Dollarization no obstacle to the formation of the Andean Common Market, according to Ecuador

Lima, Aug. 25. The President of Ecuador’s Central Bank, José Luis Ycaza, today maintained that the dollarizing of his country’s economy " constitutes no obstacle to the formation of the Andean Common Market," planned for 2005.

"On the contrary, it will contribute to that aim because it is conducive to the harmonizing of economic policies and lays a sound groundwork for monetary management and total integration," he explained at the seminar "Ecuador’s dollarization and its effects on Andean subregional trade," held at CAN headquarters in Lima.

Ycaza was a speaker at the Seminar, together with Liliana Rojas–Suárez, Managing Director of the Deutsche Bank, and Fernando Aramburú Porras, President of Panama’s Grupo Financiero Capital, who made presentations on "Dollarization processes in Latin America" and "Panama’s monetary system and its effects," respectively.

After stressing that his country’s government places considerable priority on integration, Ycaza pointed out that by boosting the attainment of basic balances, Ecuador’s new monetary model backs up the subregional integration processes and the establishment of the Andean Common Market and the monetary area.

"Dollarization in Ecuador can contribute to the coordination of common goals and macroeconomic policies the integration movement so seeks," he stated.

In fact, he added "it makes it possible to put forward an initial alternative for the adoption of a common currency in the subregion," for which a prior process of monetary harmonization is needed if the aim of having a monetary area – common market is to be attained.

Liliana Rojas-Suárez, on the other hand, was of the opinion that "although dollarization or a common currency may be a desirable objective for the region in the long run, the restrictions being faced at present by many of the countries make this a less than optimum policy in the short run."

While she recognized that Ecuador does not fulfill the requirements for its dollarization, she felt that it does comply with those that are needed for a stabilization program based on a fixed rate of exchange.

"In that context, if dollarizing the economy helps to boost the reforms needed by the country, the advantages to be obtained in the short term can be significant," she concluded.

Fernando Aramburú, for his part, gave an account of Panama’s experience with dollarization for over almost one hundred years and described how his country managed the issue and how dollarization both benefited and was harmful to the economy.

He went on to explain that while Panama’s model is not perfect, it does constitute an important experience that should be considered. "It is not a cure-all, but it does create stability and allow for more long-term planning, as well as better positioning within the international market," stated Aramburú, adding that for that reason "the Panamanian wouldn’t change their dollar for anything in the world."

Roberto Guarnieri, President of the Latin American Reserve Fund (FLAR), who added his observations as a panelist, maintained that Ecuador’s dollarization affects its economic operation, in that it eliminates the exchange rate as an instrument for adjustment and reduces or totally annuls the role of the Central Bank as the lender of last resort if the domestic monetary situation calls for action to be taken, especially in the face of balance of payments disruptions.

He explained that an essential function of the FLAR is to cooperate with countries in their stabilization efforts and to come to their aid if they experience external disruptions or balance of payments deficits. For that reason "it does not consider the dollarization of its economy by a member country to be in any way inconsistent with the full exercise of its constituted objective," he stressed.

Guarnieri showed himself to be in favor of making adjustments in Andean and Latin American supranational institutions to allow them to provide effective assistance to member countries in coping with the effects of globalization, capital volatility, and instability.

CAN Director General Jorge Vega, for his part, touched upon the performance of some Andean macroeconomic indicators, the growth of intra-Andean trade, and the efforts at macroeconomic policy harmonization in which the member countries are engaged.

"This coming September 9, the sucre will be replaced by the new currency as Ecuador’s legal tender. This step is unprecedented within the CAN and, as such, deserves thorough analysis, precisely at a time when Andean integration is deepening and moving toward the formation of a common market," he pointed out.