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Sunday, August 02, 2009

Odds Of Ecuador Dropping Dollar Mount With Ctrl Bk Legislation

QUITO (Dow Jones) July 31 --Concerns about Ecuador's commitment to the U.S. dollar have increased after its legislature on Thursday approved a bill that would effectively end the autonomy of the country's central bank.

Ecuador dollarized its economy in 2000 following an economic crisis, and the measure remains generally popular with its citizens.

President Rafael Correa however has spoken out against the dollarization of the economy, and once the new law regulating the central bank takes effect, the executive branch will gain control of that institution.

"Now that all the power is concentrated in the executive branch with a subservient central bank, the risk of de-dollarization has increased," former Finance Minister Mauricio Pozo told Dow Jones Newswires.

With the executive branch gaining formal control over the central bank, one potential impediment to abandoning the dollar would be removed, said Jaime Carrera, an economist with think-tank, the Center for Fiscal Policy.

Pablo Lucio Paredes, a former lawmaker, said the Correa administration doesn't need the central bank under its control to abandon the dollar, although this could help pave the way. He added that Ecuador lacks a system of checks and balances in running the economy.

Other economists pointed out that the central bank has already lost its independence under the Correa administration.

Credit Suisse said in a report that the move by Ecuador's legislature to give the executive branch control over the central bank will reduce the bank's influence over monetary policy in case the nation ditches the dollar.

"As long as the Ecuadorean economy remains dollarized, monetary policy decisions will likely remain confined to capping interest rates, as is the case now. However, if the government and the central bank eventually decide to de-dollarize the economy, the bill approved by Congress will reduce the central bank's ability to set monetary policy and will likely imprint a significantly more dovish tone upon monetary policy decisions, in our view," Credit Suisse said.


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