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Dollarization

Dollarization . Erica Vega Marlene Mata. Dollarization . Adopting a foreign currency of choice in a country in parallel to or instead of the domestic currency. For example Ecuador's adoption of the US dollar as their own currency.

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Dollarization

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  1. Dollarization Erica Vega Marlene Mata

  2. Dollarization • Adopting a foreign currency of choice in a country in parallel to or instead of the domestic currency. • For example Ecuador's adoption of the US dollar as their own currency. • Dollarization does not only occur with the US dollar. Other foreign currencies can be use by other countries for official dollarization.

  3. Foreign Currencies Adopted by Other Countries • European- Euro • New Zealand- Dollar • Swiss- Franc • Indian- Rupee • Australian-Dollar • US- Dollar

  4. Types of Dollarization • Unofficial: • Individuals prefer large transactions and savings in dollars. • While using domestic currency in small transactions. • Official:   • Government completely replaces local currency with foreign currency.

  5. Why Dollarization? • Promotes fiscal discipline and greater financial stability • Protect themselves against high inflation in the domestic currency

  6. Dollarized Countries

  7. Ecuador’s Economy • Highly dependent of its production and exports of raw products such as; • Bananas • Cocoa • Coffee • Shrimp • Oil (primary export)

  8. Primary Export-Oil • Finance new public services • Infrastructure • Ecuador's dependency on oil left the nation at the mercy of fluctuations in world market prices.

  9. Problems • The collapse of oil prices sent Ecuador’s economy into a crisis. • Suffered from inflation • Increased debt services • Uncompetitive industries • In order to weight out the collapse of oil prices the Government began to borrow large amounts of money

  10. Natural Disasters • El Nino phenomenon along with other natural disasters had a negative effect on key exports such as; • Shrimp • Bananas • Also damaging their agricultural economy and parts of their infrastructure

  11. Internal/External Factors • Asian economic meltdown affected oil prices • Collapse of the Brazilian economy • Political and Social instability within the country • Corruption within the Political Elites

  12. Ecuador’s Crisis • The sucre (Ecuador’s currency) fell into hyper-inflation • The country defaulted on its foreign debt • The entire banking sector collapsed • Ecuadorians rushed to put their accounts into a more stable currency such as the US dollar • Leading to the President’s decision to officially replace the country’s currency with the US dollar

  13. Conversion • In 2000 the Ecuadorian Government began exchanging sucres for dollars at the rate of S/25,000 = $1 • By the end of the year the sucre disappeared completely from circulation

  14. Government’s Actions • Began a policy of currency devaluation to “inflate away” the country’s internal debt and lower product prices. • Increase competition on the foreign market • Involvement with the IMF • Reduce fiscal deficit • Implement structure reforms for banking systems • Regain access to private capital markets

  15. Ecuador's Economic Growth

  16. Hidden Problems • However strong macroeconomic figures hide serious problems in the micro-economy. • Jobs are hard to find • The cost of living is high • Obtaining credit is expensive • Interest rates of around 20%

  17. Economic Indicators

  18. Advantages of Dollarization • Stabilizes inflation • Stabilizes overall economy • Sustains the buying power • Significant economic growth

  19. Disadvantages • Government can no longer make its own monetary decisions • Monetary policy is made by the Federal Reserve Board • Decisions made by the Fed might not be at country’s best interest • Competitive disadvantage to its trading partners because it cannot make its goods cheaper by devaluating its currency • People can be unfamiliar with the currency making it easier for counterfeiting

  20. Conclusion • Dollarization does nothing to resolve core problems that are affecting Ecuador's economy: • Lack of infrastructure • Massive internal and external debt • Continued political instability • Corruption

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