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Ecuador Monetary and Exchange Rate Policies
The Monetary Board, created in 1948, formulated the
government's monetary, credit, and public debt policies, including
maintenance of a stable currency, management of the foreignexchange reserves, control of import and export permits, and
regulation of international transactions. The Central Bank of
Ecuador was the official government bank, responsible for carrying
out the policies of the Monetary Board and for supervising the
activities of private banks
(see Financial System
, this ch.). The
Central Bank also issued the sucre (S/), the Ecuadorian unit of
currency. Notes were issued in denominations of 5, 10, 20, 50, 100,
500, and 1,000 sucres; copper-zinc coins in denominations of 5, 10,
20, and 50 centavos; and a pure nickel 1-sucre coin.
The official exchange rate was used for foreign debt repayment
and import transactions. During the 1970s, the currency's exchange
rate had remained fixed at S/25=US$1. At the end of December 1983,
after a series of currency adjustments, the rate stood at
S/54=US$1. The Febres Cordero administration quickened the pace of
currency rate adjustments. In September 1984, Febres Cordero
changed currency transactions from the official to the Central Bank
intervention exchange rate. The official exchange rate was set at
S/67=US$1, or a 24-percent devaluation in comparison with the rate
prevailing in December 1983. During 1985 the sucre depreciated a
total of 19 percent. The shock of a US$15 per barrel drop in the
value of Ecuadorian crude oil between December 1985 and April 1986
forced the government to devalue the currency another 14 percent in
January; a rate of S/109=US$1 held until July. This last
devaluation was part of a reform package that included a 15-percent
increase in prices paid to farmers and further reductions in import
tariffs to discourage smuggling and thereby increase tariff
revenues.
To help set the government's fiscal house in order and to help
persuade foreign creditors to provide essential foreign exchange,
in mid-1986 Febres Cordero ordered an across-the-board 5 percent
spending cut. Febres Cordero, however, faced with a serious
political setback to his party in midterm elections, lacked the
will and support to fully implement planned austerity measures.
In August 1986, Febres Cordero decreed that all private-sector
transactions would take place at the private free-market exchange
rate used by the private sector for overseas trade. This action and
the devaluation of the official sucre exchange rate produced a 35-
percent decline in the value of the national currency. Monetary
board officials took these measures to protect the country's
diminishing dollar reserves and to boost nonoil exports by making
them more competitive in price.
The lifting of foreign-exchange controls for private-sector
imports in 1986 and the government's tightened monetary and credit
policies resulted in a strong demand for dollars to finance
imports. This pressure on the sucre led to an oscillating freemarket exchange rate during 1987. By September 1987, the freemarket rate had reached S/206=US$1. Inflationary pressures also
began to have a significant impact on the exchange rate. In 1987
the consumer price index showed a 32.5 percent inflation rate for
that year, depreciating the value of the sucre by the end of the
year to S/280=US$1. Capital flight and inflationary pressures
contributed significantly to the devaluation of the sucre by an
additional 56 percent during the first half of 1988, from S/280 to
S/550=US$1.
In a last-ditch effort to improve his popularity and project a
populist image, Febres Cordero increased government spending and
allowed the Central Bank to loosen controls on public-sector
financing during the final seven months of his administration. The
monthly inflation rate averaged 7.16 percent in 1988, reflecting
relaxed government credit policies as well as increased food prices
brought on by a drought and by faulty agricultural policies during
1987. These policies included insufficient credit to farmers and
price controls that dampened their incentive to plant.
As he prepared to assume the presidency in mid-1988, Borja
unveiled an economic stabilization package of restrictive measures
aimed at stimulating GDP growth, devaluing the sucre to control
imports and save foreign-exchange earnings, and reducing the
central government's fiscal deficit, which had reached 12 percent
of GDP. Although the new president permitted price increases for
some food items, he sought to keep monetary growth below the rate
of inflation as a restraint on overall price increases. Interest
rates were allowed to rise. In August the Central Bank initiated a
gradual adjustment of the exchange rate, devaluing the currency by
S/2.5 per week. In 1989 Borja's anti-inflationary policies had
begun to pay off, even though the consumer price index increased
from 58 percent in 1988 to 76 percent in 1989.
During 1988 the free-market value of the sucre fluctuated
somewhat, ending the year at about S/500=US$1. By year end 1989,
however, the sucre traded at S/648=US$1. Throughout 1989 the
government maintained its contractive monetary policy to help
control inflation and sought to narrow the gap between the official
and free-market exchange rates. By December 1989, these policies
had produced mixed results. The inflation rate dropped to an annual
rate of 54 percent in December 1989, but real wages and salaries
declined markedly, and the country's fiscal deficit climbed to 17
percent of GDP. Overall GDP growth in 1989 did not exceed 1
percent.
Data as of 1989
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