Ecuador’s Dollar Reliance Worsens Impact of Oil, Correa Says

By Nathan Gill
(Bloomberg) — President Rafael Correa, a former economics professor critical of Ecuador’s use of the dollar as its official currency, said the greenback is worsening the impact of falling crude prices as liquidity in the economy contracts.

The reliance on the dollar means the government can’t print more money to increase the amount of cash circulating in the economy, hurting growth, Correa said in comments from Costa Rica, broadcast on the presidential website. The country adopted the dollar in 2000 after a banking crisis in the 1990s.

Ecuador depends on crude for about half of its export revenue, and the nation is taking steps to minimize the fallout on the economy from lower oil prices, he said. The government, which defaulted on $3.2 billion of the nation’s foreign bonds six years ago, announced this month that it would cut planned public spending by about 4 percent and take on more debt with China to offset the plunge in crude.
Lower oil prices “hit us hard,” Correa said. “In a dollarized regime, a technically absurd barbarity that occurred in Ecuador after a terrible crisis, the problem is more severe.”
Ecuador’s economic growth will slow to 3.3 percent this year from an estimated 3.9 percent in 2014, according to the median forecast of six economists surveyed by Bloomberg from Dec. 12 to Dec. 17.
Prices for the OPEC member’s Oriente oil have fallen 59 percent to $41.26 a barrel since last year’s peak in June, according to data compiled by Bloomberg. The Finance Ministry had forecast an average export price for its Oriente and Napo crudes of $79.70 in the 2015 budget. It has now cut that to between $50 and $60, Finance Minister Fausto Herrera said in an interview this month.
Ecuador Deficits
Ecuador has posted annual current-account deficits since 2009, draining dollars from the economy, according to central bank data. The bank reported a $79 million deficit in the third quarter, the last period for which data is available.
To prevent a dollar shortage crimping public spending last year, Correa used more than half the central bank’s gold reserves as collateral to obtain a $400 million loan from Goldman Sachs Group Inc. Ecuador already uses most of its monthly oil output to repay loans from China, according to the Finance Ministry.
Electronic Currency
In December, the central bank created a new, electronic currency to use alongside the greenback that it said would boost banking services in rural areas and reduce the cost of money transfers. Use of the electronic coin is voluntary, will be backed by liquid assets and can’t be swapped for government bonds, according to the central bank.
The Latin American country expects total financing needs for 2015 to rise to about $10.5 billion from a previous estimate of $8.81 billion and will use loans from China, multilateral lenders and the nation’s social security agency to help offset a drop in the price of crude, Herrera said.
Dollarized economies face challenges when export revenue falls and when policy makers don’t save enough to offset the drop in government income, said Juan Lorenzo Maldonado, an economist at Credit Suisse Group AG.
Still, Ecuador has faced periods when oil prices were lower than current levels and shouldn’t have problems weathering the drop in crude, Maldonado said.

“Dollarization can exist with a lower level of oil; you just need to make sure that you’re financing your deficit,” Maldonado said Wednesday in a telephone interview from New York. “Ecuador can withstand the shock.”


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