Ecuador heralds digital currency to start before year end

Ecuador has announced it plans to start circulating what it calls the world’s first digital currency in December. It also claims it has options for developing its new oil refinery which do not depend on China.

Financial analysts have suggested the introduction of the new electronic currency in Ecuador could be used to increase the money supply and devalue US dollar holdings, a first step to abandoning the US dollar as its currency.

The new currency was approved, and stateless crypto-currencies such as Bitcoin simultaneously banned, by Ecuador’s National Assembly last month.

A young man texts at a market in Quito as government prepares to introduce electronic currency

The electronic currency is to exist in tandem with the US dollar and to be backed by “liquid assets,” according to Deputy Central Bank director Gustavo Solorzano. Officials said it would be geared towards the 2.8 million Ecuadoreans too poor to afford a traditional bank account.

Central Bank officials said on Friday the currency does not have a name and officials would not disclose technical details. The amount of the new currency created would depend on demand, they said. President Rafael Correa has denied there is any plan to replace the US dollar, which Ecuador set as its currency in 2000 after a crippling banking crisis.

Initially payments are to be sent and received on cellphones, Solorzano said. Similar schemes have already been set up by private companies in Paraguay and in Africa – including in Kenya and Tanzania.

Nathalie Reinelt, an emerging payments analyst with the US-based Aite Group, said she does not understand any other motivation for creating such a currency other than to allow Ecuador to increase its money supply and, essentially, devalue its US dollar holdings. But analyst Juan Lorenzo Maldonado of Credit Suisse said “It is far too early to know how they are thinking of making the electronic money work.”

Pacifico Refinery

Ecuador’s minister for strategic sectors (Sectores Estratégicos) Rafael Poveda said he hoped to finalize a $9 billion (6.85 billion-euro) deal with major partner China within the month for a refinery on the Pacific coast to process 200,000 barrels of crude oil a day.

Ecuador is also reported to be asking Beijing about borrowing $1.5 billion more. Including the credit line, total loans from China are equivalent to about 13.6 percent of Ecuador’s GDP as of 2013.

Criticised locally for becoming too dependent on China, Poveda said about the refinery deal, after a week-long visit to southern near-neighbor Chile which ended on Friday: “If for any extraordinary reason, which up to now does not exist, this does not happen, we have an option for this project.” However, he did not elaborate on the options.

A pile of US currency, topped with a mobile phone, reminds us that money talks and can be very persuasive!

China has become Ecuador’s second-largest foreign investor, after the United States, mostly in mining and quarrying sectors. Ecuador has already borrowed over $11 billion from China since 2008, when the Andean country defaulted on $3.2 billion of foreign debt.

Last year, Chinese money helped cover as much as 61 percent of the government’s financing needs. In exchange, China has claimed up to 90 percent of the country’s oil shipments over the next few years. Ecuador has South America’s third-largest oil reserves.

Ecuador recently sold $2 billion in bonds with a 7.95 percent return, as well as obtaining another $400 million from Goldman Sachs in exchange for part of its gold reserves.

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