Ecuador officially adopts US dollar as sole legal currency

Ecuador has taken a significant step toward solidifying its dollarized economy with the official issuance of Decree 565 by President Daniel Noboa on March 18. 

The decree, marking the 25th anniversary of the country's adoption of the US dollar, ratifies the greenback as Ecuador's sole legal currency and proposes constitutional reforms to permanently entrench dollarization, Caliber.Az reports, citing foreign media.

The decree contains two critical provisions. First, it officially confirms the US dollar as Ecuador’s only legal tender. Second, it calls for reforms to Article 303 of the Constitution to prevent any future attempts to replace the dollar with a domestic or alternative currency.

Under the proposed changes, Ecuador’s Central Bank would be explicitly prohibited from issuing any currency other than the US dollar. This move is designed to prevent any future government from reversing the dollarization policy, which has garnered widespread support across the country.

Dollarization was first introduced on January 9, 2000, by then-President Jamil Mahuad during a period of economic crisis. Amid banking collapse, inflation rates reaching 91%, and frozen deposits, Mahuad made the critical decision to stabilize the economy by adopting the US dollar. However, Mahuad was ousted just 13 days later, and his vice president, Gustavo Noboa, continued with the policy despite opposition.

Now, 25 years later, dollarization enjoys approximately 90% public approval, with many attributing the policy to restoring confidence in the banking system and providing economic stability through tumultuous periods like earthquakes, the pandemic, and ongoing political unrest.

The timing of Noboa’s decree coincides with his bid for re-election. At 37 years old, the president is facing significant challenges, including rising crime rates, energy shortages, and stagnating economic growth. While Noboa projects a 4% economic growth rate for 2025, the International Monetary Fund has forecasted a much lower 1.2% growth, with the economy contracting by 1.5% in the third quarter of 2024.

The decree comes in response to long-standing concerns over the potential abandonment of dollarization. Many economists argue that Ecuadorians effectively dollarized long before the government formally adopted the policy, noting the deep integration of the US dollar in daily life. Noboa’s decree is seen as a measure to ensure economic stability and certainty during a time of growing uncertainty, with the president aiming to provide clarity in the face of security challenges and efforts to reignite economic growth.

By cementing dollarization in the Constitution, Noboa hopes to safeguard Ecuador's economic future while balancing the stability of the US dollar with the limitations of having little control over monetary policy.

By Khagan Isayev