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The dollarization law will be part of Moreno’s legacy

Published on April 28, 2021

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A month before leaving the presidency of Ecuador, Lenín Moreno leaves a signature piece of legislation, the “Law for the defense of dollarization,” as a sort of inheritance for incoming president-elect Guillermo Lasso in the elections, a law that is vital for Ecuador to continue accessing international loans.

The Law was passed by the National Assembly on Thursday with 86 (out of 137) votes in favor and has already been sent to the President for his approval.

“Ecuador won with the approval of the bill,” said a Government spokesperson after it took months of work—in the middle of an electoral process that dramatically contributed to its politicization—to get it passed.

The objective of the law

For many, the law’s primary objective was to stop the next government from using the Central Bank as its own reserve, a move that most believe was done in case the leftist Andrés Arauz—who in his campaign had announced that he would use the country’s reserves to rescue hundreds of thousands of Ecuadorians from poverty—won the election.

That threat has now dissolved, at least in the short term, after the victory of the center-right Lasso in the April 11 ballot, as the former banker confirmed that he would not touch money that does not belong to the Government. The monies in question are funds deposited through the Central Bank (BC), which is the “administrator” of the resources of private banking, social security, national governments, sectional governments and public companies, as a guarantor of the sustainability of the monetary system and liquidity.

“The BC reserves are shielded, citizen deposits are safe, the entity regains its autonomy. Never again will a government use it as petty cash, “said Government Minister Gabriel Martínez.

IMF conditions

Stopping any attempt to touch those reserves was one of the IMF’s conditions when it granted Ecuador $6.5 billion last year, of which $2.5 billion have yet to be delivered, pending periodic technical reviews for 27 months. One of them is in progress for the delivery this April of $450 million, although it will be delayed by the approval of the bill in the outgoing National Assembly.

For the opposition and social groups, the project carries possible biases of unconstitutionality and implies a “privatization” of the BC by leaving it outside the sphere of the Government, which in their opinion could encourage capital flight and further destabilize dollarization.

The US currency was established in Ecuador as legal tender in 2000, after a serious financial crisis, which ended with some thirty private banks taken over by the State, at a huge cost and a social crisis whose consequences still persist.

But for Moreno, the Law “includes reforms that strengthen the economic system, financial sustainability and the purchasing power of Ecuadorian families.” “Now no government will misuse the people’s money, and the Central Bank will work independently,” said the Ecuadorian president, for whom the approval of the Law had become a matter of political legacy.

Focused on restricting political interference in the BC as happened in the past, and on protecting the currencies of the country, which since 2019 has been going through an extremely difficult financial situation, the Government had to send the bill to the Assembly three times before it was accepted for processing, and finally approved on Thursday.

Three legs of dollarization

The stability of the monetary system is a continuous problem for Ecuadorian governments, even more so, in times of weak economies.

“Dollarization is a three-legged table. One leg is in the banks and cooperatives, which is taken care of with a good management of them.

The second is the resources in people’s pockets, and the third is in the Central Bank,” Finance Minister Mauricio Pozo recently explained. “If I take care of this, I am taking care of liquidity, and if I take care of liquidity, I am taking care of dollarization,” he stressed.

For this reason, he urged the next government to “safeguard” that the BC money is not “misused” because “it destroys the concept of the accumulation of reserves (…) what it does is destroy the exchange regime.”

The Law obtained the support of the outgoing assembly members of the Social Christian Party (PSC), Creo (de Lasso), SUMA, BIN, as well as some of Alianza País (ex-Moreno’s party)—a possibility that would not have occurred in the new legislature as of May 14, it will be mostly left-wing.

The Law gives the Central Bank greater autonomy through the creation of two boards, one for Monetary Policy and Regulation and the other for Financial Policy and Regulation, with three members each, independent from the Executive, although proposed by the President and appointed by the National Assembly.

In theory, this means that short-term interference by the government of the day will be stopped, as the power of the Government to appoint the Bank manager is also removed, passing instead to the Monetary Board. And it establishes, once again, a four-balance sheet regimen, which had been in force from 2000 to 2014, until the law was amended by former President Correa.

Law does not impact cooperatives and savings banks

Recent “alerts” that have been seen on social media are claiming that Law will harm savings and credit cooperatives, and that many of these would even disappear. These alerts are “false” and have “political overtones,” says Édgar Peñaherrera, the President of the Association of Integration Organizations of the Popular and Solidarity Financial Sector (Asofipse).

Peñaherrera hates that these “malicious rumors” which circulated before, and during, the last electoral campaign continue and spread through social networks. He said that everything that is specified in the regulations approved by the Assembly has already been regulated by the Monetary and Financial Policy and Regulation Board and other laws in the past.

Peñaherrera points out that the law incorporates solvency and financial prudence requirements in order to safeguard the sustainability, stability and protection of its associates’ deposits.

Regarding the cooperative sector, he added that currently stagnation has been observed due to the pandemic, and that the delinquency index has risen slightly although it is understandable, since “the partners have the will to pay, but not the resources to do so for all measures (confinement) imposed” to try to stop the contagion.

Thru last March, the cooperative sector registered $14.45 billion in total deposits and $18.209 billion in assets.

There are certain people, including economic analysts, who claim that the regulations will affect the cooperative sector, especially the smaller institutions, since the established requirements would not be contextualized.

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