Ecuadorean President Rafael Correa has joked that the only thing more popular than he is in this country is the U.S. dollar, adopted as Ecuador's official currency nine years ago in a successful bid to tame inflation.

The socialist leader is serious however about maintaining his clout with voters, meaning he will likely cling to the greenback while expanding the state-centric programs at the heart of his "citizens' revolution".

Economists agree that the dollar is not a good fit for the country, considering the government's expansive fiscal policies and troubled relationship with foreign investors.

But the decision to keep or dump the U.S. currency will be a political one, not an economic one, said former Finance Minister Magdalena Barreiro.

"People remember inflation and not being able to buy a car or get medium- or long-term credit. So I expect the dollar to remain popular for the foreseeable future, and as long as it is the president will not get rid of it," said Barreiro, now a finance professor at the University of San Francisco de Quito.

Correa has taken a tough stance with foreign oil firms and Ecuadorean banking and media companies, which he accuses of siding with wealthy elites against his programs for the poor.

Using the U.S. currency means surrendering the country's ability to run an independent monetary policy. Not being able to devalue the country's currency, print money or raise or lower interest rates places limits on the president's agenda.

But Correa appears to have no way out of the dollar for now, even as some of his own policies appear at odds with keeping the greenback on as Ecuador's currency.

"One risk to the dollar is Correa's insatiable spending combined with his confrontation with the banks," said Barreiro, who served as Correa's deputy when he was finance minister in 2005 and took over as minister when he left the post.

"If the fiscal situation deteriorates and the private banking system is weakened, dollarization will not last unless he adopts really draconian capital controls to keep dollars in the country," she added.

Dollarization depends on a net inflow of U.S. currency. Ecuador has restricted imports in an attempt to slow outflows. But the country still had a trade deficit of $681 million in the first seven months of the year versus a $2.54 billion surplus in the same 2008 period as the world slowdown bit into commodities demand.

The country has been cut off from the international capital markets since it defaulted on $3.2 billion in global bonds last year. The government had the money to pay the obligations, but declined to, saying the debt was contracted "illegitimately" by corrupt state officials and greedy international bankers.

Correa has until now made up for the loss of bond market access with multilateral loans and a $1 billion cash-for-oil deal with China. But the OPEC-member country only has $3.4 billion in reserves, down from $6.5 billion a year ago when oil prices were higher.

The price of petroleum is off its lows, but the future of the sector is uncertain as private investors shun Ecuador. The president insists on renegotiating energy contracts to give the state more control over the country's natural resources.

he 46-year-old Correa is popular thanks to his efforts at improving education, housing and health care. Critics say he is chasing off the private investment needed for economic growth.

PREEMPTIVE DE-DOLLARIZATION?

As he showed with the last year's debt default, Correa believes in preemptive action, said Patrick Esteruelas, analyst with the Eurasia Group in New York.

"If he feels that he will be forced out of the dollar at some point, he will pursue a preemptive de-dollarization himself," Esteruelas said.

Depositor confidence could crumble if the government starts flirting with getting rid of the dollar, setting the stage for a run on the banks and a political crisis.

Ecuador has a history of toppling presidents in times of economic trouble. The country's leaders have served less than two years on average over the last decade.

So, as much as he may not like the dollar, Correa is expected to keep discouraging any talk of abandoning it.

"The credibility of Ecuador's institutions is not at the point where they can sustain their own currency, irrespective of the amount of reserves the country accumulates," said Alberto Ramos, who analyses the country for Goldman Sachs.

"If they abandon dollarization," he added, "they will go through a very difficult period due to the lack of credibility of fiscal and monetary institutions."

Credit: By Hugh Bronstein, Reuters news service; photo caption: President Rafael Correa