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International Monetary Fund. Western Hemisphere Dept.

Origin, Functioning and Consequences of Central Bank Balance Sheet Expansion in Ecuador 1 In an economy that is using the US dollar as legal tender such as Ecuador, money creation is in principle impossible. But a series of legislation approved in 2009–2014, allowed an expansion of the Central Bank of Ecuador’s (BCE) balance sheet in the 2010s to finance the fiscal deficit, leaving the public sector with large liabilities towards the BCE and low reserve coverage that put the financial system at risk. This note reviews the legal and policy changes that

International Monetary Fund. Western Hemisphere Dept.

broadly adequate for surveillance purposes. National Accounts : The Central Bank of Ecuador (BCE) disseminates GDP series with fixed base year of 2007. Annual and quarterly GDP series are compiled based on the expenditure and production approaches, both in current and constant 2007 prices. Currently, disseminated data spans from 2007–20 for annual series and 2007Q1–2021Q1 for quarterly series. The GDP by the income approach is published on an annual basis, up to 2019. Annual gross fixed capital formation is disseminated by product under the expenditure-based GDP

Juan-Pablo Erraez and Julien Reynaud
A textbook argument in favor of adopting another country’s legal tender is that it imposes strong constraints on money creation and therefore fiscal dominance. In Ecuador, an officially dollarized economy since January 2000, a series of accounting practices and subsequent changes in legislations approved over the period 2009-2014 allowed an expansion of the Central Bank of Ecuador’s (CBE) balance sheet to finance the central government. At its peak, central bank financing of the government represented 10 percent of GDP. This resulted in large liabilities to the CBE that translated into low reserve coverage, putting the public and private financial systems and ultimately the dollarization regime at risk. In this paper, we first present the legal and accounting processes behind the expansion of the CBE's balance sheet and some stylized facts. In the second section, we establish a stress test-like methodology to show how the expansion of the CBE’s balance sheet induced strong pressures on CBE’s liquidity. Ultimately, such liquidity stress at the CBE translated into high cash inflows needs, i.e. external debt, for the central government.
International Monetary Fund

Figure 1 Ecuador: Selected Economic Indicators, 1992–96 1/ Sources: Central Bank of Ecuador; Ministry of Finance and Public Credit; and Fund staff estimates. 1/ Data for 1996 are estimates. 2/ includes changes in floating debt and statistical discrepancy. 3/ Excludes late interest on arrears to commercial banks. 4/ Includes late interest on arrears to commercial banks. Table 1. Ecuador: Consumer Prices (12-month percentage changes) Total Food Housing Clothing Other 1991 March