Dollarization turns 19 and still has pending tasks

Ecuadornews:

The country meets this Wednesday January 9, 2019 19 years of being dollarized and still has pending tasks to strengthen this system. Ecuador officially adopted the dollar on January 9, 2000, in the midst of an inflationary spiral caused by an uncontrollable depreciation of the sucre and a massive bankruptcy of banks.

Then, the prices went up every moment, recalls Irma Remache, who worked in a hardware store that went bankrupt due to the crisis. Now Rivera is 56 years old and owns a business of her own. She wants the dollar to continue because “it gives stability”.

In almost two decades, the system has managed to overcome internal and external crises, despite the fact that little progress was made in strengthening measures and even setbacks, according to Mauricio Pozo, former finance minister. A key factor was to strengthen productivity in order to boost economic activity and encourage exports.

Pablo Zambrano, director of the Chamber of Industries, believes that it is necessary to move towards a more modern and flexible labor market, which adapts to the new realities, but considers that there are few advances. Although the Ministry of Labor launched in 2018 new types of employment contracts, the manager argued that they have not been attractive.

For example, he says, when the price of flowers goes down, a company may require hiring staff for fewer hours, but it cannot be done unless an extra amount is paid to the worker. Another obstacle was the safeguards and tariffs on inputs from the industry, which make the products more expensive and reduce competitiveness, he said.

Many measures in the last 10 years were contrary to economic activity, said academic Marco Naranjo. Another measure to strengthen dollarization was the generation of savings funds to face ‘shocks’.

Since 2002, the country has created three oil savings funds: a productive reactivation account, a contingency fund and an energy investment fund. But those funds were eliminated in 2008 and USD 3,200 million went directly into the Budget with the argument that the country required investment and had money saved unproductive.

In addition, in the previous government the autonomy of the Central was eliminated and it became a lender of the Treasury, this affected the reserves, a kind of buffer of liquidity, highlights Pozo.

A third key point was to attract dollars. Between 2002 and 2017 the country received just USD 693 million on average per year in foreign investment. However, the stability generated by dollarization encouraged private and public investment.

The latter was driven, also by the resources of the second oil ‘boom’. A barrier to capital inflows has been the exit tax and the renegotiation of oil contracts in 2010. Turning Ecuador into an international financial center would attract dollars, but with the approval of the Monetary Code in 2014, the banking sector stopped being attractive. Despite all this, the system remains firm.

And one explanation is that the country has a solid banking system, which captures deposits and channels them to the productive sector, which increases economic activity and, with it, a sustained growth in liquidity, says Naranjo. “Since 2000 more dollars have come out than those that have entered: a deficit of USD 7 billion. But the money supply (banknotes, coins, bank deposits) exceeds 50 billion. That helps the system.”

The public debt has made it possible to compensate for the lack of dollars, but that has led to fiscal imbalances. (I)

Source: https://www.elcomercio.com/actualidad/dolarizacion-aniversario-crisis-sistema-economia.html