Key Opposition Leader Backs Dollarization Plans

Market Wire, 20050229

Reuters reported that key opposition powerbroker Jorge Marun has provisionally agreed to back President Jamil Mahuad's plan to adopt the U.S. dollar as Ecuador's sole legal currency. Marun, leader of the Roldosista party, whose support is essential for Congressional approval of the plan, said he would back Ecuador's shock economic programme under the condition that Mahuad pay more attention to social issues. For most of the last decade, Congress has blocked economic reforms amid popular protest from well-organised union workers and indigenous groups. Mahuad lacks a Congress majority and needs the backing of the Rodolsistas.

Marun played down further fiscal measures, such as raising taxes and cutting spending, despite most economists saying such reforms were essential if dollarization is to do more than just paper over the cracks of an inflation and debt-ridden country. "There is no need for more taxes in this country...any spending cuts will be nothing spectacular," Marun added.

The initial dollar plan envisages Ecuador virtually abandoning its currency over the next six months, shutting the central bank and surrendering monetary control in return for low inflation and borrowing costs to help the recession-hit economy.

The currency plan would establish the U.S. dollar as legal tender in Ecuador and make it the currency of choice for large transactions. Small purchases could still be made in sucres -- which are currently 25,000 to the dollar after falling 67 percent in value last year and 17 percent in the first week of this year.

Economic analysts have said the Achilles heel to Mahuad's dollarization plan could be a lack of political will in Congress to push through fiscal reforms which could initially squeeze incomes of the legislature's largely poor constituents.