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Ecuador’s Interest Rates Drop

January 13, 2000

QUITO, Ecuador (AP) _ Annual interest rates on loans between banks have plummeted from 200 percent to 20 percent in Ecuador, a sign that the president’s decision to use the dollar as the country’s official currency was beginning to pay dividends.

Tuesday’s drastic interest rate reduction ``indicates that market rates will probably approach international levels when the dollar comes into full force,″ said Jorge Guzman, Ecuador’s banking superintendent.

The Central Bank’s board of directors approved a plan Monday to replace the sucre with the dollar over the next year, but only after President Jamil Mahuad threatened to call a special session of Congress to fire any Central Bank executives who tried to block the change.

Central Bank President Pablo Better quit in protest.

On Sunday, Mahuad had announced that he was pegging the exchange rate at 25,000 sucres to the dollar.

The precipitous drop in interest rates between banks on Tuesday is the first indication that fixing the exchange rate to the dollar is having a positive economic impact.

Mahuad predicted that once the economy stabilizes, annual interest rates on personal loans in dollars would run between 12 percent and 15 percent.

Olmedo Farfan, head of the School of Economics at the University of Espiritu Santo in Guayaquil, said that the reduction in interbank rates was misleading and would not necessarily result in lower interest rates for personal loans. Those rates would remain high until banks have a clearer idea of how the move toward a dollar economy will affect operations.

Production Minister Juan Falconi said in a television interview that tying Ecuador’s economy to the dollar could help reduce inflation, which topped 60 percent in 1999, the highest in Latin America.

The sucre recently plunged 20 percent in less than a week to 29,000 to the dollar. A year ago, the sucre was valued at 7,000 to the dollar.

Mahuad, a political centrist who took office in August 1998, has faced growing calls to resign after failing to stop the rapid decline of Ecuador’s economy, which contracted 7 percent last year.

Many economists predicted that speculation against the sucre would quickly send Ecuador into hyperinflation this year if the government did not act.

By eliminating the sucre, Mahuad has ruled out printing extra money to meet the budget, thus eliminating a major cause of inflation.

Mahuad’s rivals in Congress and labor leaders have criticized his decision to set the conversion of sucres to 25,000 to one dollar, saying the exchange rate would impoverish thousands of people with savings in sucres.

Leftist-led organizations that demonstrated last week in Ecuador’s main cities to demand Mahuad’s resignation resumed protests Wednesday.

Police used tear gas to disperse 300 demonstrators, mostly students, who tried to march on the presidential palace and to disrupt traffic in Quito’s center.

Defense Minister Jose Gallardo, a retired army general, was replaced Wednesday by Gen. Carlos Mendoza, the head of the armed forces, in what appeared to be a move by Mahuad to give the military a greater role in confronting spreading protests.

Update hourly