July 24 (Bloomberg) -- Ecuador’s congress approved a new law today that allows the government to create its own parallel currency for use in local transactions as the government struggles to meet spending commitments.
Congress voted 91-22 to approve President Rafael Correa’s proposal to change the South American nation’s monetary and financial laws, allowing payments in “electronic money” and giving presidential appointees the power to decide who gets loans and how lenders invest their reserves. The bill now goes to Correa for his signature or veto.
As a current-account deficit drains dollars from the economy, making it harder for Correa to fund a burgeoning budget gap, a new currency could be used to meet government payments, said Jaime Carrera, a former deputy finance minister and director of the Quito-based Fiscal Policy Observatory. It could also lose its value quickly if not backed by the central bank, he said.
“There’s the doubt about whether the government is going to use electronic money, either directly or indirectly, to meet its payments,” Carrera said yesterday by phone.
Ecuador’s Economic Policy Ministry and Finance Ministry didn’t respond to e-mailed requests for comment on the proposed law. The central bank declined to comment.
A congressional commission responsible for analyzing the proposal said use of electronic money without explicit public guarantees created “concern” and added language to the bill ensuring any electronic currency would be “backed by liquid assets of the Central Bank of Ecuador.” Lawmakers declined industry group’s requests to include provisions to back the new currency with a one-to-one dollar guarantee.
It’s not clear what assets that includes and if government bonds qualify as liquid, Carrera said.
Oswaldo Larriva, a member of Correa’s political party and president of the congressional commission that studied the proposal, questioned attempts by lobbyists to require backing the new electronic money with hard currency. He said the government had expressed its commitment to using the central bank to guarantee any issuance.
“To keep repeating the same thing, that dollarization is at risk, isn’t an issue that goes against the president, it’s against the nation,” Larriva said to reporters July 15 in Quito. “Don’t repeat those things.”
Correa, who calls the South American country’s use of the greenback an economic “straitjacket,” has already started paying some pension obligations in government bonds, which brokers are refusing to redeem at face value.
The temptation to issue new currency, rather than crimp spending, may be too much to resist, according to lawmaker Ramiro Aguilar.
“Correa’s economic model will always generate liquidity problems in a dollarized economy,” Aguilar, an independent legislator serving on the same commission as Larriva, said in a July 14 interview. “You either change the model or you look for more money.”
While the government says it won’t force anyone to accept electronic money as payment, public employees and contractors who want work may have little choice, Aguilar said.
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