On February 8th, President Lenín Moreno sent his first version of the bill for the Defense of Dollarization to the National Assembly. This bill would reform the Organic Monetary and Financial Code (Comyf). The President asked that this initiative be treated as an “Urgent Economic Law.”
When the bill was submitted, the Ministry of Economy and Finance said in a statement that the initiative seeks, among others, to protect dollarization.
This draft law also aimed to provide autonomy to the Central Bank of the Ecuador (BCE), to avoid political maneuvering and “irresponsible” use of international reserves to finance the expenditure of the State.
Thus, it sought to protect the resources of the public sector and citizens, which are deposited in the Central Bank.
If approved the Monetary and Financial Policy and Regulation Board will become the Financial Policy and Regulation Board, which will be an independent body in charge of issuing prudent regulatory framework to which financial, securities and insurance entities must adhere. It would also be responsible for formulating policies and issuing regulations that promote financial inclusion.
In addition, this bill seeks to reimplement the four systems of the entity’s balance sheet, to guarantee and make transparent the due support of international reserves to the deposits held in the BCE.
Assembly returned the bill for the Defense of Dollarization to the President
Within two days of its submission, the Legislative Administration Council (CAL) of the National Assembly returned the bill to the President.
Within twenty minutes of the CAL session opening, the council decided to not qualify, and return the bill because, “it does not meet the requirements of the Constitution and the Law.”
Patricio Donoso, a member of the CAL, said that the document was returned because there were errors that the Government needed to clarify. “In some articles there is no mention of the Law that is being reformed.”
However, the legislator indicated that they are dealing with problems of form and not of substance and that after the changes, the President will be able to re-submit the initiative.
Government resubmits the bill and the CAL again rejects it
After making the formal requirements that the Legislature recommended, on Tuesday, February 23rd, the government sent the bill back to the National Assembly.
And again, after one week of review, the Legislative Administration Council (CAL) did not qualify the bill for the Defense of Dollarization Law, due to “substantive issues.”
Four of the seven members of the council, voted to not qualify and to return the project as “unconstitutional.” Their decision was based on a report from the Legislative Technical Unit.
According to legislator Ana Belén Marín, the bill has 14 unconstitutional issues. “I will not allow a law that, no matter how many commitments it has with international organizations, violates the constitution,” said Marín, without specifying what the unconstitutional issues were.
Marín also said that the project intends to privatize the Central Bank of Ecuador (BCE).
Another legislator had a different view of what happened in the CAL vote.
“They raised issues of unconstitutionality…it was not our responsibility to make these assessments,” said Cristina Reyes, a member of the CAL.
“I voted against” (the return),” she said.
On Tuesday, President Lenín Moreno, agreed with Reyes.
“The Legislative Administration Council (CAL) of the National Assembly does not have the power to determine whether a bill is unconstitutional or not. Its powers are limited to verifying compliance with the formal requirements of the bill (art. 56 Organic Law of the Legislative Function),” said the President in a statement posted on his Twitter account.
He also said that “the Assembly has the power and responsibility to deal with a bill. Only after that can it pronounce itself to approve or deny it, but the Assembly cannot, through an administrative body made up of 7 legislators, shirk its responsibility to analyze and treat a law. Even more so if it is an Urgent Economic Law.”
One of the objectives of the bill is to provide technical autonomy to the Central Bank of Ecuador (BCE) to avoid political manipulations and irresponsible use of international reserves to finance state spending.
The legal proposal provides the ECB with a Board of Directors made up of five members, who will be technical professionals specialized in monetary and financial matters, and without conflict of interest. The President of the Republic will be the one who proposes the candidates, and it will be up to the National Assembly to appoint them.
Defining what the Defense of Dollarization bill really means
With the second rejection of the bill by the CAL, questions arise about what this project contains and whether or not the functions of the Central Bank change.
José Hidalgo, director of the Cordes consulting firm, offered answers to some general questions about the bill and also an outline of what the modification to the Organic Monetary and Financial Code would do.
What is the Central Bank?
In dollarization, the Central Bank (BC) is a reserve bank that guarantees the sustainability of the monetary system. It was conceived as a bank with sufficient liquid assets to respond to the deposits it manages, such as those of private banks, social security, national governments, sectional and public companies.
Who does the money that is kept in the entity come from?
Part of it comes from the private financial system, a process known as the banking reserve. It saves a percentage of the deposits received by banks, cooperatives and mutuals, which cannot be used.
The Central Bank is also the official depository of the public sector, including social security capital, municipalities, prefectures, and others.
Can that capital be used?
The use of that capital by the public sector is for day-to-day payments. If the central government seeks to pay salaries, it uses the money it has deposited in the Central Bank. The same happens with the municipalities.
In the case of the private financial system, if there is any liquidity requirement, they must have access as long as they maintain the legal minimum that corresponds to the banking reserve.
What is the new mechanism proposed to appoint managers to the BC?
The Central Bank and the Monetary and Financial Regulation Board respond to the Executive because he appoints the manager of both. The new bill seeks to have a board of directors, a maximum body that is made up of five members: technical professionals and specialized in monetary and financial matters.
They would be selected by a shortlist sent by the President but approved by the Assembly.
Now only the President has control over the BC, and with the new bill, there would be a balance of powers.
Are there or are not changes in the functions of the Central Bank?
It maintains the same functions as the definition of monetary policy in Ecuador, but with the difference that at present this falls mainly on a management of the Central Bank and a Board. The project would provide a balance of powers.
What are the current functions of the BC?
- Official depositary of the public sector.
- Manages the payment system within the economy.
- Reviews the integrity, transparency and security of the State’s resources that are managed through banking operations.
- Offers people, companies and public authorities information for making financial and economic decisions.
What are the positive and negative points of the bill?
- Guarantees that the dollar is the only currency in circulation in the Ecuadorian economy.
- Ensures that the Central Bank is not a lender to a government.
- Guarantees that the Central Bank and the Financial Regulation Board are technical organizations that follow monetary and financial regulations according to international standards.
- Having two control bodies (the ECB’s board of directors and the Financial Regulation Board) can cause confusion in the functions.
What is prevented in the new bill?
What this project does is prevent the Central Bank from acting as a lender to the governments to come.
And furthermore, the Ecuadorian State may not force any person or company to accept a means of payment other than the United States dollar.
Impact of Defense of Dollarization not passing
If the Legislative Administration Council (CAL) continues to block the Defense of Dollarization bill from being brought before the Assembly, the next disbursement of the International Monetary Fund (IMF) of $450 million—which is scheduled to be delivered in April—would be put on hold.
Economic analysts think that there would also be little possibility that other international organizations would grant Ecuador loans. This is because, among the commitments with the IMF, is to seek the independence of the Central Bank of Ecuador and the protection of dollarization, says analyst Walter Spurrier.
“The IMF has to do a review this month of how Ecuador is complying with its commitments. The control of public spending is being fulfilled, but if the legal change condition (the bill) of the Defense of Dollarization Law is not approved, the mission will not allow its report to be submitted to the board of directors requesting that the disbursement be made, and the next government would have to see what it does about it,” said Spurrier
The proposal for the technical agreement reached with the IMF was the financing of $6.5 billion for 27 months. Since September of last year, $4 billion have been disbursed.
Spurrier believes that if the commitments are not fulfilled, the next government will have to face arrears in payments, such as salaries and suppliers.
Scenarios with which Professor Jorge Calderón agrees, who adds that the possibility of seeking loans with other international organizations is also closed.
“If with the IMF we begin to fail or not comply with what we have committed to, that will generate a domino effect with the other instances,” says Calderón, who adds that it could happen with the World Bank or the Development Bank of America Latina (CAF).
He says that the country, faced with necessity, would turn to China under oil commitments.
“The deficit gap is going to widen, one because we do not have the resources to address them and two because we will have greater needs,” he points out.
Both Calderón and Spurrier say that this scenario would pass to the next government and will depend on their policies of continuing or not with the IMF’s financial program.