Examining the Effects of Dollarization on Ecuador – COHA
The idea of supranational unification of Central American countries has frequently been discussed. Not an elimination of sovereign nations, but turning over common interests to an international organization, similar to the EU, but on a vastly different scale. A common set of laws and even a common currency is usually mentioned.
Considering that Panama and El Salvador already use the dollar, and that Belize dollars are backed entirely by the US dollar and the BZD is fixed at rate of 2:1, the US dollar is naturally the primary candidate for a common currency.
Ecuador switched to the US dollar roughly 15 years ago, for a very different reason than El Salvador. The Ecuadorian economy was in free fall, and hyperinflation was eroding the value of the sucre. The sucre lost 67% of its foreign exchange value during 1999, then in one week nosedived 17%, ending at 25,000 sucre = 1 U.S. dollar on January 7, 2000. On January 9, President Jamil Mahuad announced that the US dollar would be adopted as Ecuador's official currency.
On January 1, 2001 under the government of President Francisco Flores, the Law of Monetary Integration went into effect and allowed the free circulation of U.S. dollar in the country (see dollarization), with a fixed exchange rate of 8.75 colones. The colon has not officially ceased to be legal tender, but as of October 2016 there are only the equivalent of US$3.16 million dollars in circulation in colones which is insignificant for a population of over 6 million.
The colon had been stable for many years, but remittances are such a big part of the ESD economy, that it became easier to simply let the dollar and colon circulate side by side. As a practical consequence the colon has almost entirely vanished.
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Examining the Effects of Dollarization on Ecuador July 26, 2016
