*Editor’s note: This explanatory note is part of our premium content, but we are opening it up to all our audiences to contribute to the debate currently revolving around international reserves and the proposals announced by the two finalist candidates for the presidency of the Republic.

International reserves, which are liquid assets that support deposits entrusted to the Central Bank, reached $6.876 million on September 8, 2023, representing a decrease of $2.134 million in one year, since they stood at $9.010 million on August 31.

These days, the debate about the intention to use international reserves, expressed by two candidates for president of the Republic: Luisa González from the Civil Revolution and Daniel Noboa from the National Democratic Action, has heated up.

González said he would use $2.5 billion and Noboa said he would only use $1.5 billion. However, according to the opinion of economic experts, these reserves – contrary to what is believed – cannot be taken, but there are risky mechanisms by which ghost money, fake, non-existent money can be forced into banks and government accounts.

What are reserves and who do they belong to?

The director of the Central Bank, Guillermo Avellán, explains that reserves are liquid assets managed by the Central Bank. These are:

They must cover obligations that are:

Resources are not “parked”, but come and go as their rightful owners use them. According to Avellán, not all operations affect reserves, but they rise or fall when resources arrive from abroad, or when they go to pay suppliers, write off foreign debt, among others.

Fiscal accounts that will be inherited by the new Government, with problems of revenue, financing and execution

The central bank uses reserves for two actions:

Do the assets cover all the liabilities of the central bank?

The obligations of the Central Bank at the end of August amounted to 14,110 million dollars, and the reserves reached 6,905 million dollars, that is, they cover only part of the obligations. There is $7.205 million that is not covered.

The balance sheet of the central bank is divided into four systems:

The first two are 100% covered, but the third already has only 21% coverage, while the fourth has 0% coverage.

Can reservations be accepted or not?

According to Gabriel del Castillo, because the monetary issue is complex to understand, the narrative is positioned that governments can take reserves. However, this is not technically possible. But what was done during that period was the delivery of loans to the Ministry of Finance in the amount of 8.3 billion dollars, through a mechanism called “balance sheet expansion” of the Central Bank, which means issuing money.

This issue was also explained at the time by the current candidate for vice president of the Civil Revolution, Andrés Arauz, indicating that “starting in 2009, the Central Bank of Ecuador started giving loans to the Government, even though we are dollarized.” He explained that it “created dollars in the accounting records and made them move in the national economy.” This is also known as deficit monetization or secondary dollar issuance. That’s how the famous “Ecuadorians” were born.

But how does a central bank’s balance sheet expand or inflate?

Trying to explain it in a simple way, Gabriel del Castillo does it this way:

Candidate González and candidate Noboa should do something like this to “use” – as they said – the reservation. However, the Central Bank’s tool for lending to the Ministry of Finance is prohibited by law. That’s because over the period that option was abused, generating a mismatch on the ECB’s balance sheet, or $7.3 billion in debt, that must be paid. The manager of the Central Bank, Guillermo Avellán, explained that Articles 56 and 56.1. of the Organic Code contain a ban on the Central Bank from directly or indirectly granting loans to the state.

What could be the consequences of issuing the so-called ecuador?

Ecuador’s treasury account with only $270 million is similar to the account of a family that earns $500 and makes ends meet on $20 and owes $50

Other options

Alberto Acosta Burneo believes that there is another option that indirectly allows the use of bank reserves for the benefit of the state. This option is already used by the government of Guillermo Lasso and does not require a legal change, and the Monetary Board opens the possibility that part of the reserve requirement can be voluntarily invested in bonds. However, there is a risk that some other government will change the rules and force said investments to be higher percentages than they are now.

Meanwhile, Gabriel del Castillo says that monetary policy can be implemented through the Central Bank and therefore believes that “rational management of the ECB’s credit mechanism” can be implemented as long as it maintains the independence of the central government.