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Ecuador: Golpes, Dollarization, and FTAA Responsibilities Noboa named 13 ministers to a traditional cabinet, rejecting the system of super ministers favored by his predecessor. The formation of a megabloque of five parties (the DP, PSC, PRE, PCE and FRA, of which the Social Christians, with 28 deputies, was the largest) gave the new administration a majority in Congress. However, the history of political coalitions in Ecuador is one of instability, and hard political choices lie ahead. Noboa promised to implement the dollarization of Ecuador’s economy, a policy proposed first by Mahuad. Pointing to the Argentine experience, the government of Ecuador has argued that dollarization presents the best solution for regaining economic stability. At the time of the golpe, inflation was estimated at 14.3% and worsening, with annual inflation that exceeded 70%. Unemployment in January was officially recorded at 19% and sales were down drastically in all areas (in dollar terms). Unfortunately, Mahuad and his administration did not take—or were prevented from taking—decisive steps to address an economy spiraling out of control. Mahuad’s announcement that Ecuador would not pay its debts caused an immediate drying up of whatever short-term credit remained and further stimulated capital flight and uncertainty about the future within the private sector. Although Ecuador continued negotiations with the International Monetary Fund, an original loan rumored at $450 million was reduced to $250 million and a final agreement was never reached. After the coup, the IMF resident office in Quito informed Noboa that it was willing to accelerate the final negotiation of this loan. A mission from the IMF headquarters in Washington also spent about two weeks in Quito working on a letter of intent based on the dollarization proposal. At the same time, BCP Securities of Greenwich, Connecticut released a report that accused the IMF and US Treasury of having deliberately forced Ecuador into default. The alleged logic was that Ecuador’s small economy would not have an impact on the international financial system. The case could be used as an example to warn creditors that they would no longer be bailed out by international institutions and developed countries (as occurred in Russia, Brazil, Mexico and Asia). Creditors would be forced to take a loss, leading to more careful risk assessment in the future. The IMF was also rumored to be seeking stronger conditions for its loans. Holders of Ecuador’s bonds were not happy at the default and drew ammunition from the report to blame the US Treasury and the IMF. Currently, the change in government and the apparent steadying hand of Noboa seem to be moving the country toward stability. The megabloque was reported in Diario de Hoy to be sending the so-called “trolley bus” law to Congress proposing changes that affect many different economic areas, including monetary policy, financial institutions, commerce, public finances, hydrocarbons, the electric sector, public contracts, labor legislation, customs and municipal regimes. In addition, Minister of Finance Jorge Guzmán announced that 314,000 banking customers would have their bank accounts unfrozen. This action would affect about $2.2 billion in funds that have been frozen since March 1999, and a bond issue worth $900 million was announced on February 8 to back it. A poll by Deloitte & Touche showed a recovery of 31 points in the Business Confidence Index in January and a high level of acceptance of the government’s economic model, albeit with doubts about its political will to implement the program. Observations Assuming the allegations against the IMF and US Treasury are true, forcing more responsibility onto private creditors is not necessarily a bad idea. Their risks should not be assumed by taxpayers, except in the most serious of cases of threats to the international system or to national security. However, using Ecuador as a test case, instead of announcing a general review and tightening of lending policy, was not necessarily a good or even a fair idea. Ultimately, responsibility for the inability of Ecuador and the IMF to reach an agreement earlier cannot be attributed entirely to either party. One hopes that the experience will serve as a lesson and will spark efforts to repair the damage to Ecuador’s economy. This will not work without restructuring and opening up the economy to accompany the announced dollarization. These measures should be accompanied by good advice and financial backing from the international community to support the strong measures required on the part of the Ecuadorian government. Ecuador’s FTAA Responsibilities Ecuador is currently Vice Chair of the Trade Negotiating Committee (TNC), and is scheduled to become the Chair in April 2001. Some concern has arisen as to whether the country could fulfill its responsibilities or safely host TNC meetings, given the political and economic situation of late. However, the Ecuadorian delegates have been attending regular meetings of the Negotiating Group, and the worst of the political strife appears to be over. The longer lasting and more painful economic adjustments are yet to be implemented, and only time will tell how successfully they will be managed. For now, it appears that Ecuador will be able to meet its FTAA responsibilities in the coming months.
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