TBY talks to Pedro Delgado, President of the Board of the Central Bank of Ecuador, on incentivizing the arrival of foreign banks, promoting mobile banking, and applying the right strategies to protect the economy.
TBY What is the main function of the Central Bank of Ecuador (CBE)?
PEDRO DELGADO When Ecuador became dollarized, the central bank assumed the role of a control agent that monitors the flow of currency in the economy. The CBE cannot issue money, but instead verifies the monetary stability of the country. It analyzes the monetary supply that is circulating in the economy, implements mechanisms that make monetary supply more efficient, and protects the economy from external shocks.
How does the CBE ensure that monetary supply control is efficient?
The CBE affects the velocity of circulation. We are working toward the modernization of national payment systems in order to make all transactional mechanisms similar to the modern methods used in developed countries. In many countries, you can enter any business point and make payments using magnetic technology, such as a debit card or mobile payment systems. We haven’t achieved this level of efficiency in Ecuador, and the objective of the CBE in 2012 is to accelerate the penetration of electronic transactions so that people from both urban and rural areas have access to electronic and mobile payment methods. The CBE has a strong capacity to manage the economy by controlling the flow of money.
What does the freely available monetary fund consist of, and how does the country utilize it?
When we used a local currency, the freely available monetary fund was a protection mechanism against crises. In a dollarized economy, the freely available monetary fund cannot be a control mechanism to cover external shocks. During the most recent crisis, complex accounting management took place. When the economy shifted to dollarization, four balance sheets were created for the CBE, and included within these documents is the concept of the freely available monetary fund. According to the law of the CBE, the IMF is still mentioned, in addition to national funds. In practice, we have to manage a general reserve and understand how much money supply we can depend on to respond to external shocks.
What is the amount available to cover a possible crisis?
We manage the currency flow in the economy adequately. Adding up every fund we have available amounts to over 30% of GDP, which corresponds to all the currency that is circulating in the economy. This currency would be readily available in a time of crisis. In terms of the freely available fund, it contains more than $3.5 billion on average; in circulating currency there is $26.5 billion. These resources are more than enough to control an external shock. However, no amount would cover a calamity as severe as the crisis in Greece. In 2008, we had enough maneuvering capacity to use roughly $1.2 billion to control the economy, and currently we are enjoying favorable rates of growth. During the crisis, we experienced a 1% growth rate, followed by 3%, 4%, and 8% in 2009-2011, respectively. We have learned that managing a crisis is not related to the size of the fund, but rather to the efficient use of resources.
What is your forecast for 2012 in terms of the trade balance?
Our predictions for 2012 are positive, and we firmly believe we will maintain excellent growth rates of around 5%. Our growth depends on the depth of the crisis in Europe, which can easily affect the global economy. Regardless, we believe that 2012 will be a year of growth. In terms of our trade balance, we believe that a certain deficit level will continue, as historically the economy has registered trade balance deficits. The gap of the trade balance is covered by investments in high-yield projects and the increase of exports. There has been important growth in exports from the country and a considerable reduction in imports, and for the first time sectors such as textiles and metallurgy are growing at rates higher than 5% or 6%. Sectors that were historically importing products are now manufacturing locally and conserving the currency outflow. The concern regarding the trade balance is not the deficit itself, but the quality of the deficit that is determined by the types of products we are importing.
What expectations do you have for the introduction of mobile banking in Ecuador?
Mobile banking is a payment method that facilitates financial inclusion. We, however, are also creating a much more powerful scheme that will allow people to carry out financial transactions using various methods of interaction. Through this integrated system, people will be able to utilize banking or non-banking agents to make withdrawals, complete payments, receive and send remittances, and check balances. The mobile wallet is only an additional payment method. What we are creating is a very powerful transactional system that will include cooperatives and specialized banks. We hope that non-banking agents and other non-financial institutions will participate so we can provide financial transaction solutions to people in urban and rural areas.
For what reasons is there an absence of large foreign banks in Ecuador?
The big international banking groups came to Latin America over 15 or 20 years ago. The Spanish banking groups have the widest presence, as they bought banks from Mexico to Chile. However, these were investments made in the 1980s and at the beginning of the 1990s. Unfortunately in Ecuador, the position of the interested powers that controlled the banking industry prevented the entrance of international banks in a major way. Ecuador was thus left behind as these groups began to make inroads into Latin America. In terms of the future, I don’t believe they will make an entrance in the short term, because these banking groups are concentrating on surviving the crisis and they are not investing in any new regions around the world. Our expectation is that other kinds of groups will come from neighboring countries, such as specialized banks. However, this also won’t happen in the short term because of the international juncture. We do believe that there are opportunities, thanks to the anti-monopoly law passed last year, as it limits banking groups and their shareholders from making investments in the real or media sectors. This has opened up many opportunities, as many financial groups with interests in the real sector have decided to sell off their participation in the financial sector. This will be an opportunity for groups specialized in the financial sector to buy these participants. The same happens with insurance companies because the law also states that banks can’t own insurance companies. Therefore, the shareholders are selling their assets in the insurance sector, and this is opening up a myriad of opportunities for groups that are specialized in this sector. These facts will generate lots of opportunities, and it is also the right time as the regulatory framework is incentivizing development in this area.
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