, withdrew, and over 1999 the Central Bank had to provide banks massive liquidity support. By year's end, the resulting monetary issue led to the exchange rate collapse and incipient hyperinflation that forced the move to full dollarization. Ecuador's Central Bank will continue operating, using its foreign exchange holdings to carry out limited liquidity management and lender-of-last-resort activities. Ecuador's public accounts and banking system remain vulnerable to commodity-price and natural shocks. Exchange rate adjustment and monetary expansion are no longer available, however, to manage the external accounts, accommodate the public deficit, or assist failing banks. Further structural reform remains essential to assure fiscal discipline and banking system safety.

Bibliographic Details

Main Author:	Beckerman, Paul
Language:	English en_US
Published:	World Bank, Washington, DC 2001-07
Subjects:	BANK DEPOSITS, BANK FAILURES, BANK LOANS, BANK PERFORMANCE, BANK SAFETY, BANKING SUPERVISION, BANKING SYSTEM, BANKS, BONDS, BUDGET FORMULATION, CAPITAL MOBILITY, CAPITAL PROJECTS, CD, CENTRAL BANK, COMMERCIAL BANKS, CONNECTED LENDING, CORPORATE INCOME TAX, DEBT, DEBT SERVICE, DECENTRALIZATION, DEFICITS, DEPOSIT ACCOUNTS, DEVALUATION, DOMESTIC BORROWING, ECONOMIC ACTIVITY, ECONOMIC GROWTH, ECONOMIC PERFORMANCE, ELECTRICITY, ELECTRICITY GENERATION, EMERGING MARKETS, EMPLOYMENT, EQUITY MARKETS, EXCHANGE RATE, EXPORTS, EXTREME POVERTY, FINANCIAL INSTITUTIONS, FINANCIAL MANAGEMENT, FINANCIAL MARKETS, FINANCIAL PLANNING, FINANCIAL SECTOR, FINANCIAL TRANSACTIONS, FISCAL DISCIPLINE, FISCAL SURPLUS, FOREIGN EXCHANGE, GDP, GDP DEFLATOR, GLOBALIZATION, GROSS FIXED CAPITAL FORMATION, GROWTH RATE, HOUSING, ILLIQUIDITY, IMPORTS, INCENTIVE EFFECTS, INCOME, INDEXATION, INFLATION, INSURANCE, INTEREST RATES, INTERNATIONAL RESERVES, LABOR MARKETS, LEGISLATION, LIQUIDATION, LIQUIDITY, LIQUIDITY CREATION, M2, MACROECONOMIC ADJUSTMENT, MACROECONOMIC POLICY, MARKET POWER, MONEY SUPPLY, MULTIPLIER EFFECTS, NATIONAL GOVERNMENTS, NET EXPORTS, NET IMPORTS, OIL, PAYMENTS ARREARS, PENSIONS, PORTFOLIOS, PRIVATE CONSUMPTION, PRIVATE SECTOR, PRIVATIZATION, PROPERTY VALUES, PUBLIC DEBT, PUBLIC EMPLOYMENT, PUBLIC EXPENDITURE, PUBLIC FUNDS, PUBLIC SECTOR, PURCHASING POWER, REAL GDP, REORGANIZATION, SAVINGS, SOCIAL SERVICES, SOCIAL WELFARE, STRUCTURAL ADJUSTMENT, TAX, TAX ADMINISTRATION, TAX REFORM, TAX REVENUE, TAXATION, TELECOMMUNICATIONS, TIME DEPOSITS, TRANSPORT, TREASURY, UNDERLYING PROBLEM, UNDERVALUATION, WEALTH,
Online Access:	http://documents.worldbank.org/curated/en/2001/07/1552023/dollarization-semi-dollarization-ecuador https://hdl.handle.net/10986/19595
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