Did you know that in the country of Ecuador the official currency is the United States Dollar? In the late 1990s Ecuador was suffering from rampant inflation of above 60% on their national money called the Sucre. In an attempt to stabilize the economy, then President of Ecuador, Jamil Mahaud, announced the dollarization of the country’s currency. Protests erupted all over Ecuador and Mahaud was ousted in a coup and replaced by his vice-president. The vice-president continued with the implementation of the US Dollar as the official currency in the year 2000. Many Ecuadoreans were sad and thought they were losing their identity while others were frustrated with the change, trying to figure out the values of the new money since for all their life they had used the Sucre. Some were hopeful that it would improve their economy. In the end, it appeared that the dollarization of the country did drastically cut back inflation and help stabilize the economy over time.
Figuring out the monetary system of another country can be a challenge sometimes, especially when there are lots of zeros involved. As an American in Ecuador, I have had no such challenges. The one big surprise I experienced was that I rarely see US one-dollar bills here, but I always seem to have a pocket-full of US one-dollar coins. Somehow it seems that all the one-dollar coins ended up here in Ecuador, they are omnipresent. The US government has been trying for decades to get people to use the one-dollar coin instead of the paper version, but Americans seem to prefer the bill to the coin. Ecuadoreans are always shocked when I tell them that we rarely use one-dollar coins in the United States. Though Ecuador uses all US currency, they do print their own coins for any denomination less than a dollar, which are not valid in the United States.
What does the dollarization of Ecuador mean for Kiva borrowers? It means there is no possible loss of currency exchange, which is a big plus. When the loss of currency exchange takes place in other countries, it is a cost that the field partners have to absorb. It is not a common occurrence, but Kiva does offer its field partners the option to protect themselves against severe currency fluctuations by sharing any losses greater than 10% with Kiva lenders. For Kiva, severe currency fluctuations have been defined as a US dollar appreciation of over 10% relative to the local currency. By bearing these losses, lenders are able to protect the field partner and their borrowers from catastrophic currency devaluations. Investing in a borrower in Ecuador the lender does not take on the risk the loss of currency exchange.
I recently went to the famous market in Otavalo, Ecuador. It was interesting trying to negotiate prices with local vendors in dollars. Even though I was unsure if I was being overcharged for an item, I did know exactly how much money to give them, I mistake that I have made a couple of times before in other countries. I was happy to unload my pockets full of one-dollar coins for some beautiful hand-made artisan works.
UPDATE: November 29th, 2013
Article on cnn.com
$1 coins: Unwanted, Unloved and Out of Currency
.... Maybe true for the United States, but not true for Ecuador! :)