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Ecuador Monetary and Exchange Rate Policies
http://www.photius.com/countries/ecuador/economy/ecuador_economy_monetary_and_exchang~5.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    The Monetary Board, created in 1948, formulated the government's monetary, credit, and public debt policies, including maintenance of a stable currency, management of the foreignexchange reserves, control of import and export permits, and regulation of international transactions. The Central Bank of Ecuador was the official government bank, responsible for carrying out the policies of the Monetary Board and for supervising the activities of private banks (see Financial System , this ch.). The Central Bank also issued the sucre (S/), the Ecuadorian unit of currency. Notes were issued in denominations of 5, 10, 20, 50, 100, 500, and 1,000 sucres; copper-zinc coins in denominations of 5, 10, 20, and 50 centavos; and a pure nickel 1-sucre coin.

    The official exchange rate was used for foreign debt repayment and import transactions. During the 1970s, the currency's exchange rate had remained fixed at S/25=US$1. At the end of December 1983, after a series of currency adjustments, the rate stood at S/54=US$1. The Febres Cordero administration quickened the pace of currency rate adjustments. In September 1984, Febres Cordero changed currency transactions from the official to the Central Bank intervention exchange rate. The official exchange rate was set at S/67=US$1, or a 24-percent devaluation in comparison with the rate prevailing in December 1983. During 1985 the sucre depreciated a total of 19 percent. The shock of a US$15 per barrel drop in the value of Ecuadorian crude oil between December 1985 and April 1986 forced the government to devalue the currency another 14 percent in January; a rate of S/109=US$1 held until July. This last devaluation was part of a reform package that included a 15-percent increase in prices paid to farmers and further reductions in import tariffs to discourage smuggling and thereby increase tariff revenues.

    To help set the government's fiscal house in order and to help persuade foreign creditors to provide essential foreign exchange, in mid-1986 Febres Cordero ordered an across-the-board 5 percent spending cut. Febres Cordero, however, faced with a serious political setback to his party in midterm elections, lacked the will and support to fully implement planned austerity measures.

    In August 1986, Febres Cordero decreed that all private-sector transactions would take place at the private free-market exchange rate used by the private sector for overseas trade. This action and the devaluation of the official sucre exchange rate produced a 35- percent decline in the value of the national currency. Monetary board officials took these measures to protect the country's diminishing dollar reserves and to boost nonoil exports by making them more competitive in price.

    The lifting of foreign-exchange controls for private-sector imports in 1986 and the government's tightened monetary and credit policies resulted in a strong demand for dollars to finance imports. This pressure on the sucre led to an oscillating freemarket exchange rate during 1987. By September 1987, the freemarket rate had reached S/206=US$1. Inflationary pressures also began to have a significant impact on the exchange rate. In 1987 the consumer price index showed a 32.5 percent inflation rate for that year, depreciating the value of the sucre by the end of the year to S/280=US$1. Capital flight and inflationary pressures contributed significantly to the devaluation of the sucre by an additional 56 percent during the first half of 1988, from S/280 to S/550=US$1.

    In a last-ditch effort to improve his popularity and project a populist image, Febres Cordero increased government spending and allowed the Central Bank to loosen controls on public-sector financing during the final seven months of his administration. The monthly inflation rate averaged 7.16 percent in 1988, reflecting relaxed government credit policies as well as increased food prices brought on by a drought and by faulty agricultural policies during 1987. These policies included insufficient credit to farmers and price controls that dampened their incentive to plant.

    As he prepared to assume the presidency in mid-1988, Borja unveiled an economic stabilization package of restrictive measures aimed at stimulating GDP growth, devaluing the sucre to control imports and save foreign-exchange earnings, and reducing the central government's fiscal deficit, which had reached 12 percent of GDP. Although the new president permitted price increases for some food items, he sought to keep monetary growth below the rate of inflation as a restraint on overall price increases. Interest rates were allowed to rise. In August the Central Bank initiated a gradual adjustment of the exchange rate, devaluing the currency by S/2.5 per week. In 1989 Borja's anti-inflationary policies had begun to pay off, even though the consumer price index increased from 58 percent in 1988 to 76 percent in 1989.

    During 1988 the free-market value of the sucre fluctuated somewhat, ending the year at about S/500=US$1. By year end 1989, however, the sucre traded at S/648=US$1. Throughout 1989 the government maintained its contractive monetary policy to help control inflation and sought to narrow the gap between the official and free-market exchange rates. By December 1989, these policies had produced mixed results. The inflation rate dropped to an annual rate of 54 percent in December 1989, but real wages and salaries declined markedly, and the country's fiscal deficit climbed to 17 percent of GDP. Overall GDP growth in 1989 did not exceed 1 percent.

    Data as of 1989


    NOTE: The information regarding Ecuador on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Ecuador Monetary and Exchange Rate Policies information contained here. All suggestions for corrections of any errors about Ecuador Monetary and Exchange Rate Policies should be addressed to the Library of Congress and the CIA.

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