Ecuador has substantial petroleum resources and rich agricultural areas. Because the country exports primary products such as oil, bananas, flowers and shrimp, fluctuations in world market prices can have a substantial domestic impact. Industry is largely oriented to servicing the domestic market, and some exports to the Andean Common market. Deteriorating economic performance in 1997-98 culminated in a severe economic and financial crisis in 1999. The crisis was precipitated by a number of external shocks, including the El Niño weather phenomenon in 1997, a sharp drop in global oil prices in 1997-98, and international emerging market instability in 1997-98. These factors highlighted the Government of Ecuador's unsustainable economic policy mix of large fiscal deficits and expansionary money policy and resulted in an 7.3% contraction of GDP, annual year-on-year inflation of 52.2% and a 65% devaluation of the national currency in 1999, which helped precipitate a default on external loans later that year.

On January 9, 2000, the administration of President Jamil Mahuad announced its intention to adopt the U.S. dollar as the official currency of Ecuador to address the ongoing economic crisis. The formal adoption of the dollar as currency on September 10, 2000, as opposed to pegging the local currency to it, as Argentina has done, theoretically meant that the benefits of seigniorage would accrue to the U.S. economy. Subsequent protest related to the economic and financial crises led to the removal of Mahuad from office and the elevation of Vice President Gustavo Noboa to the presidency.

However, the Noboa government confirmed its commitment to dollarize as the centerpiece of its economic recovery strategy. The government also entered into negotiations with the International Monetary Fund (IMF), culminating in the negotiation of a twelve-month stand-by arrangement with the Fund. Additional policy initiatives include efforts to reduce the government's fiscal deficit, implement structural reforms to strengthen the banking system and regain access to private capital markets.

Buoyed by high oil prices, the Ecuadorian economy experienced a modest recovery in 2000, with GDP rising 1.9%. However, 70% of the population was estimated to live below the poverty line that year, more than double the rate in 1995.