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Ecuador: Dollarization on the chopping block

Correa considers new currency regime; Oil price collapse stifles growth

Ecuador’s president, Rafael Correa, is a step closer to dropping dollarization, according to analysts.

"It’s definitely realistic that Correa will start looking at ways to get rid of dollarization," says David Dowsett, senior portfolio manager at BlueBay Asset Management. "He would prefer to not be in charge of a dollarized economy. At the moment it is potentially too risky but it is difficult to say anything with certainty. In time I could definitely foresee a situation where Correa will take this route away from dollarization." By using the dollar as the national currency, Ecuador’s central bank lacks the ability to print money and stimulate growth. In 2008 public spending drove Ecuador’s growth of 6.5%. This year Correa’s government expects the economy to grow only 2.5%.

The slow-down is largely a result of the collapse in the oil price since mid-2008, although the commodity markets are showing signs of recovery. Oil accounts for more than 50% of Ecuador’s fiscal accounts and central bank foreign reserves have tumbled 30% since December 2008.

Two years ago Correa announced that he thought dollarization, which was adopted in 2000, was a "complete failure". However in April he said: "We have said that we will maintain the dollarization system, and as an economist I know how to do that."

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