Dollarization At All Cost
Dollarization at all costs was Finance Minister Fausto Herrera’s promise during a recent press conference – where listeners responded with a standing ovation. Herrera said the government would do whatever it takes to maintain the dollarized regime, by increasing the inflow of dollars, and protecting outflows.
But inflows to compensate for falling exports have come primarily from external financing, not from any opportune or creative policy to increase Ecuador’s non-oil export markets neither external direct investment.On the other hand, to curb outflows, the government has been forced to impose a 5% capital outflows tax, and Draconian import controls. The devaluation of the Colombian peso, combined with these controls, has generated a wave of Ecuadorians crossing the border to buy things they cannot find or afford at home.
In response, Correa has ordered hard border controls, and is imposing “safeguards” on products brought from Colombia by land – similar to those imposed over regular trade.Correa justified his new decree by saying: “Give me back the exchange rate, and I will cancel all safeguards.”He insisted that all of Ecuador’s problems come from falling oil prices and dollarization.So he continues to send mixed signals on his will (and capacity) to sustain dollarization, which could end up undermining the financial sector stability.
In fact, total liquidity was up $643 million between January and July 2015, despite a fall of $1.5 billion in private current deposits.Thus, even there is no evidence that the fall in deposits correlates to capital flying out of the country, these numbers seem to suggest that people are transferring part of their money from private banks to the mattress bank.
New Ministry of Finance figures for January-August show a relatively small deficit of $688 million (according to our estimates).Total revenues are $14.5 billion, or 69% of initial estimates for 2015 (based on an average oil price of $47 per barrel) and total expenditures are $15.1 billion (56.5% of year’s total). Capital expenditures were $5.85 billion, only 49% of estimated, showing that adjustments have already been made.
The government cut spending by $1.4 billion in January, and recently imposed another $800 million reduction. Even after these adjustments, the deficit could reach $2.25 billion by this December, requiring another $1 billion to finance it for the remaining of the year.
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