QUITO, Ecuador -- Ecuador plans to buy back its currency over the next year, replacing it with the U.S. dollar to stabilize the economy and prevent hyperinflation.
Ecuador's Central Bank opposed the move, but President Jail Mahuad warned that he would call a special session of Congress Tuesday to fire any Central Bank executives who tried to block the measure.The step means the Central Bank will lose control of much of Ecuador's monetary policy.
Juan Falconi, the production minister, said Monday that sucres currently in circulation in the Andean nation would be bought back and only small denomination sucre coins would be used.
Finance Minister Alfredo Arizaga said in a television interview Monday that Ecuador has $400 million worth of sucres in circulation and holds foreign cash reserves worth $900 million. That ratio "means there will be no problem in swapping sucres for dollars," Arizaga said.
The dark orange 50,000 sucre note, the largest denomination, which bears the national seal and a portrait of former President Eloy Alfaro, will be replaced with the American greenback under the plan. Under current exchange rates, 50,000 sucres are worth only $2, forcing shoppers to carry small bricks of cash to make purchases.
Mahuad announced Sunday that he was pegging the exchange rate at 25,000 sucres to the dollar, but details of his plan to make the U.S. dollar Ecuador's official currency only became clear on Monday.
Mahuad, a Harvard-educated 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.
The economy shrank 7 percent and inflation topped 60 percent in 1999, the highest in Latin America. Many economists predicted that speculation against the sucre would quickly send Ecuador into hyperinflation this year if the government did not act.
Mahuad said Sunday night that replacing the currency was "the only way out that we have, and it is the road that we have to travel." He predicted that adopting the dollar would reduce annual inflation to 10 percent this year.
Scrapping a national currency means a government can no longer print extra money to meet its budget, thus eliminating a major cause of inflation. Boosting the money supply devalues the currency.
The United States technically cannot block a country from adopting the dollar, but such a move typically involves consultation with U.S. officials. There was no immediate public response from the U.S. Treasury department.
Political analyst Cesar Montufar criticized the move, saying it would erode the nation's sovereignty and make "the president of the U.S. Federal Reserve" Ecuador's true president.
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's announcement came after a tense week of street protests and rumors that Ecuador's military was planning a coup. The military high command issued a statement Saturday expressing support for Ecuador's democratically elected government.
Panama is the only other Latin American nation to use the U.S. dollar as its official currency. The Central American country has avoided the inflation that has afflicted other nations in the region because it could not print currency to back up excessive government spending.