The decision by Ecuador's government to replace the national currency with the US dollar to counter inflation has been approved by the country's Central Bank despite the resignation by its head in protest against the move.

President Jamil Mahuad had proposed dollarisation and pegging the currency at the rate of 25,000 sucre per dollar on Monday, in the latest attempt to turn the crisis-ridden economy around and boost foreign investment.

The Ecuador military supported the move, but trade unions, Ecuador's native people, and oil workers said they would continue to call for President Mahuad's resignation.

The organisations representing the country's indigenous people, which have protested frequently in the past, said they planned demonstrations Saturday to force Mahuad's ouster and to shut down Congress and the courts as part of their drive for a government that will work on behalf of the poor.

"A government of national salvation is necessary," said Antonio Vargas, president of the Confederation of Indigenous Nationalities of Ecuador, the nation's largest federation of native Americans.

Analysts said the move had more to do with politics than economics.

"It's a desperate step," said political scientist Simon Pachano. "It's more a political measure than an economic measure."

"Last week Mahuad was at the point of falling and made this decision as the only way to save his government," he added.

Dollarisation

Under dollarisation, the US dollar is used as the official currency of another country.

"Following two months of analysis ... I reached the conclusion that the dollarisation system is advisable and necessary for Ecuador. It is the solution we now have," President Mahuad announced on Monday.

At the end of trade on Friday, one dollar bought 25,100 sucre, off lows of about 29,000, but still 17% lower than at the start of the week.

One year ago, a dollar bought only 7,000 sucre.

Hit by Asian crisis

Ecuador was one of the hardest hit in Latin America by the Asian crisis, which was triggered in May 1997 by the devaluation of the Thai baht.

Its economic problems were compounded by El Nino storms in 1998.

Weak prices for oil and bananas, two of its principal exports, exacerbated the situation.

Ecuador is the world's top banana exporter as well as Latin America's fourth-largest exporter of crude oil and sixth-largest producer. About 50% of its economy depends on its oil exports.

Last year, gross domestic product is thought to have contracted 7% - the worst performance since central bank records began in 1927. Inflation also reached 60.7%.

In the past year the currency has dropped by 67%.

In September last year, Ecuador won its place in economic history when it became the first Latin American country to default on its Brady bonds, US dollar denominated debt which carries the backing of the US government.

A good idea?

Whether dollarisation will do the trick for the Ecuadorian economy is questionable.

Often, dollarisation provides stability to countries whose currency blows in whatever direction speculative traders decide it should.

Given that the central bank ruled out dollarisation as an option last week, the move by the President creates an impression of confusion at the heart of the government.

The free floating exchange rate system has been in place since last February and the central bank insisted last week that it was sticking with it.

"It's not a matter of introducing rushed, crazy measures," Central Bank chief Virginia Fierro said then. "We will maintain a free exchange market."

It should initially provide some relief and security for Ecuadorian workers, defusing a potentially volatile political situation, as interest rates fall.

Financial markets are also likely to welcome the move, though in some cases, the fact that a local currency has been pegged to the dollar has given speculative traders a level to target.

Critics of dollarisation say that it reduces the control countries have over their economy.

The International Monetary Fund has yet to offer its opinion of the currency peg. It had previously asked Ecuador to stick to agreed economic policies.

Ecuador is negotiating with the IMF on a $250m loan package.

Meanwhile, the economy of the other Latin American country to operate a dollar peg, Argentina, continues to suffer.

The link has made Argentinian exports too expensive compared to rivals like Brazil.