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 Nino 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 monetary policy and resulted in a 6.3% contraction of GDP, annual year-on-year inflation of 52.2%, and a 65% devaluation of the national currency in 1999.

In 2000, President Jamil Mahuad announced that Ecuador would adopt the U.S. dollar as its official currency. Shortly thereafter Mahaud was forced from office, but his vice president who assumed the presidency, Gustavo Noboa, stayed with the dollarization policy and completed the transition later that same year. The rate of inflation soared to an annual rate of over 96% is 2000. However, since dollarization, the inflation rate has continued to drop each year until it reached 1.9% in 2004, lower than the rate in the United States.

One of the first acts of the incoming Lucio Gutierrez administration in 2003 was the negotiation of a standby agreement with the International Monetary Fund. Though his administrationís fiscal economic policies were sound, the Gutierrez administration was never able to enact the structural reforms the country needed. The IMF standby agreement lapsed in 2004.

Buoyed by higher oil prices, the Ecuadorian economy experienced a modest recovery in 2000-01, with GDP rising 2.8% in 2000 and 5.1% in 2001. GDP growth leveled off to 3.4% in 2002. Ecuador experienced modest GDP growth of 2.7% in what the Government of Ecuador called a transition year in 2003. Spurred by high oil prices and the completion of a second oil pipeline (the Trans-Andean Oil Pipeline or OCP, in Spanish) in late 2003, GDP growth for 2004 reached nearly 7%.

Though Ecuador has a relative abundance of oil reserves, it has been unable to take full advantage of those resources for its own development. Mismanagement, lack of investment and corruption in the state-owned oil sector has caused declines in state oil production over the last decade. Commercial disputes as well as judicial and contractual uncertainties have deterred private oil and other companies from investing in the country. The electricity and telecommunications sectors also have similar significant problems, which are costing Ecuadorians hundreds of millions of dollars each year. As much as 70% (statistics vary) of the population lives below the poverty line. Ecuador is in the final stages of negotiating a free trade agreement with the U.S.

Ecuador's investment climate worsened with the April 2006 Hydrocarbons Law, which pursued contract renegotiation with foreign investors in that sector, and the May 2006 forfeiture of Occidental Petroleum assets.