Ecuador has solidified its commitment to a dollarized economy with the official issuance of Decree 565 by President Daniel Noboa on March 18, 2025. Celebrating the 25th anniversary of the country adopting the US dollar, the decree officially designates the dollar as Ecuador's sole legal tender and proposes crucial constitutional reforms aimed at entrenching dollarization further.
The decree stipulates two main provisions: first, it confirms the US dollar as the only legal currency throughout Ecuador, and second, it initiates reforms to Article 303 of the Constitution to prevent any future attempts to adopt a domestic or alternative currency. If the changes are implemented, Ecuador’s Central Bank would be explicitly prohibited from issuing any currency other than US dollars.
Dollarization was first introduced on January 9, 2000, by then-President Jamil Mahuad during a turbulent economic crisis. At that time, Ecuador was grappling with banking collapse and inflation rates soaring to 91%. Facing immense pressure, Mahuad made the pivotal decision to stabilize the country's economy through dollarization, but his term was cut short as he was ousted just 13 days later. His vice president, Gustavo Noboa, maintained dollarization against considerable opposition, and it has since garnered significant public support.
Fast forward to today, dollarization enjoys a remarkable 90% approval rating among the Ecuadorian populace. Many citizens credit the policy with restoring confidence in the banking system and providing economic stability through various challenges, including natural disasters, the COVID-19 pandemic, and ongoing political turmoil.
The timing of Noboa's decree correlates with his campaign for re-election. At only 37 years of age, Noboa faces pressing issues ranging from increasing crime rates and energy shortages to stagnating economic growth. While the president has projected a 4% economic growth rate for 2025, the International Monetary Fund (IMF) has painted a more conservative picture, forecasting a growth rate of just 1.2%. In addition, the economy is expected to contract by 1.5% in the third quarter of 2024, adding to the complexity of the challenges ahead for the president.
Noboa’s decree responds to longstanding fears about potentially abandoning dollarization. Economists argue that Ecuadorians were essentially dollarized long before the formal adoption, highlighting the deep integration of the US dollar into the daily lives of Ecuadorians. By officially enshrining dollarization in the Constitution, Noboa aims to provide clarity and assurance amid an environment of uncertainty, where security challenges and a sluggish economy persist.
This decree not only safeguards the future of Ecuador's economic framework but also manages the inherent trade-offs of relying on the US dollar while conceding significant control over monetary policy. The historical significance of this move is not lost on many, as it marks a determined stride towards an economic strategy that seems to resonate well with a majority of its citizens.
In summary, as Ecuador embarks on another chapter in its monetary history, the reaffirmation of dollarization carries implications not only for economic stability but also for the political landscape ahead. Noboa’s approach reflects a delicate balance of maintaining the people's trust, steering through current adversities, and planning for a sustainable future in the face of fluctuating predictions in global markets.
