2025 marks the 25th anniversary of the most important public policy in Ecuador’s history: dollarization. This measure is so popular that almost 90% of Ecuadorians support the US dollar as their legal currency. They trust a stable currency that retains its value over time, and they no longer worry about Ecuadorian politicians eroding their purchasing power through inflation.
Maintaining a globally recognized currency has brought multiple benefits to Ecuador, such as price stability, and the protection of property rights by preventing monetary authorities from acting without public consent. This protection particularly benefits the most vulnerable, allowing them to preserve and even regain their purchasing power. Saving is now possible, and long-term financial planning is a reality.
Businesses have also benefited, experiencing increased productivity. While GDP per capita has grown at a modest annual rate of 1.96% during dollarization, according to World Bank data, this exceeds the 0.46% annual growth rate before dollarization. This is because the country had yet to capitalize on the advantages that a dollarized economy and economic freedom can offer. But now, companies can focus on production and efficiency rather than worrying about price fluctuations and exchange rate instability.
Another significant advantage has been macroeconomic stability. Despite ongoing challenges such as a lack of sustained growth, fiscal deficits, and unemployment, Ecuador has avoided monetary crises, and inflation has remained at an average of 3.4% annually since 2002 when the country’s situation stabilized (from 1982 onward, annual inflation never fell below 22% until Ecuador adopted the US dollar). Interest rates remain low compared to those under the former national currency—the sucre. A great example of this is how the 30-day active interest rate of banks fell from 89% at the end of 1999 to just 16% a year later, reducing the risk premium since dollarization, according to data from the Central Bank of Ecuador. Additionally, the absence of exchange rate risk enables more reliable economic calculations for investment decisions.
This stability, however, came at a cost. Before dollarization, Ecuador faced one of the worst economic crises in its history, one that had already led many citizens to informally adopt the US dollar to protect their savings.
The crisis had multiple causes. External factors included the 1994 Tequila Crisis, an international financial crisis that began in Mexico caused by the lack of global reserves and currency devaluation. This spread across the region and triggered capital flight to developed economies which made it harder for Latin American countries to obtain credit. Compounding the stress were the 1995 war with Peru, which increased government spending; the El Niño phenomenon, which caused heavy rains that devastated export crops and financial institutions exposed to those sectors; the white spot disease crisis in shrimp, one of Ecuador’s top exports; and low oil prices, which weakened state revenues.
Internal factors also played a role. A 1994 law eliminated banking supervision, allowing financial institutions to self-regulate through market mechanisms. However, the same law maintained the Central Bank of Ecuador as the lender of last resort, creating a moral hazard problem: it encouraged banks to take excessive risks, knowing they would be bailed out.
Since its establishment in 1927, the Central Bank of Ecuador—tasked with issuing currency, managing exchange rates, and acting as the government’s fiscal agent—had struggled to maintain monetary stability. When the bank was created, the exchange rate was 5 sucres to 1 US dollar; by 1999, it had fallen to 6,825 to the dollar; and by 2000, it had exceeded 21,000 to the dollar.
Among the most damaging economic policies was a 1999 tax reform that eliminated income tax and replaced it with a 1% tax on all financial transactions. This decision accelerated the collapse of banks and the financial system at a time when liquidity was crucial. The Central Bank’s response? Printing and injecting more money into the system, leading to inflation and economic instability, and driving up prices disproportionately.
These factors resulted in the bankruptcy of many banks and a widespread loss of public trust in the monetary system, forcing the government to declare a banking holiday to prevent massive withdrawals. The crisis not only wiped out the savings of countless families, but also destroyed thousands of jobs and led to a surge in emigration as people sought better opportunities abroad.
Ultimately, then-President Jamil Mahuad accepted what was already happening informally and officially dollarized Ecuador’s economy. That’s when the government announced a formal dollarization at a fixed exchange rate of 25,000 sucres per US dollar. While this was partly an attempt to save his administration, it failed to do so, and he was overthrown just 12 days later.
Despite initial criticism from both national and international institutions regarding the risks and disadvantages of adopting and maintaining this system, dollarization has given Ecuador its longest period of monetary stability, proving that the benefits far outweigh the drawbacks.
Although monetary stability has been a major success, it is not enough to achieve high levels of development. Ecuador still needs economic policies that promote progress, such as trade and financial freedom, low taxes to encourage savings and attract capital, legal stability with laws that do not change with each administration, and a limited government.
While Ecuador faces many challenges ahead, the country has taken an essential first step in defending savings and individual prosperity—starting with its currency.
