《Paul Beckerman》.pdfVIP

DOLLARIZATION AND SEMI-DOLLARIZATION IN ECUADOR Paul Beckerman* Summary. In January 2000 Ecuador announced that it would dollarize fully, in response to an unprecedented crisis encompassing recession, widespread bank failures, and incipient hyperinflation. The crisis had intensified since early 1998, when a combination of external and climatic shocks set it off. The economy’s semi-dollarization made the crisis far worse than it would otherwise have been. The move to full dollarization is perhaps best understood as a structural reform to end an unstable dual-currency system. Over the 1980s and 1990s, GDP growth had stagnated on account of oil- export price volatility and natural disasters; the sacrifice of capital formation to heavy external public debt service; and incomplete, 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- account deficits. The external imbalance led to exchange-rate depreciation. Dollar- denominated bank loans whose borrowers lacked dollar income increasingly turned non- performing, while depreciation swelled the local-currency value of dollar deposit liabilities. Many depositors, fearing that banks were unsafe, withdrew. Over 1999 the Central Bank had to provide banks massive liquidity support. By the 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 in operation, 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 natu