Economy of Ecuador

Ecuador has substantial oil resources and rich agricultural areas. Because the country exports primary products such as oil, bananas, and shrimp, fluctuations in world market prices can have a substantial domestic impact. Industry is largely oriented to servicing the domestic market. Deteriorating economic performance in 1997-98 culminated in a severe economic and financial crisis in 1999. The crisis was precipitated by a number of external shocks, including the El Niño weather phenomenon in 1997, a sharp drop in global oil prices in 1997-98, and international emerging market instability in 1997-98. These factors highlighted the Government of Ecuador's unsustainable economic policy mix of large fiscal deficits and expansionary money policy and resulted in an 7.3% contraction of GDP, annual year-on-year inflation of 52.2% and a 65% devaluation of the national currency in 1999, which helped precipitate an unprecedented default on external loans later that year.

On January 9, 2000, the administration of President Jamil Mahuad announced its intention to adopt the U.S. dollar as the official currency of Ecuador to address the ongoing economic crisis. Subsequent protest led to the removal of Mahuad from office and the elevation of Vice President Gustavo Noboa to the presidency. The adoption of the U.S. dollar as currency, as opposed to pegging a local currency to it, means that the benefits of Seigneurage accrue to the U.S. economy whether or not there is any compensation for this.

The Noboa government confirmed its commitment to dollarize as the centerpiece of its economic recovery strategy. The government also entered into negotiations with the International Monetary Fund (IMF), culminating in the negotiation of a 12-month stand-by arrangement with the Fund. Additional policy initiatives include efforts to reduce the government's fiscal deficit, implement structural reforms to strengthen the banking system and regain access to private capital markets. Buoyed by high oil prices, the Ecuadorian economy experienced a modest recovery in 2000, with GDP rising 1.9%. However, 70% of the population lives below the poverty line, more than double the rate of 5 years ago. Inflation in 2000 remained high at 96.1%, but the rate of inflation continues to fall. Monthly inflation in February 2001 was 2.9%.

Ecuador and the IMF

Journalist Greg Palast, of the British Observer, alleges that the International Monetary Fund is attempting an economic coup against the Ecuadoran government. He cites documents which he claims show the IMF is working to force the nation to grant British Petroleum rights to build and own an oil pipeline over the Andes.