The presidential candidates propose using money from the International Reserves (IR) to stimulate the economy. Luisa González suggests taking $2.5 billion and Daniel Noboa $1.5 billion. The problem with this proposal is that it would not stimulate the economy and would threaten the financial system.

A popular argument is that IR is “parked money”. Accumulated funds there have an owner and fulfill a key function, although different from that of IR in a non-dollarized economy. The owners are depositors in the private and public financial system, municipalities, prefectures, state enterprises, IESS, among other public sector entities.

The two finalists for the presidency of Ecuador are looking at international reserves, even though they are illegal

If there is a national currency, IR funds are used to manage the exchange rate. Because they are dollarized, they serve to satisfy the public’s demand for cash and so that the financial system can increase credit and the amount of money in circulation.

As of September 8, RI had accumulated a total of $6,876.5 million, covering 58% of required commitments ($11,810.8 million). Of the $6,876.5 million, $5,761.4 million or 83% corresponds to the exchange system and the financial reserve system. In other words, almost all RI consists of bank reserves deposited with the central bank and liquid assets that support monetary issuance to meet the country’s foreign exchange demand (currency in the amount of $87.2 million).

International reserves fell to $6.905 million, although they still cover partial currencies and bank deposits

(…) ends up as a policy that restricts credit… and inhibits economic growth…

In order to fulfill their promise, the candidates would have to risk, to a greater or lesser extent, ensuring the liquidity of the financial system. When Correa ended his presidency, the coverage of this very important part of IR reached a minimum point of 66%. If at that moment the demand for liquidity suddenly increased due to a lack of confidence among economic entities and/or a strong external shock such as, for example, a natural disaster or a drop in the price of oil, the ECB would not be able to satisfy it and a run on the banks would be unleashed.

This is the danger of keeping the central bank of Ecuador alive after it dollarized the economy. He remained like an empty shell, until the Correa administration assigned him more and more functions. Something has been done to repair the damage with the law approved during the Lenín Moreno administration, for example, which prohibits the ECB from directly or indirectly financing the government and gives independence from executive power to the Monetary Policy Regulatory Board. But that does not stop when there is a political will to dispose of other people’s money.

Politicians sell this idea by claiming it will boost the economy. They are indeed proposing a forced transfer of funding from the productive sector to the public sector. Since it is evident to those who grant loans to the financial system that they no longer have 100% of their liquid assets, because the ECB lent them to the Government, then – all things being equal – they grant fewer loans than if they had all their liquid assets. That is, this measure ends up being a policy that restricts credit, slows the growth of the currency, puts pressure on interest rates and inhibits economic growth. (OR)