Ecuador - International University of Japan

Country Profile 2004

EcuadorThis Country Profile is a reference work, analysing thecountry’s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit’s Country Reports analyse current trends and provide atwo-year forecast.

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Ecuador 1

© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

Ecuador

3 Basic data

4 Politics4 Political background5 Recent political developments10 Constitution, institutions and administration12 Political forces16 International relations and defence

17 Resources and infrastructure17 Population20 Education21 Health22 Natural resources and the environment23 Transport, communications and the Internet26 Energy provision

28 The economy28 Economic structure29 Economic policy34 Economic performance36 Regional trends

37 Economic sectors37 Agriculture39 Mining and semi-processing40 Manufacturing42 Construction42 Financial services44 Other services

45 The external sector45 Trade in goods48 Invisibles and the current account49 Capital flows and foreign debt51 Foreign reserves and the exchange rate

53 Regional overview53 Membership of organisations

54 Appendices54 Sources of information55 Reference tables55 Population55 Labour force56 Education statistics56 Health statistics

2 Ecuador


56 National energy statistics57 Non-financial public sector finances57 Money supply57 Interest rates58 Gross domestic product58 Nominal gross domestic product by expenditure58 Real gross domestic product by expenditure59 Real gross domestic product by sector59 Prices and earnings59 Assets and liabilities of deposit money banks60 Tourism statistics60 Exports61 Imports61 Main trading partners62 Balance of payments, IMF series62 Foreign direct investment by country of origin63 Foreign direct investment by economic sector63 External debt, World Bank series63 Foreign reserves64 Exchange rates

Ecuador 3


Ecuador

Basic data

276,840 sq km

12.8m (2003 estimate)

Population in ’000 (2001 census)

Guayaquil 1,952Quito (capital) 1,400Cuenca 277Santo Domingo 200Machala 198Manta 183

Tropical on the coast and in the eastern region. Temperate in the centralmountain zone

Annual average temperature, 16°C; hottest months, December and January, 8-22°C (average daily minimum and maximum); coldest months, April and May,8-21°C; driest month, July, 20 mm average rainfall; wettest month, April, 175 mmaverage rainfall

Spanish (official); Indian languages, particularly Quechua, are also used

Metric system; also local units, including: 1 vara=84 centimetres

US dollar officially adopted as legal tender in March 2000, replacing the formernational currency, the sucre, at a conversion rate of Su25,000:US$1. The sucreceased to be legal tender in September 2000, apart from new sucre coinsequivalent to US nickels, dimes and cents, used as fractional money

5 hours behind GMT

New Year’s Day (January 1st), Good Friday, Labour Day (May 1st), Battle ofPichincha (May 24th), Founding of Guayaquil (Guayaquil only, July 25th),Independence of Quito (August 10th), Independence of Guayaquil (Guayaquilonly, October 9th), All Souls’ Day (November 2nd), Independence of Cuenca(Cuenca only, November 3rd), Foundation of Quito (Quito only, December 6th),Christmas Day (December 25th)

Land area

Population

Main towns

Weather in Quito(altitude 2,879 metres)

Languages

Measures

Climate

Currency

Time

Public holidays

4 Ecuador


Politics

Political background

For 80 years before the arrival of conquistadors from Spain in 1531, the territorythat is now Ecuador served as the northern outpost of the Inca empire, whichintroduced the Quechua language. The country gained independence fromSpain in 1822 and temporarily joined Venezuela, Colombia and Panama inSimón Bolívar’s Grancolombian Federation, before becoming an independentnation in 1830.

The period after independence was characterised by government instabilityand economic and political rivalry between coastal and highland regionalfactions. Political power was concentrated in the hands of a highland land-owning class allied with the Catholic Church. However, the growth of thebanking sector and a rapid expansion in cocoa production created a wealthycoastal banking and agricultural middle class that began to seek greaterpolitical influence.

External shocks, including a collapse in the cocoa market in the 1920s and theGreat Depression of the 1930s, were at the root of instability between 1931 and1948, and all 21 governments in this period failed to complete a full term inoffice. José María Velasco Ibarra was an important figure at this time. Apopulist, first elected in 1933, he held office five times and was overthrown onfour occasions. His final term was in 1968-72. Between 1948 and 1960 Ecuadorenjoyed 12 years of stable civilian rule. Increasing banana exports helped tofinance development policies and also shaped the emergence of growers as apowerful economic group.

As industrial development occurred in the 1960s, the influence of therevolution in Cuba contributed to growing social unrest, prompting the militarygovernment of 1963-66 to take a strongly anti-communist stance. Emphasis wasplaced on economic modernisation, and the role of the state in the economywas expanded. The exploitation of extensive oil reserves discovered in the late1960s was begun under another military dictatorship from 1972. The oil boomwas accompanied by the accumulation of high levels of indebtedness to foreignbanks, as governments contracted loans to finance a programme of state-ledindustrialisation. Easier access to external financing and a fixed exchange ratealso stimulated large borrowing in foreign currency by the private sector. In1978 a referendum approved a new constitution that formed the basis for areturn to democratic elections and civilian rule in 1979.

Since 1979 civilian governments have held power, but a lack of party discipline,deep-seated regionalism and political opportunism have all militated againstthe formation of stable government majorities with coherent policy agendas.Powerful interest groups and public-sector unions have stymied themodernisation efforts of successive governments. From 1996, a period ofrenewed political instability began, following the election of the leader of thepopulist Partido Roldosista Ecuatoriano (PRE), Abdalá Bucaram. Blatant

Independence gave way topolitical instability

State-led development undermilitary rule

Ecuador 5


cronyism and corruption, in addition to Mr Bucaram’s coarse style of govern-ment, soon began to antagonise both members of the coalition governmentand voters, leading to massive popular protests, and his eventual removal byCongress—with dubious legal justification—on the grounds of “mentalincapacity” in February 1997. The congressional leader, Fabian Alarcón of thesmall Frente Radical Alfarista (FRA), was elected by legislators to serve outMr Bucaram’s term until August 1998. Mr Alarcón’s concessions to bothpowerful public-sector unions and regional lobbies contributed to adeteriorating fiscal situation.

Recent political developments

Jamil Mahuad, a Harvard-trained, successful former mayor of Quito, and thecandidate of the centrist Democracia Popular (DP), was elected president in July1998 and assumed office in August. Although lacking an absolute majority inCongress, the DP was the largest party and Mr Mahuad took power under newconstitutional norms (see Constitution, institutions and administration) thatgave him several important advantages over his predecessors. Mid-termcongressional elections were abolished and the power of Congress to impeachministers was rescinded—both had debilitated many previous governments—inan attempt to provide greater administrative stability.

Presidential electionsa

First round Second roundElection Front-runners Party % of votes % of votes1979 Jaime Roldósb Concentración de Fuerzas Populares 27.7 68.5

Sixto Durán Ballén Partido Social Cristiano 23.9 31.51984 León Febrés Corderob Partido Social Cristiano 27.2 51.5

Rodrigo Borja Cevallos Izquierda Democrática 28.7 48.51988 Rodrigo Borja Cevallosb Izquierda Democrática 24.5 54.0

Abdalá Bucaram Ortiz Partido Roldosista Ecuatoriana 17.6 46.01992 Sixto Durán Ballénb Partido Unidad República 31.9 57.3

Jaime Nebot Saadi Partido Social Cristiano 25.0 42.7

1996 Abdalá Bucaram Ortizb Partido Roldosista Ecuatoriano 26.3 54.5Jaime Nebot Saadi Partido Social Cristiano 27.2 45.5

1998 Jamil Mahuad Wittb Democracia Popular 35.2 51.2Alvaro Noboa Pontón Partido Roldosista Ecuatoriano 26.5 48.8

2002 Lucio Gutiérrez Borbuab Sociedad Patriótica 21 de Enero 20.6 54.8

Alvaro Noboa PontónPartido Renovador InstitucionalAcción Nacional 17.4 45.2

a % of votes excludes blank and null ballots. b Elected president.

Source: Corte Nacional Electoral, Tribunal Suprema Electoral.

However, Mr Mahuad proved unable to capitalise on his initial popularity toset in motion much-needed fiscal and structural reforms. His consensus-basedleadership style left him looking indecisive, as successive congressionalagreements broke down, dissent appeared within the government’s economicteam, and the economy deteriorated, exacerbated by a series of external shocks.One of the Mahuad government’s few remaining assets was that, unlike its pre-decessors, it appeared relatively free from corruption. However, in late 1999 ascandal broke over campaign financing of around US$3m, in which

Instability worsenedunder Mahuad

6 Ecuador


Mr Mahuad was linked to the disgraced former president of the Banco delProgreso, Fernando Aspiazú; the bank had been taken over by the state—at acost of around US$1bn—at the height of the banking crisis earlier that year (seeEconomic sectors: Financial services). The scandal fuelled public anger over thegovernment’s handling of the banking collapse, from which corrupt bankerswere believed to have profited at the expense of the state. The government’sauthority was seriously diminished, and, having soared to over 60% with thesigning of a peace agreement with Peru in October 1998, Mr Mahuad’s approvalratings fell to single-digit levels by end-1999.

A week of indigenous protests in the centre of Quito began in mid-January2000 and culminated on January 21st. A short-lived coup, during which Congresswas occupied by around 10,000 indigenous protestors, removed Mr Mahuad. Itsleaders installed a ruling triumvirate comprising the president of theConfederación de Nacionalidades Indígenas del Ecuador (Conaie), theConfederation of Ecuadorean Indigenous Nationalities, Antonio Vargas; thecommander-in-chief of the armed forces, General Carlos Mendoza; and a formerpresident of the Supreme Court, Carlos Solórzano. However, the heads of theNational Security Council swiftly negotiated the dissolution of the triumviratein favour of a constitutional succession of power. In the early hours of January22nd the elected vice-president, Gustavo Noboa, assumed the presidency.

Mr Noboa, a political independent with no formal ties to any of the parties inCongress, appeared to be relatively free of the political debts that had helped toundo previous presidents. He was also on good terms with the powerful inter-ests in Guayaquil that had frequently opposed Mr Mahuad, a member of theQuito elite. Moreover, he had a reputation for honesty and a strong businesssense. Mr Noboa adopted the dollarisation project announced by Mr Mahuadshortly before his ouster, and espoused a pro-reform agenda, acknowledgingthe importance of IMF support for the new monetary system to succeed.Initially, he made rapid progress; within a few months Congress had approvedlaws implementing dollarisation and allowing foreign investors to takemajority stakes in privatised state firms. In July 2000 Ecuador secured arestructuring of its foreign debt.

However, controversy surrounding the election of a new congressional speakerin August 2000 triggered a split in the DP, the largest party, and a breakdown inthe alliance between the DP and the PSC, which had formed the majorityvoting bloc in Congress. The Noboa government thereafter struggled to buildsupport for its policies in a fragmented Congress. The president madeincreasing use of his powers of veto to reject amendments introduced byCongress that often radically altered the spirit of original legislation, but thegovernment still fell behind in the programme of reforms agreed with theFund. Although Mr Noboa remained fairly popular with the public, he facedcontinued pressure from indigenous groups, who convened disruptivemobilisations in opposition to his reforms.

By 2002 Mr Noboa had become increasingly concerned with maintaining socialpeace, often at the expense of reform. Having presided successfully over theintroduction of dollarisation in 2000, and the completion of Ecuador’s first IMF

A quasi-coup broughtMr Noboa to power in 2000

Promising start gives way tofamiliar obstructionism

Ecuador 7


stand-by arrangement since the 1980s, the pace of reform slackened. Politicalsupport started to fall away. The appointment of Carlos Julio Emanuel asfinance minister in November 2001, ostensibly in return for the support of thePRE for fiscal reforms, proved to be an error. The government lost control ofcurrent spending and Mr Emanuel resigned in disgrace in June 2002 after acorruption scandal came to light that involved the theft of around US$300m inpublic funds. By the final few months of his term, Mr Noboa had all but givenup seeking an arrangement with the Fund. Public-sector workers were grantedan unaffordable 40% wage rise and costly concessions were made to theGuayaquil private sector, such as the scrapping of a range of import tariffs andthe vetoing of a competition law.

Electoral politics began to dominate from mid-2002, making it increasinglydifficult to secure the cooperation of the parties in Congress. In October, twopopulist candidates, Lucio Gutiérrez and Alvaro Noboa, narrowly polled themost votes in a fragmented first-round election, securing 20% and 17% of thevote respectively. Neither was from one of the traditional parties. In a run-off inNovember, Mr Gutiérrez won with 55% of the vote to Mr Noboa’s 45%, andimmediately began to moderate the left-wing stance he had taken during thecampaign. A respected orthodox economist, Mauricio Pozo, was named financeminister and relations with the Fund and the US got off to a smooth start withthe signing of a new 12-month US$205m stand-by arrangement with the Fundin March 2003.

However, the election had resulted in a Congress even more fragmented thanits predecessor, and one where Mr Gutiérrez could count on the support of only25 of the 100 members. This, and the rumblings of discontent overMr Gutiérrez’s apparent conversion to neo-liberal policies within theMovimiento Unidad Plurinacional Pachakútik (MUPP, Pachakútik), which,despite having been a crucial backer of Mr Gutiérrez's presidential bid, obtainedonly a small minority of cabinet posts and other presidential appointments,caused problems from the outset. By August 2003, the fragile ruling coalitionhad split, with Pachakútik and the smaller Marxist Movimiento PopularDemocrático (MPD) abandoning the executive (the MPD left of its own accordin July and Mr Gutiérrez dismissed Pachakútik in August), following strongdisagreements over government policy.

Renewed social unrest, including a month-long public schoolteachers' strikeand a two-week stoppage by state-sector oil workers in June, had promptedcriticism of the president and official government policy from both parties.Ultimately, Pachakútik’s position became untenable. Having been awarded fewgovernment posts, it was increasingly frustrated by its lack of influence. Thegroup was also dismayed by indications of closer co-operation between thegovernment and the two main coastal-based parties, the Partido SocialCristiano (PSC) and the Partido Roldosista Ecuatoriano (PRE). Had it stayed ingovernment under such circumstances, Pachakútik's credibility with itsconstituents would have been damaged. In opposition, the party could insteadspearhead protests against the government’s policies.

2002 presidential election wonby Lucio Gutiérrez

Fragmented coalition sooncrumbles

8 Ecuador


The departure of the MPD and Pachakútik reduced the president’scongressional representation to six seats, forcing him to rely increasingly on thePRC and the PRE for congressional support. This was to prove costly. The risksof entering into a purely pragmatic agreement with these parties were clearfrom the outset. The PSC had previously derailed Mr Mahuad’s programme byimposing its own conditions.

In subsequent months, progress on the government’s reform agenda wasnegligible. The IMF board approved the second review of the stand-byarrangement in August 2003, but noted that progress on meeting performancetargets had been uneven. Of the reforms targeted by the Fund, only a watered-down customs reform had been approved in April. Other agreed targets,including civil-service reform, tax reform, the contracting out of themanagement of the public telecommunications (telecoms) and electricitycompanies to the private sector and the liquidation or sale of the closed banksin the hands of the Agencia de Garantía de Depósitos (AGD), the DepositGuarantee Agency, were all outstanding, forcing the Fund to postpone the thirdreview of the SBA until November. To make matters worse, the minister for theeconomy, Mauricio Pozo, was under constant pressure to relax thegovernment’s tight fiscal management, with calls from across the politicalspectrum to increase current expenditure on wages and social spending.Opposition on the left and the right wanted the government to use windfall oilrevenue to finance such spending, which was contrary to the official IMF-agreed policy to use the vast proportion of above-budget oil revenue for public-debt buybacks in order to stabilise the economy.

Amid these pressures, a cabinet reshuffle in mid-December 2003 was designedto minimise the impact of early corruption allegations against the governmentand, more importantly, to pin down the unofficial support of the majortraditional political parties, particularly the PSC and the PRE, who securedseveral seats in the executive. Mr Gutiérrez retained his most competentministers, including Mr Pozo, while appointing as chief cabinet minister aformer speaker of the house with strong links to the leadership of theindigenous movement, Raúl Baca. This appointment proved crucial, as Mr Bacasubsequently adopted a tactic of negotiating individually with the variousindigenous groups, limiting Pachakútik’s ability to mobilise support for large-scale anti-government protests in the first half of 2004.

Although the cabinet reshuffle brought some temporary political stability inlate 2003, by the opening months of 2004, the situation had deteriorated again.The price of the traditional parties’ support was becoming increasingly clear, asthey successfully engineered subtle policy changes and won governmentconcessions in order to satisfy their regionalist and clientelistic demands. Notonly had they secured membership of the new cabinet back in December, butthey also subsequently gained important positions in state-owned companiesand regulatory agencies. Moreover, despite pressure from the Fund, thetraditional parties continued to block important policy goals like tax reform andthe sanctioning of private-sector participation in the state-owned oil sector.Mr Gutiérrez subsequently suffered a severe blow when Mr Pozo was forced to

Reform agenda stalls

Cabinet reshuffle buystraditional party support

Traditional support comes atan increasingly heavy cost

Ecuador 9


resign in June over congressional resistance to his continued insistence onfiscal austerity.

In May 2004 Mr Gutiérrez came dangerously close to being ousted in acongressionally led coup, allegedly promoted by the PSC. The president hadlargely lost the support of former cabinet allies and seemed increasinglyisolated in the legislature, with his PSP now holding only six seats in the 100-seat lower house. In such a hostile environment, the prospects of Mr Gutiérrezconcluding his four-year term to January 2007 appeared dim at best. Yet, by theend of July, such speculation had all but vanished and a separate congressionaleffort to impeach the president on corruption allegations faded from thepolitical agenda.

Among the most important reasons for the turnaround in Mr Gutiérrez’sfortunes was a realisation by the congressional leadership and political partiesthat oppose the president that a stable and growing economy deprived mostconstituents of a strong enough motive to support a coup. Equally importantly,the US Embassy in Quito forcefully intervened (and not for the first time) towarn local politicians that it would not countenance any departure from theconstitutionally established order. Ultimately, most local politicians are wary ofprovoking US hostility and most consider Washington’s approval, or at least itsneutrality, a basic precondition for any legitimacy.

In mid-2004 Mr Gutiérrez was enjoying some respite from political pressures,largely owing to an improving economic scenario, as high oil prices boosted thepublic finances. The traditional parties also wanted to maintain stability aheadof the local elections scheduled for October 17th. Yet, despite appearing newlysecure in his position after fending off strong opposition on both the left andthe right in previous months, Mr Gutiérrez remained isolated in the presidencyand heavily dependent on the traditional coastal-based parties for support. Thepresident’s hold on power was far from solid, as he struggled to maintain aworking base in the fragmented and opposition-dominated lower house.Policymaking remained hostage to a fractured Congress and there was a strongrisk that the administration would become increasingly ineffective as thelegislative agenda was co-opted by the traditional parties. Owing to theweakness of the institutional framework, infighting in the heterogenous cabinetand large-scale popular protests continued to carry the potential to precipitate agovernment collapse.

Important recent events

January 2000

A quasi-coup, spearheaded by indigenous groups and sections of the military, oustsJamil Mahuad from the presidency less than two years into his term. Confusednegotiations avert the complete collapse of constitutional order. Gustavo Noboabecomes president.

March 2000

The Law for Economic Modernisation is passed in Congress, setting up the legalframework for dollarisation. The country is fully dollarised by September.

Coup rumours highlight fragilityof the constitutional order

President survives threat, butgovernability remains weak

10 Ecuador


August 2000

In a restructuring, Ecuador secures a 40% reduction in the stock of Brady bond andEurobond debt, issuing two global bonds to its creditors.

December 2001

Ecuador successfully completes its first IMF stand-by arrangement since the 1980s.

June 2002

The resignation of Carlos Julio Emanuel from the Ministry of Finance amid acorruption scandal triggers a downturn in the fortunes of the Noboa government.

November 2002

The second round of the presidential election is won by a former army colonel,Lucio Gutiérrez, who takes up office in January 2003, with the backing of a lefitstindigenous coalition.

March 2003

Fund approves a new 12-month US$205m stand-by arrangement with theGutiérrez administration.

August 2003

Ruling coalition splits, as the leftist Pachakútik is dismissed by the president, after thegroup opposes government policy on several occasions. Legislative programme stalls.

April 2004

IMF arrangement expires with most of the available funding undisbursed amidcongressional hostility to important targeted reforms.

Constitution, institutions and administration

Since 1830 Ecuador has had 18 different constitutions, all subject to a largenumber of amendments. The 1979 constitution underpinned the return tocivilian democracy and established a unicameral parliament and presidentialgovernment. The president is elected for four years, may not be re-electedimmediately, and can be impeached by a two-thirds majority of Congress. Theconstitution was reformed most recently in 1998, with the chief aim ofstrengthening the power of the executive vis-à-vis the legislature. Congress’spower to impeach ministers was removed, and mid-term elections wereabolished (see Recent political developments). However, the leaders ofpowerful blocs have shown that they are still able to weaken the government.

The election of deputies to the unicameral Congress for four-year terms takesplace at the same time as the presidential election, on the third Sunday ofOctober of the electoral year. The number of deputies in Congress has fluctuated inrecent years, expanded by the 1998 constitutional reforms from 82 to 121 members.and again in 1999, to 123 members, following the creation of a new province,Orellana. An electoral reform, passed in March 2000, reduced the number ofdeputies in Congress to 100, starting from the congressional election in 2002.Representation is geographically based and deputies are elected from open lists.The most heavily populated provinces, Guayas and Pichincha, elect 18 and 14deputies to the chamber respectively. Nevertheless, the sparsely populated

The 1979 constitution isreformed in 1998

A powerful Congress

Ecuador 11


provinces of the Oriente (6 out of 22) are over-represented as congressionalcandidates from these areas need far fewer votes to be elected. The PSP usedthis to its advantage as it performed strongly in the Oriente (Mr Gutiérrez’shome region) in the 2002 elections. Parties that do not reach a threshold of 5%of the popular vote in two consecutive national elections lose their partyregistration, barring them from contesting future elections. However,independents have been allowed to run for Congress and other official positionssince 1996. Their number has grown in recent years.

There are 221 municipalities in Ecuador, but new ones have been created withrelative frequency, normally as political favours to local notables who want togain more state funding and powers. Congress takes up office on January 5th ofthe October after it is elected, and the largest party bloc has the right to choosea president or speaker for the first two years of the Congress. In January 2003the PSC, the largest party, ceded its right to choose a president to the second-largest party, ID. The president of Congress has considerable power overlegislation: he can call extraordinary congressional sessions and determine theagenda for discussion and is an intermediary between the executive andthe legislature.

Ecuador’s judicial and regulatory bodies have traditionally been highly pol-iticised. Congress appoints officials to the Supreme Electoral Tribunal and theSupreme Constitutional Court, as well as appointing the banking and companysuperintendents, the attorney-general and the comptroller-general. In 1997 anattempt was made to depoliticise the Supreme Court, which had previouslybeen appointed by Congress. In that year, Congress selected 31 new judgesfrom a shortlist prepared by a commission, based on nominations from 12electoral colleges representing different civic groups and individuals. TheSupreme Court itself selects replacements upon the death or retirement of itsmagistrates. Judges still tend to serve the interests of the parties that selectthem. The Supreme Court appoints judges to the provincial superior courts.

The flawed political culture has impaired the quality of policymaking andlegislation. For example, the strong influence of interest groups hamperedefforts to deal effectively with the banking crisis by preventing the governmentfrom recovering most of the bad loans in the collapsed banks (see Economicsectors: Financial services). Cronyism has been reflected in a series ofcorruption scandals over the past few years. The influence of the military oversome policy areas, such as the oil industry, waned during the 1990s, butreceived a boost when Mr Gutiérrez put former middle-ranking officers in anumber of important ministerial and administrative posts. Regionalistsentiment centering on rivalry between the highlands and the coast remainsintense, hampering the formation of consensus on important issues.

A politicised judiciary

A flawed political culture

12 Ecuador


Political forces

Ecuador’s largest political parties in terms of congressional representation arethe centre-right PSC, the PRE and the centre-left Izquierda Democrática (ID). Allhave held power at some time since the transition to democracy in 1979.

Composition of Congress, Aug 2004No. of seats

Partido Social Cristiano (PSC) 24Partido Roldosista Ecuatoriano (PRE) 16

Izquierda Democráica (ID) 15Partido Renovador Institucional Acción Nacional (PRIAN) 10Movimiento Unidad Plurinacional Pachakútik –Nuevo País (MUPP-NP) 10

Independents 9Partido Sociedad Patriótica 21 de Enero (PSP) 6

Democracia Popular (DP) 4Movimiento Popular Democrático (MPD) 3

Patria Solidaria-Frente Amplio 3Total 100

Source: Economist Intelligence Unit.

The PSC was founded in the 1950s in Quito by a group of upper-middle-classRoman Catholics, but for the past two decades has been closely identified withthe coastal area around Guayaquil. The reformist agenda espoused by the partyin the past, as in 1996 when Jaime Nebot ran for president, has beensuperseded by stronger regionalist and clientelistic considerations. The partystaunchly defends the interests of the coastal private sector and opposes highertaxes. The elderly former president (1984-88) and former mayor of Guayaquil,León Febrés Cordero, continues to be the most powerful figure in the party, butlacks an obvious successor. His protégé and former PSC congressional leader,Mr Nebot, became the mayor of Guayaquil in 2000 when Mr Febrés Corderodecided to stand down on grounds of poor health.

The populist PRE was founded in memory of a former president, Jaime Roldós(1979-81), who was killed in a plane crash in 1981. Support for the party isstrongest on the coast, where it vies with the PSC and PRIAN for dominance,particularly in marginal urban and rural areas. The party was discredited by thebrief presidency of Mr Bucaram in 1996-97, and by the disastrous tenure ofCarlos Julio Emanuel as finance minister in 2001-02 (see Recent politicaldevelopments). The party continues to be led by Mr Bucaram from exile. Itspends much of its energies lobbying for his return, and appears to have littleinterest in serious policymaking.

The ID, founded in 1970, is centre-left, with a moderate reformist wing and amore radical element. Presided over by a former president, Rodrigo Borja(1988-92), the ID tends to favour higher taxes for the wealthy, and to opposepublic-sector job losses and privatisation. The ID-controlled administration inPichincha (the province surrounding Quito) blocked the privatisation of theregional electricity distributor in 2002. After the PSC, as the largest party in

A crowded political landscape

PSC

PRE

Democracia Popular (DP)ID

Ecuador 13


Congress, relinquished its prerogative of choosing the speaker of Congress, thispost was taken by the former congressional leader of ID, Guillermo Landázuri.

Local banana magnate, Alvaro Noboa, established his own political party, thePartido Renovador Institucional Acción Nacional (PRIAN), to support hissecond bid for the presidency in 2002. An electoral vehicle, the party does nothave deep roots, raising support during the presidential campaign via populistgestures. Like its founder, PRIAN has not presented a coherent ideologicalposition and acts in an opportunistic fashion in Congress.

The Movimiento Unidad Plurinacional Pachakútik (Pachakútik) is thedescendant of the umbrella group of indigenous organisations, socialmovements and trade unions formed in 1996 that achieved immediate electoralsuccess, winning several seats in Congress. Pachakútik rejects privatisation andopposes dollarisation on ideological grounds, but has appeared to moderate itspolicies since winning a number of cabinet posts in the Gutiérrezadministration. Although by no means exclusively indigenous, it remains theprincipal congressional vehicle for indigenous groups represented in theConfederación de Nacionalidades Indígenas del Ecuador (Conaie), theConfederation of Ecuadorean Indigenous Nationalities. This grass-rootsmovement, which is highly mobilised, continues to lobby the government fromoutside Congress, using the threat of a return to mass protest (similar to thatwhich culminated in the 2000 coup) as leverage. The group’s membership isdivided over the extent to which it should become involved in electoral politics,and disputes between highland indigenous groups and the Amazonianminority have weakened it.

The Partido Sociedad Patriótica 21 de Enero (PSP) was founded byLucio Gutiérrez as a vehicle for his electoral bid and is dominated by his formerarmy colleagues. In addition, three of the PSP’s ten congressionalrepresentatives are Gutiérrez relatives. The PSP has not espoused a particularideology, although its stated central motivations are to promote social justiceand eliminate corruption. The party is trying to build up a popular base and itspresence in state institutions. It is stronger in the highlands and in the Orientethan on the coast, but it is not regionally exclusive.

The DP used to be the natural party of the highland middle classes. Formerly arelatively small and compact organisation controlled by a clique of Quitointellectuals gathered around a former president, Oswaldo Hurtado (1981-84), itgreatly increased its representation in Congress at the 1998 general election onthe back of a wave of support for Jamil Mahuad. His downfall as presidentamid corruption scandals caused the party to fragment. The rump of the DPstill in Congress now houses Mahuad loyalists, whereas the others have left.Mr Hurtado, in a bid to revive the original social-democratic principles of theDP, set up the Patria Solidaria (PS) in early 2002, but it won only one seat in the2002-06 Congress.

The military plays an important political role behind the scenes, especially intimes of political instability. In February 1997 it helped negotiate the agreement

The military becomespoliticised in the late 1990s

Pachakútik

PRIAN

PSP

DP

14 Ecuador


that brought a swift end to the constitutional crisis following the ousting ofMr Bucaram. The military has traditionally been seen as less corrupt thancivilian politicians, business or the unions, although its prestige has beendented by recent scandals. The military also won respect among the populationfor its role in providing education, infrastructure and healthcare facilities inmarginal rural communities, especially in the Amazon region, during the yearsof military rule. However, the military’s role as a guarantor of stability wascompromised by its involvement in the January 2000 quasi-coup, whichexposed divisions in the institution. Soldiers were aggrieved at themismanagement and corruption scandals of the 1990s, and some had becomesympathetic to radical indigenous movements. Many of the (mostly junior)officers who supported the coup were removed in 2000, among themMr Gutiérrez and former army colleagues who have taken up important postsin the administration. Mr Gutiérrez sacked many of the most senior officers inthe army and navy as one of his first acts as president, promoting officerssympathetic to his own views. By undermining professionalism and disruptinglines of command, this has further eroded the institution's integrity. Thepresident continues to identify strongly with the military and has sought toinvolve it more in civilian life, for example by increasing its involvement indomestic security. This has also been divisive.

Main political figures

Lucio Gutiérrez

The son of a riverboat trader from the Amazon region, Mr Gutiérrez becamepresident in 2002 without having held any previous political office. In the army, hereached the rank of colonel and gained civil engineering qualifications from themilitary academy, where he came under the influence of a previous generation ofnationalist army officers. He later served in military intelligence, before hisparticipation in the January 2000 coup led to his dismissal. Having come to poweron a left-wing political platform, and in alliance with radical indigenous groups,Mr Gutiérrez’s sudden adoption of a pro-US foreign policy stance and an orthodoxeconomic strategy precipitated a rupture of relations with his former supporters.forcing him into a heavy reliance on the support of the traditional establishmentparties. His decision to appoint numerous relatives and former army colleagues toimportant positions also generated severe criticism.

Mauricio Yépez

Mr Yépez took over at the helm of the economy and finance ministry onJune 1st 2004 after his predecessor, Mauricio Pozo, was forced to resign owing tocongressional resistance to his insistence on an austere fiscal stance and the use ofabove-budget oil revenue for debt buybacks. Mr Yépez, an economist, waspreviously executive president of the Banco Central del Ecuador (BCE, the CentralBank), a post he held since 2001. He holds orthodox views on economic policy andis well regarded by foreign investors and multilaterals. He worked closely withMr Pozo in negotiating Ecuador’s April 2003 12-month stand-by arrangement withthe IMF and, until mid-May 2004, was also Ecuador’s chief negotiator in the currentfree-trade talks with the US. Upon taking up office, Mr Yépez pledged to maintainthe same policy stance as his predecessor. However, he faces the same challenges toloosen fiscal discipline and the same resistance to structural reform, particularly

Ecuador 15


given the current high oil prices, which have increased demands for higher publicexpenditure across the political spectrum. Finance ministers tend to have a short lifespan in Ecuador, owing to political pressures and corruption scandals. Mr Pozo, whoserved for 14 months, had the longest tenure in the post in eight years.

Álvaro Noboa

Mr Noboa (no relation of the former president, Gustavo Noboa) is a leadingbusinessman, whose family firm is Ecuador’s largest banana exporter and apowerful conglomerate. He narrowly lost the presidential election of 1998 as thecandidate of the Partido Roldosista Ecuatoriano (PRE) and he reached the secondround again in 2002 on a vague populist platform, leading his own party, the PartidoRenovador Instituctional Acción Nacional (PRIAN). Mr Noboa has almost unlimitedresources for campaigning and is likely to make another bid for the presidency in thenext elections in 2006.

Jaime Nebot

A major figure in the Partido Social Cristiano (PSC), Mr Nebot was runner-up in hissecond attempt to win the presidency in 1996 and disappointed his party by refusingto run in 1998. A protégé of a former president, León Febrés Cordero (1984-88),Mr Nebot was the leader of the powerful PSC congressional bloc until May 2000,when he stood down to assume his new post as mayor of Guayaquil. Mr Nebot willcontinue to be a prominent political player because of his influence in the PSC.Single-minded and stubborn, he has little patience with consensus-building.

León Febrés Cordero

At 73 years old, and suffering from a range of illnesses, the former president remainsone of the most powerful politicians in the country and the de facto leader of thecountry’s largest political party, the coastal-based conservative Partido SocialCristiano (PSC). He won a congressional seat in the 2002 elections. He is especiallypopular in Guayaquil, where he was mayor for several years before retiring in 2000.

Abdalá Bucaram

The exiled former president (1996-97) remains a potent force in Ecuadorean politicsand would dearly like to make a comeback. Indeed, his party, the Partido RoldosistaEcuatoriano (PRE), has recently withheld its temporary support for the governmenton important legislative issues in the hope of forcing the president, Mr Gutiérrez, toallow Mr Bucaram back into the country without the risk of facing arrest andprosecution on several corruption charges pending in the nation’s courts. Given thecontinued attractions of populism for many disillusioned voters, particularly poorrural-to-urban migrants on the Pacific coast, his party, the PRE, could well gatherrenewed support ahead of scheduled provincial and municipal polls inOctober 2004.

Rodrigo Borja

The 68-year-old former president (1988-92) and leader of Izquierda Democrática (ID)is one of the most popular politicians in the Andean highlands, where he is regardedas capable and relatively honest, but he enjoys little support on the coast.

16 Ecuador


International relations and defence

A permanent peace agreement, signed in October 1998, brought to an end afive-decade border dispute with Peru which had led to war in 1941 and again—briefly—in 1995. As a result, relations with Peru have been normalised and tradehas grown rapidly in recent years. Since then, Ecuador has had to switchattention, and defence resources, northwards to cope with a new securitythreat, incursions by guerrillas across the Colombian border. Relations with theUS are generally good. The US military has modernised an airbase at Manta,which it uses for anti-drug surveillance operations. This is the cause of somedomestic unease, with critics of the arrangement fearful that the base could beused for military action against Colombian guerrillas, potentially implicatingEcuador in the Colombian conflict. Ecuador maintains a neutral stanceon Cuba.

Security risk in Ecuador

Armed conflict

Until the signing of a peace treaty in 1998, Peru represented Ecuador’s most serious external threat. Decades of tensionbetween the two nations over the demarcation of an 80-km stretch of the border led to a brief war in early 1995, in whichEcuador gained the upper hand. The treaty appears to have ended the conflict permanently. Since then, crossborder tradehas increased, although a lack of funds on both sides is likely to prevent infrastructure and other economic partnershipprojects—conceived as a way of cementing the peace—from being carried out fully.

Politically motivated armed insurgency originating within Ecuador itself has not been a serious problem for over a decade,especially when compared with the situation in Colombia. The main trouble spot is the northern border area, which haswitnessed an upsurge in criminal activity in the past few years. Since the start of 2000, hundreds of farmers along theborder have reported being forced off their land by gunmen. The northern Amazon region, centred on the town ofLago Agrio, is home to Ecuador’s main oilfields, and criminal groups have frequently targeted oil companies for extortionand kidnapping. As a result, the UK Foreign and Commonwealth Office currently advises against all travel to the zonebordering Colombia (especially Sucumbios province), listing it among the world’s most risky areas.

Some of this criminal activity has been linked to the movement of Colombian guerrillas across the border, a problem thathas arisen comparatively recently to become the most serious security issue now facing Ecuador. Plan Colombia, a US-funded programme to eradicate drug crops in southern Colombia, has increased pressure on the Fuerzas ArmadasRevolucionarias de Colombia (FARC) rebels, and has led to more frequent incursions by the guerrillas into Ecuador. FARCcamps have been discovered within Ecuadorean territory, and the military has occasionally clashed with guerrillas. ManyEcuadoreans fear that the country could become dragged into the conflict itself, or that the state or armed forces couldbecome a direct target for Colombian guerrillas.

The government is anxious to bring the security situation under control, as it poses a serious risk to the development of theoil industry. A series of bomb attacks on the Sistema del Oleoducto TransEcuatoriano (SOTE), the trans-Ecuadoreanpipeline, in 2000 were never decisively attributed to guerrillas, or other criminal elements, but a repeat of such incidents,directed at the new Oleoducto de Crudos Pesados (OCP), the heavy crude oil pipeline, from the Amazon region to thecoast, could prove extremely damaging. Oil companies operating in the Amazon region also work under the threat ofkidnap by armed gangs, some of them based in Colombia.

Guerrilla incursions worrypolicymakers

Ecuador 17


Unrest and demonstrations

Economic dislocation and weak government have fostered a fragile sociopolitical climate in Ecuador. The radicalisation ofsections of the poor, indigenous minority has worsened the situation. Mass demonstrations, centred on Quito, broughtdown governments in 1997 and 2000. Since the dismissal of the Movimiento Unidad Plurinacional Pachakútik (MUPP,Pachakútik), the political wing of the Confederación de Nacionalidades Indígenas del Ecuador (Conaie), the mainindigenous organisation, from the government coalition in August 2003, the indigenous movement has adopted a morehard-line stance against the government, seeking to renew regular political protests and strikes. Although foreign businesseshave not been specifically targeted in these protests, privatisation is unpopular and there is a degree of hostility to foreigncapital. However, an improving economy and public fatigue with political instability have limited support for such protestsin recent months and Conaie has seen its political influence wane, temporarily at least.

Violent crime

Economic collapse in 1999 stimulated a rise in petty crime such as robbery, particularly in Guayaquil and Quito. Police arepoorly paid and trained. The murder rate is lower—and levels of personal safety slightly better—than in neighbouringcountries, but the gap is narrowing. Officials say that the number of reported crimes increased by 66% between 1995 and2000. In a survey carried out by Cedatos, a local polling organisation, in 2001, 67% of respondents said that they felt lesssecure than in the previous year and 80% felt that crime was on the rise. Local mafias are believed to have considerablepower in Ecuador, based on the drug trade—although Ecuador is only a marginal drug producer—and contraband.

Organised crime

Overall, the threat of organised crime to business, apart from the risks posed by criminal or guerrilla gangs to the oilindustry, is manageable. However, corruption in the state institutions, which poses more direct problems for business, isfuelled by organised crime.

Kidnapping and extortion

The oil industry, which accounts for the bulk of foreign investment in Ecuador, faces the greatest risk of extortion andkidnapping. This type of crime has been especially prevalent in the northern border region with Colombia. In 1999-2000 atotal of 22 foreigners were kidnapped in the border province of Sucumbios. A Mexican business consultancy, Coparmex,put Ecuador at seventh place in the top ten world countries ranked by kidnapping rates in 2002, with 88 reported cases.However, increased security by companies operating in the area, as well as the increased presence of the Ecuadoreanmilitary in the region in recent years, has helped to reduce abductions. According to the US State Department, the policereported 34 kidnappings in the northern border region overall in 2003, including foreigners, local ranchers, farmers andbusinessmen. However, the actual numbers may be underestimated as many victims may not come forward for fear ofreprisals. Kidnappings are not just carried out by criminals or rebel groups, or for financial gain—several workers from anArgentinian oil company, Compañia General de Combustibles, were kidnapped by Achuar Indians in December 2002, in abid to stop the company from prospecting for oil in Block 23. Kidnappings by gangs in urban areas, once rare, are also onthe rise.

Resources and infrastructure

Population

According to the most recent (November 2001) national census, carried out bythe Instituto Nacional de Estadística y Censos (INEC), the national statisticsinstitute, population growth slowed in the 1990s, falling short of national andUN projections based on the previous 1990 census. The population countrevealed by the 2001 census was 12.1m, compared with a previous projection of12.9m. Population growth slowed to an average of 2% in the 1990s, comparedwith 2.2% in the 1980s and 2.6% in the 1970s. The main reasons were increased

Emigration affectspopulation growth

18 Ecuador


use of family planning, greater participation of women in the labour force, andmost importantly, the impact of mass emigration in the late 1990s. Populationgrowth has continued to slow since 2001, impacted by migration in particular.The most recent population estimate by the World Bank (2003) was 12.8m andthe bank estimated that average annual population growth would fall to 1.4% inthe period 2002-2015.

According to data from the 2001 census, at least 200,000 people are estimatedto have left the country between 1998 and 2000. In 2001 alone, according toINEC data, just over half a million people left Ecuador, establishing a new fastertrend that has remained more or less constant since then. Before 1995 around65% of migrants headed for the US. Since then, Spain has become the primarydestination, attracting over one-half of all migrants, with Italy hosting anothersignificant share. Many work illegally, but efforts have been made to formalisetheir status. Current estimates of the total number of Ecuadorean migrants inSpain vary, but Spain's Instituto Nacional de Estadística (INE) estimates thatthere are about 135,ooo formally registered migrants in the country, withanother estimated 100,000 living illegally. Traditionally, the majority ofemigrants came from the highlands, but the pattern has been changing, withmore coming from the coast in recent years. Emigrants are typically city-dwellers impoverished by the economic crisis of the late 1990s. Many have leftdependants in the country and as a result, flows of family remittances toEcuador, the second largest source of foreign currency, continue to registerstrong growth, reaching a total of US$1.54bn in 2003, according to theCentral Bank.

Urbanisation has increased rapidly in the past two decades, although it remainsbelow the regional average. The 2001 census showed that the urban populationaccounted for 61% of the total, with the remaining 39% living in rural areas. Thefastest population growth has taken place in the Galápagos Islands, as migrantshave sought opportunities in the tourism and fishing sectors. The coast remainsslightly more densely populated than the highlands. The three principal cities,Quito, Guayaquil and Cuenca, accounted for an almost constant 30% of thetotal population for most of the 1980s and 1990s. A relative increase in theurban population is attributable to migration towards major secondary citiessuch as Loja, Santo Domingo and Machala, a trend that is expected to continue.Predominantly young, 33.8% of the population was aged 0-14 years in 2000.Despite improvements since the 1970s, social indicators remain among thepoorest in the region. Ecuador fell three places to 100 in the 2004 UnitedNations Development Programme (UNDP)’s Human Development Index (HDI),(which looked at 2002 data), largely on a lower level of literacy among adultsand a faster improvement in similarly rated countries like Armenia andSri Lanka. A higher life expectancy and stronger GDP per capita were notenough to prevent the slippage. In regional terms, Ecuador still lies behindcountries like Peru and Paraguay, which are similarly classed in the “mediumhuman development” category.

Ecuador 19


Population indicators, 2001% of total

By regionCoast 49.8Highlands 44.9Amazon 4.5Galapagos & others 0.8

By age profile0-14 33.315-64 61.965+ 4.8

Source: Instituto Nacional de Estadística y Censos (INEC), November 2001 census.

The formal economy employs just over one-half of the workforce, a share thatfell slightly during the 1990s. Around 70% of workers are employed in theservices sector, and this proportion has risen at the expense of manufacturingand primary-sector employment. The recession of 1998-99 caused heavy joblosses in construction, agro-industry, commerce, manufacturing and financialservices, although these were partly reversed in 2000-03. The Ministry ofEconomy and Finance estimated the total number employed by the publicsector at around 279,000 in 2003, an increase of 6,000 on 2001.

A growth spurt triggered by trade and financial liberalisation helped to reduceinequality in the first half of the 1990s. However, the economic crisis, and thegrowing disparities between the earning capabilities of skilled and unskilledworkers, worsened income inequalities in the latter half of the decade. By2000, according to a study by INEC, the richest 10% of the population received45% of total income. In 2003 the finance ministry estimated that the proportionof citizens living below the statistical poverty line was 51%, up from 34% in asurvey by INEC from 1995. Extreme poverty (defined as the inability to afford astripped-down basic basket of goods) is estimated at 25%, a proportion thegovernment aims to cut to 10% by 2007.

In general terms, the inhabitants in the highlands are poorer than those on thecoast, and the incidence of poverty is higher in rural areas than in the cities.The economic recovery in 2000-03 reduced unemployment, but minimum-wage adjustments have not been sufficiently generous to redress the lossessustained during the crisis. Unions have lost influence over the past decade,and by 2002 had only 54,000 registered members. They exert most influence inthe oil and state sectors.

Comparative Life expectancy and mortality indicators1980 2002

Life expectancy at birth (years)Chile 69 76Venezuela 68 74Colombia 66 72Ecuador 63 70Peru 60 70

Employment and inequality

20 Ecuador


Comparative Life expectancy and mortality indicators1980 2002

Infant mortality rate (deaths per 1,000 live births)Chile 31 10Venezuela 34 19Colombia 40 19Ecuador 64 25Peru 89 30

Source: World Bank, World Development Indicators, 2004.

Ecuador is ethnically diverse. Indigenous people account for around one-quarter of the population, according to estimates from the Confederación deNacionalidades Indígenas del Ecuador (Conaie), the Confederation ofEcuadorean Indigenous Nationalities. However, definitions are fluid, and only6.8% of the population reported itself as indigenous in the November 2001census. Highland Quichua form the vast majority of this group, with smallerindigenous populations in the Amazon and coastal regions. The mestizo (mixed-race) population includes the descendants of foreign immigrants whointermarried with indigenous people. These immigrants included colonistsfrom Spain and other European settlers; Arabs, especially those from theLebanon, who arrived at the beginning of the 20th century and who form aneconomically and politically powerful community on the coast; and imm-igrants from China and from other countries in Latin America, in particular,from neighbouring Colombia. Two areas in northern Ecuador—around the portof Esmeraldas and in the Chota valley near the border with Colombia—have amainly black population, comprising the descendants of slaves of Africanorigin, numbering up to 500,000.

Education

Since the 1970s successive governments have sought to reduce illiteracy and toincrease the country’s number of trained professionals through the provision offree education. The illiteracy rate has fallen, although it remains high in olderage groups and among disadvantaged communities. Advances were madeduring the oil boom in the 1970s, but since the early 1980s state resources foreducation have been squeezed. According to the 2004 United NationsDevelopment Programme’s (UNDP) Human Development Index (HDI), publicexpenditure on education was equivalent to 2.8% of GDP in 1990, falling to amere 1.0% of GDP in the 1999-2001 period. Since then, it has improvedgradually. The 2004 budget provisionally allotted education spending 12.4% ofthe total, or 5.0% of GDP, according to the Central Bank. However, most of thiswas destined for “personnel” (i.e. wages), which accounted for 84% of currentexpenditure on education (a rise of 17.6% year on year), reflecting the pressureon the Gutiérrez administration to raise public-sector salaries. Only a smallproportion of the population can afford private education, which isconcentrated in urban areas at secondary and university levels. Poor health andnutrition, a lack of transport and materials, and antiquated teacher-trainingmethods compound the problems, leading to high drop-out rates. Teachers areunderpaid and strikes cause repeated disruption.

Racial diversity

A history of underfunding

Ecuador 21


Educational opportunities and achievement diverge sharply between rural andurban areas. According to the last census, in 2001 the average Ecuadorean overthe age of 24 years in an urban area had received just over nine years ofeducation; in the countryside, the average was below five years. Just under 30%of the population as a whole above 18 years of age had completed secondaryschool. Indigenous groups had, on average, two years of schooling, withilliteracy rates of 40-50%.

In tertiary education, there has been a rapid rise in the number of institutions,pupils and teachers since the 1970s. There are as many as 57 universities andpolytechnics, of which 27 are public, 21 are private and the remainder draw ona mixture of public and private funds. A policy of free entry to stateuniversities, combined with budget cuts, has inevitably led to a decline inquality. Most university courses are directed towards training professionals forthe services sector and government administration, rather than for industry.

Comparative education dataBolivia Ecuador Paraguay Peru

Primary completion rate, % of all children attending primary school (1992-2000) 77 96 86 90

Avg yrs of schooling, total (2000) 5.6 6.4 6.2 7.6Adult Literacy rate, % aged 15 & above (2002) 86.7 91 91.6 85

Public expenditure on education as % of total government expenditure (2001-02) 18.4 8.0 9.7 21.1

Sources: World Bank, World Development Indicators, 2002, 2003; UN, Human Development Report, 2004.

Health

Life expectancy in Ecuador (70 in 2002) is almost exactly the Latin Americanaverage (71 in 2002), but the country ranked 100th out of 177 countries in the2004 edition of the HDI, 32 places below Venezuela, 27 places behindColombia and 15 places behind Peru. According to the World BankDevelopment Indicators 2004, Ecuador continues to have one of the lowestlevels of expenditure on healthcare in Latin America – 2.3% of GDP annually in2001, compared with 9.5% for Argentina and 7.2% for Costa Rica and a regionalaverage of 7.0%. Central government expenditure on healthcare dropped below1% of GDP in the latter half of the 1990s, reaching a low of 0.6% of GDP in 1999.In the 2004 provisional budget the proportion of total expenditure allocatedtowards health was 5.5%, or the equivalent of a mere 2.2% of GDP.

Limited funding has been compounded by poor targeting, and a lack ofcoordination between different state agencies. State hospitals are run by theMinisterio de Salud Pública (MSP), the Ministry of Health, and the InstitutoEcuatoriano de Seguridad Social (IESS), the Ecuadorean Social Security Institute,with some sizeable voluntary organisations in Guayaquil. The poorest generallyreceive least benefit from state health spending, because of a lack of coverage,with around 23% of the population having no access to public healthcare.Barely 20% of the population, mostly state employees, are affiliated to aninsurance scheme. Most of the health budget is spent on salaries, yet in the late1990s conditions within public hospitals deteriorated and the value of healthprofessionals’ wages was drastically eroded.

Funds are inadequate andpoorly targeted

22 Ecuador


Up to 5,000 doctors and nurses left the country in the late 1990s, but they havebegun to return as the gap in standards of living between Ecuador andArgentina (and other host countries) has narrowed. There is a relatively highincidence of diseases related to inadequate nutrition and poor sanitation andhousing, especially in marginal urban and rural areas. Piped public water andsanitation reach less than half of the population. Urbanisation and the shift ofemployment towards more sedentary, office-based activities have also led to anincrease in those illnesses more prevalent in developed countries, such asheart disease.

Comparative health dataBolivia Ecuador Paraguay Peru

Life expectancy at birth, years (2002) 63.7 70.7 70.7 69.7

Physicians per 100,000 people (1990-2003) 76 145 49 103Public health expenditure, % of GDP (2001) 3.5 2.3 3.1 2.6

Health expenditure per head, US$ at PPP (2001) 125 177 332 231Undernourished people, as % of total population

(1998-2000) a 22 4 13 11

a The UNDP defines undernourishment as a level of food intake which is chronically insufficient tomeet people's minimum energy requirements.

Source: UN, Human Development Report, 2004.

Natural resources and the environment

Ecuador covers a total area of 276,840 sq km and includes the Galápagosarchipelago, 1,552 km off the coast of Manabí province. The mainland falls intothree regions: the western coastal plain, the central highland corridor ofvolcanoes, and the eastern rainforest of the Amazon basin, known as theOriente. Owing to the country’s equatorial location, there are no extremevariations in climate during the year. There are about 12 hours of daylight allyear round. On the coast, the rainy season lasts from January to May, and therest of the year is dry. In the highlands the rainy season lasts from October toJune. Rainfall is heavier throughout the year in the Amazon basin. Around 78%of the country is tropical or subtropical, whereas 20% is temperate. There are 23different microclimates, resulting in great biodiversity. The alluvial soils of thecoast and the Oriente are the most fertile and can support a wide rangeof crops.

Ecuador is prone to natural disasters: extremely heavy rains are occasionallyprovoked on the coast and in the highlands by the El Niño weather pattern,which occurred most recently in 1998, washing out roads and destroying crops.The country is also home to many active volcanoes. A minor eruption by theGuagua Pichincha volcano in 1999 blanketed nearby Quito with ash and forcedthe closure of the airport for several days. Earthquakes of varying severityoccur frequently, both on the coast and in the highlands. A major quake causedextensive damage to Quito in 1987.

Ecuador is predominantly agricultural. Around 8.29m ha of land have thepotential for agricultural use, of which 74% lie in tropical and subtropical zones.Climatic diversity facilitates the cultivation of a wide variety of crops. Inland

Topography and climate

High occurrence of naturaldisasters

Agricultural resources

Ecuador 23


rivers, lakes and the long coast provide an abundance of fish and seafood. Theexpansion of freshwater shrimp production for export since 1990s, especially inthe Gulf of Guayaquil and in the provinces of Esmeraldas and Manabí, has comeat the expense of the environment, with mangrove habitats being cleared tomake way for shrimp farms.

Ecuador is considered one of the world’s richest centres of biodiversity. With0.2% of the world’s surface, it holds 10% of all plant species and 18% of birdspecies. However, the destruction of natural ecosystems is threatening thiswealth and diversity. There are regulations intended to protect theenvironment—a total of 26 designated ecological reserves and national parkscover 18% of the country’s land area—but the technical capacity, personnel andpolitical will necessary to enforce the rules have been lacking. Control andoversight is dispersed among a number of organisations. The government isexpected to receive more international help to preserve the Galápagos Islands,the most ecologically valuable portion of Ecuadorean territory. The islands areunder threat from an increase in their population; their vulnerability wasfurther highlighted by an oil spill from an Ecuadorean tanker in January 2001.The ecology of the marine reserve, which stretches for 40 miles around thearchipelago, covering an area similar to the size of the Ecuadorean landmassitself, is also under attack from illegal fishing, often by foreign vessels.

Transport, communications and the Internet

Most transport in Ecuador is by road. However, with the exception of the low-lands around Guayaquil, where a huge donor-financed reconstructionprogramme took place following the flood damage caused by El Niño in 1997-98, most of the road network is in poor condition, owing to years ofunderinvestment, and constitutes a significant competitive weakness. At theend of 2002, the Asociación de Empresas Automotrices del Ecuador (Aede), thenational motor industry association, estimated the number of vehicles incirculation at 866,000, up from 563,523 in 1998. Vehicle purchases soared in2000-01, creating more congestion on the roads, as consumers sought a hedgeagainst inflation that did not involve entrusting their savings to the financialsector. The constitutional reforms of 1998 permitted the government to transferresponsibility for the provision of public services, including potable water,electricity, telecommunications, roads and ports, to the private sector, throughconcessions or the sale of partial stakes in state-run enterprises.

The Ministry of Public Works and the local authorities in Guayas and Pichinchahave so far conceded 1,219 km of roads to the private sector. Plans are also afootfor the so-called National Integration Highway, which will run from thePeruvian border via Quito and Guayaquil to the border with Colombia. Thisfour-lane 320km highway is to be financed by the private sector to the tune ofUS$500m. Construction is scheduled to begin in 2005 and end in 2006-07,although the legal structure of the project is still being drawn up by therelevant authorities.

The railway system, built at the turn of the 19th century, is now almostderelict, and track and rolling stock are in urgent need of modernisation. A few

Biodiversity and theenvironment

A decaying transportinfrastructure

24 Ecuador


tourist trains still run on the main railway line between Riobamba and thecoast, but services are irregular. The Consejo Nacional de Modernización delEstado (Conam), the state modernisation body, plans to wind up the staterailway company, which receives a state subsidy of around US$8m per year,and to seek private purchasers or subcontractors.

Ecuador’s two main airports are at Quito and Guayaquil. In 2002 a 30-year,US$350m concession for the construction of a new airport for the capital,Quito, was awarded to the sole bidder, the Canadian Commercial Corporation(CCC). In March 2004 the CCC completed the upgrade of Quito's existingairport (built in the early 1970s). Construction of the new airport is set to beginduring the fourth quarter of 2004 and is scheduled to be completed by June2007. The new airport, which will be built 25km to the east of Quito, inPuembo, will replace the existing one and will be equipped to handle newer,wide-bodied aircraft. The concession to build a new US$120m highway to linkthe airport to Quito is set to be offered by the end of 2004 and completed bythe June 2007 main deadline. In December 2003 the Argentina-basedCorporación America won a 15-year concession to operate Guayaquil’s SimónBolívar airport. The concession includes an estimated initial investment ofUS$90m to expand and upgrade passenger and cargo terminals and toconstruct a new control tower by 2006, in an effort to regain the airport’scategory-one status.

Ecuador’s civil aviation industry is in a poor state, and suffers from a patchysafety record. In its survey of international compliance with the safety andregulatory requirements of the International Civil Aviation Organisation, theUS Federal Aviation Administration rates Ecuador as falling short of therequired standards (Category 2). This prevents new Ecuadorean carriers fromflying to the US. The air force retains influence over civil aviation, and ownsTransportes Aéreos Militares Ecuatorianos (TAME), the only fully operationalnational airline. Its aging fleet operates internally and serves destinations inLatin America, but does not fly to the US. Ecuatoriana, the former state airline,was part-privatised in 1995 but is non-operational. Its routes are currently beingoperated by the Chilean airline LAN-Chile, but could be taken overpermanently by another foreign carrier.

Civil Aviation Data1986 2000

Kilometres flown (m) Total 15 12International 9 6

Passengers carried (,000s) Total 1925 1319International 385 163

Passenger-km (,000s) Total 1663 1042International 1123 544

Source: UN Statistical Yearbook.

Ecuador has four main ports. Guayaquil handles 65% of all traffic, followed inimportance by Puerto Bolívar, which is the main gateway for banana exports.Esmeraldas, Manta and Bolívar. Two additional ports, at Balao and La Libertad,are equipped to accommodate oil tankers. Manta mainly exports coffee andcocoa, and Esmeraldas is the main oil terminal. As with other parts of the

Ecuador 25


infrastructure, modernisation has been held back by delays in passinglegislation to enable the subcontracting of port services to the private sector.However, in July 2004 the Nuevo Milenio Consortium (composed of the EcuadoreanHidalgo-Hidalgo and the Colombian Port Group SA) began operating a 25-yearconcession (first signed in 2003, but subsequently delayed) for the port of Esmeraldas.The group plans to invest US$40m-US$60m to modernise the plant and expandcurrent capacity. Conam also plans to award concessions to run the portsof Manta.

The government also made efforts in 2003 to tighten state control over customsin order to improve efficiency. The Ecuadorean Customs Corporation (CAE) hasbeen reformed, to reduce private-sector influence over its management, whichhad encouraged evasion.

Merchant shipping fleets(gross registered tonnes; ‘000)

1997 2001Total 145 306Oil tankers 80 219

Source: UN Statistical Yearbook.

Ecuador had 12.5 fixed telephone lines per 100 inhabitants as of June 2004,according to the Superintendencia de Telecomunicaciones (Suptel), the bodyoverseeing the sector. This is low, even by regional standards, and services areconcentrated in urban areas Attempts to privatise the state telecommunications(telecoms) companies, Andinatel and Pacifictel, which operate services in thehighlands and coastal region (another state-owned firm, Etapa, serves the thirdcity of Cuenca) respectively, began in 1992. Opposition from interest groups anda lack of political will initially led to delays, and two attempts to sell off a 35%stake in the companies failed in 1997-98. The privatisation law wassubsequently reformed in 2000 to allow the government to offer 51% of bothfirms, but no privatisations took place under the Noboa government. Under the12-month stand-by arrangement signed with the IMF in March 2003, theGutiérrez government committed to putting telecoms and electricity distributorsunder private administration, in an effort to improve the management of thecompanies in the absence of an outright sale. The Fondo de Solidaridad (FS),the government body that owns the central government’s stakes in theelectricity and communications firms, had set a target of January 2004 for thehandover of the administration of Andinatel and Pacifictel. However, thecontract auction was cancelled at the end of January. Only one of sevenqualified companies was prepared to present a bid, and there were complaintsover the transparency of contract terms and the bidding process. As of mid-2004, an alternative to the failed bidding process remained to be negotiatedwith the Fund, possibly centering on government-to-government negotiationsto find an international operator to manage the companies.

The number of mobile users has grown rapidly in the past few years, to reach2,520,788 by June 2004, according to Suptel. There are two main foreign-backedconsortia operating mobile services, Porta and BellSouth. The governmentawarded a third mobile-phone licence in February 2003 to Andinatel. That therequired investment will not be coming from private sector is not an optimal

Telecommunications

26 Ecuador


result, but the entry of a new competitor should help to reduce mobile-phonecharges, which are high by Latin American standards. The recent opening up ofthe wireless local loop (WLL) promises to reduce the costs of increasingcoverage of households.

Telecoms infrastructure is one factor holding back the development ofe-commerce in the country. However, prospects have improved since a law tofacilitate e-commerce, the Ley de Comercio Electrónico (electronic commercelaw), came into force in April 2002. A lobby group representing e-commerceentrepreneurs in Ecuador—Corpece—collaborated in the drafting of the bill. Thelaw allows for electronic signatures and provides a legal basis for e-commercetransactions. Access to the Internet in Ecuador is widening, although it remainsrestricted. The estimated penetration rate in 2003 was 2.7 Internet users per 100people (compared with a regional Latin American average of 8.1), with 30.4 PCsper 1,000 people (compared with a regional average of 98.4). Several virtualbusiness-to-business (b2b) marketplaces have been established, serving specificindustries, such as cut-flower exporters.

Telecommunications and IT indicators, 2003(number per 100 people)

Argentina Brazil Colombia Ecuador PeruTelephone mainlines 22.0 20.0 16 12 7.0Mobile subscribers 19.1 26.0 13.9 18.8 10.7

Internet users 10.4 9.5 3.8 2.7 3.8

Source: Economist Intelligence Unit, CountryData.

The dominant news medium in Ecuador is television, followed by radio. Thetwo largest commercial television stations are Gamavisión and Ecuavisa.Supertel reported that there were 94,000 cable-TV subscribers in 2003.Broadcasting is regulated by the Consejo Nacional de Radiodifusión yTelevisión (Conartel). There are several daily national and local newspapers,but they reach far fewer people—the leading newspaper in Quito, El Comercio,has an accredited circulation of around 160,000. The influence of powerfulproprietors over media output is pronounced.

Energy provision

Ecuador has abundant hydroelectric power-generation potential. The country isdependent on the Paute hydroelectric plant for around 65% of its electricity, butlow rainfall, inadequate water storage and the accumulation of silt as a result ofdeforestation have reduced generating capacity. In severe dry seasons,generation can drop by 50%. During the mid-1990s, Ecuador often enduredextended blackouts, but the situation has improved in recent years. If economicrecovery is sustained, the power infrastructure will be strained. Thecontribution of thermal stations has declined markedly in recent years, owingto poor maintenance and a lack of investment in new technology.

In May 2o03 the government awarded a 30-year contract for the Mazar damproject to the state firm that runs Paute, Hidropaute. Located several kmupstream from Paute, Mazar will be used as a secondary water-collection

Internet

The media

Hydroelectric power

Ecuador 27


basin, both to provide Paute with the required flow during the dry seasonand to allow the dredging of sediment. Mazar should prolong the useful lifeof the Paute dam and generate around 186mw in its own right, but it willtake several years to build. A two-way transmission line connecting Ecuadorto the Colombian national electricity grid entered service in March 2003,with another line from Peru due to be operational by end-2004. These lineswill top up supplies of power during the dry season when the contributionof hydroelectric power stations falls, at less cost than building the equivalentamount of thermal capacity.

Successive governments have failed to attract private investment intoelectricity distribution. The fragmentation of the market is itself unattractive.The 16 distributors are highly indebted and have a poor record of payinggenerating companies. Unions and vested interests are additional sources ofobstruction. Privatisation plans collapsed in 2002, as municipal andprovincial governments refused to release their stakes and grass-rootsorganisations threatened large-scale protests. The 2003 IMF stand-byarrangement committed the Gutiérrez administration to hiring private-sectormanagers for 13 of the state electricity distribution companies (Ecuador’s threelargest electricity companies, which have the greatest administrative problems,are not among the 13 to be transferred to private management). However thisprocedure, due to be completed in late February 2004, has again been delayed,with little sign of progress in the near term. The electricity sector faces seriouscashflow problems. Uncollected provision of services by the 13 companies isestimated at over US$110m a year, and they in turn maintain a sizeable debtwith state oil firm, Petróleos del Ecuador (Petroecuador), estimated at US$90min early 2004. To resolve these problems, the Gutiérrez government hasestablished several new regulations, including a requirement that electricity-generating companies pay Petroecuador on the spot for all fuels, and theestablishment of a trust fund to guarantee international payments and to repayPetroecuador. A new Electricity Reform law was also before Congress in mid-2004, which included provisions to guarantee payment by distributors to thegenerating firms; and the creation of a US$500m fund to guarantee paymentsto potential private investors in the generation sector.

Ecuador has the refining capacity to process only around 20% of the natural gasproduced in the Oriente oilfields and imports are necessary to meet about 50%of national demand. Proven reserves as of January 2004 were 345bn cu ft (bcf),according to the US Energy Information Administration (EIA). A further 177bcfof recoverable reserves are located offshore from the Gulf of Guayaquil. EDCEcuador, a subsidiary of US Noble Affiliates, has tapped these reserves under a1996 agreement with Petroecuador, building a 40-km pipeline to an onshorenatural-gas-fired power plant, which has been in operation since 2002. Most gasconsumption is in the form of imported liquefied petroleum gas (LPG). Theexisting national network of ducts transporting gas and other derivatives is1,300 km long, but there are plans to increase this to 2,000 km.

Little progress is made inelectricity privatisation

Natural gas

28 Ecuador


The economy

Economic structureMain economic indicators, 2003(Actual unless otherwise indicated)

Real GDP growth (%) 2.7Consumer price inflation (av; %) 7.9

Current-account balance (US$ m) -456.0Exchange rate (av; US$:US$) 1.00Population (m) 12.6 a

External debt (year-end; US$ m) 16929.31 a

a Economist Intelligence Unit estimates.


Following the dollarisation of the economy in 2000, the Banco Central delEcuador (BCE), the Central Bank, completed a revision of its national accountsdata in 2002. These data are now denominated in US dollars and the base yearhas been updated from 1975 to 2000, giving a more accurate picture of thecurrent structure of the economy. Oil and export agriculture are still the mainpillars of the Ecuadorean economy. During 1999-2003, agriculture, forestry andfishing accounted on average for 9.9% of GDP. The share of the oil and miningsector (dominated by the extraction of crude oil) as a proportion of nationaloutput averaged 20.2% of GDP in 1999-2003. In general, the export sector ismore developed than the rest of the economy. Exports accounted for an averageof 29% of GDP in 1999-2003. Owing to the fact that exports remain dominatedby primary goods, this increases the economy’s vulnerability to externalshocks, such as downturns in commodity prices. The domestic consumermarket is small, with limited purchasing power.

Investment rates have generally been low, averaging around 18% of GDP in thesecond half of the 1990s. However, investment was boosted after 2000, andparticularly in 2001-03, by work on the construction of a new oil pipeline thatwas financed by foreign investment. Private consumption has typicallyaveraged 65-68% of GDP over the past decade. It has been supported since 1997by the marked growth since then of family remittances from migrant workersoverseas. Both investment and private consumption tend to be import-intensiveand the stability of the exchange rate since the economy was dollarised in 2000has provided further impetus to import growth.

Ecuador 29


Comparative economic indicators, 2003

Ecuadora Colombia a Perub Venezuela a Brazilb

GDP (US$ bn) 27.3 77.6 b 61.0 85.3 492.1GDP per head (US$) 2,162 1,740 2,243a 3,337 2,772a

GDP per head (US$ at PPP) 3,784 6,336 4,933a 4,664 7,455a

Consumer price inflation (av; %) 7.9b 7.1 b 2.3 31.1 14.7

Current-account balance (US$ bn) -0.5b -1.4 -1.1 9.7 3.5Current-account balance (% of GDP) -1.7 -1.8 -1.8 11.3 0.7

Exports of goods fob (US$ bn) 6.2b 13.5 9.0 25.8 73.1Imports of goods fob (US$ bn) -6.3b -13.3 -8.2 -10.7 -48.3External debt (US$ bn) 16.9 37.8 30.0a 32.5 214.9a

Debt-service ratio, paid (%) 23.7 39.8 33.7a 18.4 70.2a

a Economist Intelligence Unit estimates. b Actual.


Economic policy

Ecuador lagged well behind most of the region on structural reform in the 1990s,mainly because of political instability and opposition from vested interests andtrade unions. In 1998 income tax was abolished and replaced by a 1% tax oncapital circulation. Policymaking deficiencies were exacerbated in 1998-99 byseveral external shocks. The price of crude oil plunged and the El Niño weatherphenomenon caused extensive damage to the agricultural sector. The bankingsystem collapsed, requiring large infusions of public money. Policymakingbecame concentrated on short-term crisis management. The fiscal deficitwidened to .7% of GDP in 1999, interest rates spiralled and the governmentissued increasing amounts of debt, before defaulting on Brady bondsand Eurobonds.

The decision, in January 2000, to adopt the US dollar as Ecuador’s currency (seeThe external sector: Foreign reserves and the exchange rate) avertedhyperinflation and the stabilisation of macroeconomic variables brought arecovery of growth in 2000-01. The focus of energies shifted to macroeconomicand fiscal reforms that would boost growth and put the public finances on asustainable medium-term basis. With an IMF programme in place, thegovernment of Gustavo Noboa made further achievements, setting up a fund tocapture windfall oil revenue and improving tax collection. However, thesesuccesses were accompanied by some failures, such as the collapse of attemptsto privatise telecoms and electricity companies. These setbacks highlighted thefact that the forces opposing the modernisation of the state were still powerful,and included both private-sector and public-sector interests.

An erosion of support in Congress and concern about the social consequencesof raising the price of public services and lifting subsidies on fuel curbedMr Noboa’s appetite for reform in the second half of his term. Despite theexpectations of a slowdown in the pace of reform, or a change in policydirection created by his campaign, the newly elected president, Lucio Gutiérrez,obtained a 13-month, US$205m stand-by arrangement in March 2003, havingconvinced the Fund of his commitment to a reform agenda.

Political instabilityfrustrates reform

Dollarisation stabilises theeconomy

30 Ecuador


However, Mr Gutiérrez’s initial efforts were soon derailed by political pressures,with concerted opposition to the agreed reform measures from within theruling coalition and opposition traditional parties in Congress. Despite someprogress, mainly the passage of a limited civil service reform in late 2003, thegovernment failed to comply with key targets under the programme, with theresult that, as the stand-by arrangement expired in April 2004, only US$85m infunds had been disbursed, and around US$200m in associated lending fromthe World Bank and Inter-American Development Bank (IDB) was stillundisbursed. Pending reforms included the placement of public-sector utilitiesunder private management, increasing the flexibility of labour markets, theliquidation of failed banks still in the hands of the Agencia de Garantía deDepósitos (AGD), the Deposit Guarantee Agency, the introduction of initiativesto promote the availability of affordable credit and tax reform.

In June 2004 Mr Gutiérrez suffered a severe blow when his economy andfinance minister, Mauricio Pozo, chief architect of the government’smacroeconomic policies and its main interlocutor in the administration’s fragilerelationship with the Fund, was forced to resign, owing to congressionalresistance to his insistence on an austere fiscal policy and the use of mostabove-budget oil revenue for debt buybacks. His successor, Mauricio Yépez, theformer head of the Central Bank, affirmed his commitment to maintaining asimilar policy stance; however, he also acknowledged the political pressures onthe government by stating that he would not immediately seek a newprogramme with the Fund. Two factors weighed on this decision. Firstly, highoil prices over the previous 12 months had increased pressure from across thepolitical spectrum to loosen fiscal policy, while also temporarily easing theneed for multilateral financial support. Secondly, scheduled provincial andmunicipal elections in October 2004 gave Congress little incentive to cooperatewith the government’s reform agenda until the end of the year, if at all.

Important recent economic policy initiatives

1998

In November the Agencia de Garantía de Depósitos (AGD), the Deposit GuaranteeAgency, is created and charged with overseeing a clean-up of the financial system. Inthe following nine months the government issues bonds for US$1.5bn to support theailing financial sector and 70% of the banking system is brought under state control.

1999

Ecuador defaults by suspending payment of Brady bond coupons in September andEurobond coupons in October.

2000

The US dollar is adopted as the official currency. An IMF stand-by arrangement issigned and the government negotiates a partial write-off, and a new restructuring, ofUS$6.6bn of Brady bond debt held by private creditors.

Gutiérrez makes only marginalprogress on reform

Ecuador 31


2001-03

A private consortium of foreign oil companies, OCP Ltd, builds the Oleducto deCrudos Pesados (OCP), the heavy crude oil pipeline from the Amazon region to thecoast. The IMF stand-by arrangement, extended to December 2001, is completed.

2002

A fiscal responsibility, stabilisation and transparency law is passed in order to saverevenue from the new heavy crude oil pipeline and use 70% of this for buying backexternal debt, with the remainder to go to the social security fund and a revenuestabilisation fund. A limit of 3.5% in real terms is placed on spending growth in anygiven year. However, sucessive governments concede important public-sector payrises. Renewed attempts to privatise electricity and telecoms companies fail.Important elements of a bill to reform the bankrupt social security system aredefeated in Congress and later in the courts.

2003

The Gutiérrez administration secures a new 12-month US$205m stand-byarrangement with the Fund. Progress on performance targets is scant, amidwidespread political resistance to the agreed structural reforms.

2004

The IMF arrangement expires in April, with most of the available fundingundisbursed. Talks on a new programme are delayed by political considerations anda continued failure to implement agreed reforms.

Workings of the Fondo de Estabilización, Inversión Social y Productivay Reducción del Endeudaniento Público (FEIREP)

Funding sources

• Revenue from (heavy crude) oil exports• 45% of any surplus oil revenue earned over budget, resulting from price and

output differentials• Fiscal surpluses• Earnings from investments made with accumulated stock of the funds

Uses

• 70% to repurchase foreign and domestic debt (of which up to 15% can be usedfor amortisation of central government debt to the social security institute)

• 20% to a fiscal stabilisation fund, which can be drawn on when fiscal revenue inthe previous quarter was below the corresponding revenue due, according to thebudget, and in case of “natural disasters”

• 10% to education and health investment

Under dollarisation, fiscal policy has assumed a primordial role. Both theNoboa and Gutiérrez governments have aimed to record substantial overallnon-financial public-sector (NFPS) surpluses in order to allow for someflexibility in fiscal policy now that, under dollarisation, the authorities havesurrendered control of monetary policy. A long-term goal is to reducedependence on fluctuating oil revenue and to tap more stable sources of

Aiming to reduce fiscaldependence on oil

32 Ecuador


income. The NFPS relied on oil revenue for 21.7% of income in 2002, down from35% in 2000. However, this percentage rose back to 24.1% in 2003, amid strongworld prices for oil.

After falling deeply into deficit in 1998-99 (as oil revenue fell owing both to adrop in world prices and to disruption in production), the public finances havesubsequently performed better. In 2001 the government achieved an overallNFPS surplus of 0.4% of GDP. In 2002 this rose to 0.7% of GDP, although onlyafter some payments were delayed in order to prioritise debt service. In 2003the NFPS surplus was a stronger 1.2% of GDP, although this was still well shortof the 2.0% target agreed with the IMF. Most of the improvements have been onthe revenue side, enabled partly by growth in tax collections, which havesurpassed expectations. Institutional changes at the Servicio de Rentas Internas(SRI), the internal revenue service, contributed to large nominal increases in taxrevenue between 2000 and 2003.

Collections of value-added tax (VAT) averaged 6.5% of GDP in 2000-03,compared with an average of 3.3% of GDP in 1995-99. Growth in income tax hasbeen less impressive, and still amounted to only 2.7% of GDP in 2003. Non-oilrevenue as a whole reached 19.0% of US dollar GDP in 2003, compared with anaverage of 13.3% in 1995-99. During the post-dollarisation period, oil revenue hasalso recovered from its previous lows because of high world prices, averagingUS$1.5bn per year in 2000-03, compared with US$980m a year in 1998-99.Strong revenue has been partly offset by rising expenditure under the Gutiérrezadministration, reflecting higher domestic debt interest payments (in theabsence of concessional external financing) and rising current expenditure asthe government has been forced to make concessions on public-sector wagedemands. However, the strength of oil prices has temporarily masked thistrend, allowing the overall NFPS balance to continue to improve.

Successive governments have tried and failed to privatise major state-ownedenterprises, particularly the telecoms and electricity companies. In 2000 theLey para la Promoción de la Inversión y la Participación Ciudadana, theInvestment Promotion and Citizen Participation Law, or Trole II, was submittedto Congress, containing reforms to labour markets and to the regulation of theindustries the government hoped to privatise. However, the then presidentÁlvaro Noboa lost the battle to impose many of these reforms by veto on areluctant Congress. One outcome of this was the striking down of the existinglegislation allowing joint-ventures between Petroecuador and private oilcompanies, damaging confidence among foreign oil investors. The Gutiérrezgovernment has tried to secure the passage of substitute legislation (theHydrocarbons Reform Bill) allowing instead for a more limited form of“association contracts” between private operators and Petroecuador. Passage ofthis bill, an IMF performance target under the 2003 stand-by arrangement, isconsidered crucial to securing the future of state oil output, which has declinedrapidly in recent years owing to lack of investment. Congress twice rejected thebill in 2004 in a disagreement about the minimum level of state participationin additional oil production, but is likely to eventually pass it given theimportance of oil revenue to the state coffers.

Privatisation plans runinto obstacles

Tax collection and high oilprices support public finances

Ecuador 33


The 2003 stand-by arrangement also committed the Gutiérrez administration tohiring private-sector managers for 13 of the 16 state electricity distributioncompanies and two state telecoms firms. In the absence of a politicalconsensus behind the outright privatisation of important state sector entities(most of which are heavily in debt), this was envisaged as a suitablecompromise. However, despite winning congressional approval for the process,it has been subject to considerable delay, both for political and administrativereasons, and in mid-2004 there was little sign of any short-term progress.

Unlike Panama, the region’s other fully dollarised economy, Ecuador, hasretained its Central Bank (the Banco Central del Ecuador—BCE), albeit withmuch reduced powers and fewer staff. The primary responsibilities of the BCEare now to manage the reserves that back both coins in circulation and thestock of Central Bank stabilisation bonds; administer the provision of US dollarnotes; maintain a reserve to provide short-term assistance to banks; conducteconomic research; and compile statistics.

Ecuador’s relations with the IMF

Between 1985 and 1995 Ecuador managed to complete only one of the six stand-byarrangements signed with the Fund. After a long spell without any IMF support, inApril 2000 the government signed a one-year stand-by arrangement, which was laterextended until December 2001. The deal extended a total of US$304m in loans,conditional on the government achieving an extensive list of structural reforms,including a reduction in subsidies on fuel and a loosening of restrictions onprivatisation and foreign investment.

These reforms were designed to stimulate foreign investment inflows, regarded as aprerequisite for the economy to recover under a rigid money-supply constraint,particularly with the financial system in a weakened state. The other aim of the IMFprogramme was to stabilise the public finances, reducing the state’s dependence onvolatile oil revenue by raising other taxes. Compliance with an IMF arrangementwas a precondition for the restructuring of the foreign debt, a major reduction ofwhich was achieved in July 2000 (see The external sector: Capital flows and foreigndebt). The unforeseen boost to the economy provided by high oil prices allowedEcuador to exceed growth and fiscal targets, but some policy goals in the agreement,such as the removal of subsidies on domestic fuel prices, were only partlyimplemented, or postponed. Nevertheless, in December 2001 the Fund announcedthat Ecuador had completed the programme, and released the final disbursementattached to it. An IMF deal is a necessary precondition for Paris Club debtrestructuring and for lending from other multilaterals.

During 2002 the government tried and failed to obtain another IMF arrangement.The government battled to obtain approval for the Cuenta de Estabilización yReducción de la Deuda Pública (CEREP), a fund designed to collect revenue from thenew heavy crude oil pipeline, of which 70% was to be used for buying back externaldebt, in an ambitious plan to reduce the external-debt burden. However, loopholesintroduced in the law convinced the Fund that it was not sufficiently watertight,delaying an arrangement. The Fund lost confidence in the Noboa administration

Ecuador retains theCentral Bank

34 Ecuador


after a corruption scandal and a massive increase in current spending, andMr Noboa became increasingly strident in his criticisms of the Fund.

The change of government in January 2003 allowed a fresh start and Mr Gutiérrez’seconomic team, led by the respected finance minister, Mauricio Pozo, obtainedapproval from the IMF board for a new 13-month, US$205m stand-by arrangement inMarch 2003. The conditions attached to the deal included reforms to the statebanking sector, the privatisation of the main commercial bank in state hands, theappointment of private-sector managers for state enterprises, the reform of the taxsystem to expand the tax base and measures to reduce evasion of customs revenue.Although the Fund adopted a relatively lenient attitude towards Ecuador’s non-compliance with quarterly performance targets (possibly owing to some pressurefrom the US government), the deal expired in April 2004 with few of the reformmeasures implemented and most of the available funding still undisbursed. TheGutiérrez administration maintains that it would like to agree a new deal with theFund, although political exigencies surrounding local elections in October 2004 maydictate that talks are delayed until late 2004 or early 2005. At that stage, thegovernment could look for a new longer-term arrangement to cover the rest of itsperiod in office to 2007.

Economic performance

Gross domestic product(% change)

Annual average2003 1999-2003

Private consumption 2.7 1.9Public consumption 1.1 0.8

Gross fixed investment -1.6 2.5Exports 3.2 1.9Imports 0.8 4.3

GDP 2.7 1.5

Source: Banco Central del Ecuador, Información Estadística Mensual.

Since Ecuador began producing oil in the early 1970s, economic growth haslargely tracked the performance of the oil sector, not least owing to the failure toinstitute reforms to promote growth in other areas. An expansion in productionfollowing Ecuador’s departure from OPEC in 1992 led to a period of stronggrowth, but this boom had come to an end by 1995. Non-oil producers and thefinancial sector struggled against lower liquidity and bad debts, as interest rateswere raised to deter capital flight. The economy experienced another burst ofgrowth in 1997, largely reflecting rising export commodity prices, before politicalinstability and a series of external shocks began to take their toll. Short-termpolitical considerations encouraged fiscal laxity, while investment in the state-owned oil company, Petroecuador, was neglected. The damage inflicted on theeconomy by mismanagement was exacerbated in 1997-98 by an adverse externalenvironment, including natural shocks such as the devastation of a largesegment of coastal agriculture by El Niño, a sharp drop in prices for oil and othercommodities, and an emerging market credit crunch in the wake of the financialcrises in Asia and Russia.

Oil shapes growth

Ecuador 35


The banking and currency crises of 1998-99 were the main catalysts of thedeterioration from stagnation to deep recession in Ecuador in 1999.Government borrowing also fuelled upward pressure on interest rates,crowding out productive lending to the private sector and aggravating theeffects of the external credit crunch. The Central Bank’s increasingly desperateefforts to contain pressure on the falling sucre—itself largely a function ofpolitical instability and fiscal laxity—brought further huge increases in interestrates, compounding strains on the increasingly fragile banking sector. Anunprecedented week-long bank holiday declared in March 1999, and asubsequent year-long deposit freeze, intensified a decline in domestic demandand contributed to a 6.3% economic contraction for the year as a whole,pushing aggregate output below 1994 levels.

A recovery began in 2000 following dollarisation. The economy grew by 2.8%year on year, as private consumption rebounded after the steep drop of theprevious year, helped by the unfreezing of bank deposits. Remittances from therising number of Ecuadorean emigrants surged, funding investment inhousebuilding and durable goods, and growth accelerated to 5.1% year on yearin 2001. As the consumption boom began to taper off, construction of the newOleoducto de Crudos Pesados (OCP), the heavy crude oil pipeline, provided amassive boost to investment, allowing the economy to record respectablegrowth in 2002. (3.4% year on year). In 2003 real GDP growth fell back to 2.7%year on year, almost exclusively reliant on the oil-sector (and particularly theprivate oil sector), as growth in the non-oil sector of the economy slackenedamid political and business environment uncertainty and growingcompetitiveness problems under dollarisation.

One of the main advantages of dollarisation promises to be the reduction ofinflation to sustainably low levels, as the Central Bank no longer has the powerto increase the money supply. Ecuador has a history of high inflation, averaging39.9% a year in 1990-99, caused by lax fiscal policy, exchange-rate weakness, alack of credibility in economic policy and entrenched structural rigidities. Wagecontracts have typically been indexed to past rather than expected inflation,whereas periodic attempts to cut fuel price subsidies have spurred increases inoverall price levels.

The annual rate of consumer price inflation continued to rise after dollarisationwas introduced, peaking at 107.9% in September 2000. A backlog of inflationarypressures in the system was worked out. Producer price inflation peaked at 301%in February 2000. By mid-2001 monthly price increases had fallen to well below1%. In 2003 the price of services and non-tradeables rose substantially, drivenup by education and utilities costs, whereas goods price inflation fell to lowlevels. The consumer price index ended 2003 at 6.1%, as price increases werecontained by subdued domestic demand. Producer prices have been slower tofall, with the price index averaging 7.3% in 2003 (up from 6.2% the previousyear). Higher producer prices cannot easily be passed on to consumers inEcuador given the strong competition from imports since dollarisation, meaningthat many producers focused on the domestic market have struggled to remainprofitable in the period since 2000.

A history of high inflation

36 Ecuador


Chronic inflation decimated real wages during the latter half of the 1990s.Fiscal constraints combined with pressure from the business community tokeep wage increases below the level of inflation. Although the average nominalwage rose by 8.0% in 2003 (to US$158.8 a month), the real minimum wage was,on average, 4.6% below its level in 1998. The official monthly minimum wageand associated benefits are revised intermittently—usually twice a year—by acommittee comprising representatives of the government, trade unions andemployers. The latest intervention, in January 2004, raised the value of theminimum wage and compulsory allowances by 5% to US$166.1 a month,slightly above the Central Bank’s inflation projection for 2004 (4.4%), but stillfar short of the cost of a basket of basic goods for a family of four, which wasestimated at US$386.75 a month by the Instituto Nacional de Estadística yCensos (INEC), the national statistics institute, in July 2004.

Between March 1998 and March 2000, the rate of unemployment almostdoubled, to reach 16.1%. Joblessness fell in 2001-02 as employment was boostedby a boom in construction and services stimulated by the construction of thenew heavy crude oil pipline. Unemployment began to rise again in 2003 aswork on this project drew to a close. In mid-2004, total unemployment was10.5%, little improvement on the previous year. Unemployment figures areflattered to an extent by emigration. Underemployment averaged around 43%of the workforce in the same period.

Regional trends

Longstanding rivalry between the coast, home to the most powerful nationalbusiness interests, and the highlands, has intensified in recent years. The largelycoastal export sector benefited from macro-devaluations in the late 1990s, butcoastal banks were harder hit during the economic crisis than their highlandcounterparts. Demands for the devolution of greater financial and admini-strative control to the provinces, voiced strongly by coastal elites, haveincreased in tandem. The Consejo Nacional de Modernización del Estado(Conam), the state modernisation body, published a draft bill fordecentralisation in October 2000, which established that provinces coulddecide whether to acquire more powers and revenue by holding a referendum.By mid-2001 six provinces (five of them in the coastal region) had heldreferendums, in which a loosely defined proposal on autonomy wasoverwhelmingly endorsed. The pro-autonomy movement is strongest inGuayaquil, which wants to retain more of its wealth to spend locally.Indigenous organisations have additionally demanded the creation ofautonomous ethnic homelands, in which indigenous and Afro-Ecuadoreancommunities would enjoy a considerable measure of self-government.

The Noboa government sought to gain control of the decentralisation agenda,agreeing to hand over responsibility and funding for agricultural, environ-mental, tourism and public works projects to the provinces, provided theycould demonstrate the administrative capacity needed to assume theseresponsibilities. The potential impact of decentralisation on the centralgovernment’s fiscal accounts, and on the welfare of the poorest provinces,remains a cause for concern.

Declining real wages andrising unemployment

An upsurge in regionalistsentiment

Ecuador 37


Economic sectors

Agriculture

Around one-third of Ecuador’s land is used for agriculture. The most recent(2001) census survey of the economically active population (eap, 4.6m of apopulation of 12.1m) estimated that 14% of the population was occupied inagriculture, but for the population as a whole, this is an underestimation, withsubsistence farming providing an income for most of the poor in rural areas.Agriculture’s contribution to GDP has declined in recent years, from around 25%of total output (at factor cost) in the 1960s to around 14% in the 1990s and 9.0%in 2000-03. The more modern agro-export sector is concentrated on the coast,where forests and swamps have been converted into plantations for theproduction of bananas, coffee, cocoa, rice, other export fruits and shrimp. Theprincipal traditional export crops—bananas, coffee and cocoa—are grown on thecoastal plain.

In recent years, cut flowers, especially roses, cultivation of which is con-centrated in the central and northern highland areas, have surpassed coffee andcocoa in value-added and export earnings. However, they face stiff competitionfrom other countries, including neighbouring Colombia. Other non-traditionalproducts that have flourished include broccoli and organic vegetables.

Ecuador is the world’s largest banana exporter, shipping almost twice as muchas Costa Rica, its closest rival. In contrast to many other banana-producingcountries, in Ecuador the main banana exporters are nationally owned. Thethree leading exporters, led by the Corporación Bananera Noboa, account fortwo-thirds of exports. Banana plantations employ around 200,000 people. Thepeak year for banana exports was 1997, when earnings reached US$1.3bn. TheEl Niño weather phenomenon curtailed output in 1998, and earnings fell in1999-2000, owing to depressed prices. A recovery in prices and earnings beganin 2001, with volume increases supporting a continued recovery in earnings in2002, despite a renewed fall in prices.

Total export earnings in 2oo3 were US$1.1bn, according to the Central Bank, arise of 13.4% year on year. The trend in the first half of 2004 was towards aweakening of earnings by the sector, amid excess supply on internationalmarkets. The banana industry faces an uncertain future. The European Union(EU), the destination of approximately 43% of Ecuadorean banana exports (EUmarkets account for about one-third of all traded bananas and havetraditionally offered higher prices), is in the process of moving from its currentcomplex tariff-rate licensed quota system to a tariff-only system, which isscheduled to be in place from January 1st 2006 in order to comply with WorldTrade Organisation (WTO) regulations. Ecuadorean producers are concernedthat they will be faced with a higher import tariff from 2006, as the EU seeks toprotect its traditional suppliers from former colonies in the African, Caribbeanand Pacific (ACP) group of states for a transitional period, ahead of completemarket liberalisation at a later date. The uncertainty surrounding the new EUregime, as well as falling world prices, has prompted local producers to

A major source of exportearnings and employment

38 Ecuador


consider diversification strategies. Some have already shifted their productiontowards other export-oriented fruits, such as pineapples, lemons and mangoes.

Shrimp cultivation, concentrated in the provinces of Guayas and Esmeraldas,grew rapidly during the 1990s. By 1998 Ecuador was the world’s fourth-largestproducer, after Thailand, the US and India, and shrimp was the country’s third-largest export earner, after oil and bananas. However, the outbreak of the whitespot and yellow head viruses devastated the industry, slashing export earningsby two-thirds between 1998 and 2000. Lack of financing delayed a recoveryuntil the beginning of 2003, when some improvement in financing, and theadoption of new techniques to prevent the disease, led to a substantial increasein production. Although the volume of shrimp exports has still not recoveredfrom pre-white spot disease levels, it is improving rapidly. According to theCámara Nacional de Acuicultura, the National Chamber of Aquaculture, exportvolumes rose by 23% year on year in 2003.

Cocoa was the country’s main export crop until bananas took over in the1940s. The sector still contributes over US$100m a year in export earnings, ifcocoa products are taken into consideration. The sector recovered quickly fromdamage caused by El Niño in 1998-99, and a surge in world cocoa prices droveearnings to US$159m in 2003. Post-El Niño, many producers have replantedwith higher quality organic brands, on the basis of lower production costs andhigher prices in important markets like Europe. In 2003, 100 kg of organic cocabeans sold for US$60 on international markets, around US$10-US$15 higherthan non-organic cocoa.

Coffee production has been slower to recover from the after-effects of theEl Niño phenomenon. However, export earnings from coffee and coffeederivatives recovered in 2003 (after a dip in 2001-02 amid a glut of supply oninternational markets), helping to drive a recovery in output. Coffee producershave also shifted production to higher-quality coffees, while local tradeassociations have improved coordination and marketing channels betweenproducers and exporters. The prospects for the coffee industry remain uncertainhowever, with global oversupply likely to cap export growth potential unlesslocal producers are able to demonstrate continuous innovation.

Landholdings in the non-export sector are generally small, with low rates ofproductivity and mechanisation. Poor conditions have encouraged migrationinto urban areas, and illegal occupations of marginal land. Infrastructure isinadequate and irrigation systems are in need of extension. The country islargely dependent on foreign aid to increase levels of productivity andmechanisation. Credit to agriculture is channelled through the loss-makingBanco Nacional de Fomento (BNF, the state development bank). Farmers havestruggled to service loans, especially since the banking crisis. The recentstabilisation of the economy has helped farmers to a certain extent, and thearea under seed for most staple crops, such as rice and maize, has expandedsince 2001.

Domestic agricultural sectorsuffers problems

Ecuador 39


Mining and semi-processing

Large-scale oil production in Ecuador took off in the 1970s. The main player inthe sector is the state oil company, Petróleos del Ecuador (Petroecuador), createdin 1972. The firm’s investment budget is set by central government and,particularly since the economic crisis, has often been cut and reallocated tocurrent spending. As a consequence of underinvestment, Petroecuador’s levelsof production declined every year between 1994 and 2003. Its share of totaloutput slipped to 37% in 2003, compared with 60% in 2000, although thisnumber is partly a reflection of the step-up in overall production. Theremainder has been taken up by private oil companies, under a varietyof contracts.

Oil production averaged around 370-380,000 barrels a day (b/d) for most of the1990s. Production began to rise from 2000 in anticipation of the availability ofnew pipeline capacity. Output rose to a new peak of 418,000 b/d in 2003.Ecuador exports around 60% of its production in the form of crude oil, thecountry’s primary export revenue earner (accounting for 39% of total exportearnings in 2003). The main fields operated by the state oil company containlight crude, but crude exports from the Oriente are of medium-heavyclassification (27° API), and the most recent discoveries have been of super-heavy crude. Until recently, oil was transported mainly via the Sistema delOleoducto TransEcuatoriano (SOTE), the Trans-Ecuatorean Heavy Crude OilNetwork, which, since an expansion in 2000, has had the capacity totransport 390,000 b/d. The opening of the new 450,000-b/d Oleoducto deCrudos Pesados (OCP), the heavy crude pipeline, in September 2003doubled Ecuador’s transport capacity to 850,000b/d, allowing private energycompanies to ramp up exports in order to take full advantage of highinternational oil prices. “Ship or pay” transport contracts with the OCPgroup–an international consortium formed by EnCana of Canada, Italy’sAgip, Perenco of France, Occidental of the US, Spain’s Repsol-YPF andArgentina’s Pecom Energía (formerly Pérez Companc), together with thepipeline builder Techint–also encouraged the private sector to increaseexports in late 2003. The OCP, which also allows the separation of morecommercially valuable light crude from heavy crude, may not reach its fulltransport capacity, however, after Petroecuador opted to continue using theSOTE line over the OCP to transport its crude. Smaller amounts of crude arealso shipped to Colombia along a branch of the Oleoducto TransAndino(OTA), the TransAndean pipeline.

Most oil exploration and production activity takes place in the Amazon region.The principal refining facilities are located at Esmeraldas on the northern coastand at La Libertad in the south. Ecuador has proven oil reserves of around 4bnbarrels, and probably much more. However, the largest deposits, such asIshpingo Tambococha Tiputini (ITT) field near the Peruvian border, areinaccessible and often in environmentally sensitive areas or the homelands ofindigenous people. Oil companies therefore face both technical obstacles andpotential obstruction from native or environmental activists. The state’s mainfields (Lago Agrio, Sacha, Shushufindi, Libertador, Auca and Cononaco) are

New pipeline galvanisesproduction

Relations with foreign oilinvestors are not smooth

40 Ecuador


maturing and yielding less oil every year. Investment in advanced recoverytechniques is required to improve output. This will inevitably require private-sector involvement. However, the government faces fierce political resistancestemming from powerful nationalist unions and business lobbies. Urgentlegislation allowing private-sector association contracts with Petroecuadorwas rejected by Congress in mid-2004 and was subsequently withdrawn bythe government as a political concession to the legislature. The governmenthopes to resubmit the legislation in late 2004 following local and provincialelections in October.

Relations with foreign oil companies have also been soured by disputes overtaxation. In July 2004 the London Court of Arbitration (LCIA) found infavour of a US firm, Occidental Petroleum, in a lengthy tax dispute with theEcuadorean authorities. The court ordered the government to pay OccidentalUS$75m in compensation for wrongfully withholding value-added tax (VAT)rebates to the end of 2003. Although the government is appealing against theverdict, the ruling may set a precedent for similar cases. Local courts are alsoexamining cases taken by 12 oil companies, with possible contingentliabilities of an estimated US$200m. Again, the government and the taxauthorities jointly dispute the legitimacy of these actions. Such regulatoryuncertainty may mean that foreign investment in the sector may not meet itspotential until these problems are resolved.

The mining sector contributes less than 1% of GDP, and accounted for justUS$11.7m in exports in 2003, as its potential has been underexploited. Mineralresources include gold, silver, copper, iron, lead, zinc, uranium, magnesium,phosphates, limestone, kaolin, marble and sulphur. Most activity isconcentrated in the production of non-metal construction materials such aslimestone, sand and clay, as well as pumice stone. The southern provinces ofZamora-Chinchipe, El Oro and Azuay, where there are deposits of preciousmetals, are the main metallic mining areas. The most significant find in recentyears has been of potential copper reserves in the Corriente copper belt insouth-east Ecuador, which are being explored by several majormining companies.

A six-year multilaterally funded project called Prodeminca was completed in2001. Geological survey work was carried out and Ecuador’s mining admini-stration overhauled, with the aim of improving the concessionary process. Anew body was set up to oversee the sector, the Dirección Nacional de Minería(Dinami). Reforms to the mining law passed in 2000 also made significantprogress in making the sector more attractive to investors, by abolishing theprevious 3% royalty, strengthening the legal rights of mining companies andremoving restrictions such as the need to obtain exploration rights from themilitary for projects near the Peruvian border.

Manufacturing

Industrial development in the 1960s built on traditional manufacturing sectorssuch as textiles, food and drink, tobacco, oil-refining and cement production. Arapid expansion took place in the 1970s, accompanying the oil boom. Sectoral

The mining sector haspotential

Market liberalistion inthe 1990s

Ecuador 41


development laws encouraged import substitution and sheltered manufacturersbehind tariff and non-tariff barriers. This protection was stripped away duringthe 1990s (see The external sector: Trade in goods). Although trade liberalisationhas exposed domestic industry to tough competition, it has also widened itstraditionally narrow focus on the national market, providing an incentive toexport. Like other sectors, manufacturers have been hampered by the lack ofaffordable financing and the travails of the banking sector. Apart from privatefinancial institutions, the Corporación Financiera Nacional (CFN, the NationalFinance Corporation) is the principal channel of external funding for industry.By exposing underlying competitiveness problems, dollarisation has madeconditions more difficult for manufacturers, who used to rely on having lowercosts than their competitors in neighbouring countries.

Stimulated by the prospect of new export markets, especially in the AndeanCommunity (CAN, grouping Bolivia, Colombia, Ecuador, Peru and Venezuela),the chemicals, machinery, minerals, paper, printing and wood productsindustries were the growth areas of the 1990s. However, food, drink andtobacco remain the most important sectors. Canned fish (particularly tuna),mostly exported outside the region, has seen the strongest growth in recentyears, and by 2002 was the single largest manufacturing export. In 2003 exportearnings from this category reached a record US$386m. Tuna exporters areseeking to include canned tuna in the current free-trade agreement (FTA)negotiations with the US and the Andean Three (Colombia, Ecuador and Peru),so that they can enter the US market tariff-free. Under current preferentialaccess rules, only tuna fish in vacuum-packed pouches has tariff-free access tothat market. Having received a boost from devaluation, the value of vehicleexports jumped by 49% in 2001 to US$100m, following the decision of GeneralMotors (GM) of the US to allow new models to be assembled in Ecuador forexport to other Andean countries. It dropped back in 2002, as manufacturersfocused on the national market but rebounded strongly again in 2003 (toUS$114m), as saturation of the domestic market prompted manufacturers tolook again at the regional Andean market

Around 78% of production and 70% of businesses remain concentrated in theprovinces of Guayas and Pichincha. The Banco Central del Ecuador (BCE, theCentral Bank) estimates that Guayas accounted for 27% of national economicoutput, with Pichincha representing 22%. However, there are also importantindustrial sectors in the provinces of Azuay (ceramics, furniture and tyres),Esmeraldas (oil-refining and wood), Manabí (marine and agricultural products),Cotopaxi (iron and steel) and in the towns of Ambato, Milagro, Riobambaand Latacunga.

In 1990 a maquila (offshore assembly for re-export) programme was established,but has yet to be fully developed. Five free-trade zones (FTZs), which areexempt from any kinds of taxes, are established in Ecuador, and are regulatedunder the 1991 Free-Trade Zone Law. The main FTZ is Zofragua (Zona Franca deGuayas—Guayas Free Zone), which is located near Guayaquil. Several otherFTZs are being set up, both on the coast and near Quito, although some ofthese are transshipment, rather than manufacturing, sites. The extensive site of

Manufacturing exportsare diversified

Geographical concentration

Maquila sector isunderdeveloped

42 Ecuador


the new airport in Quito will also include a duty-free zone. The bodyrepresenting these interests is the Consejo Nacional de Zonas Francas (NationalCouncil of Free Zones), known as Conazofra.

Construction

The construction sector, a major employer of low-income, unskilled urbanworkers, has suffered several crises in recent years owing to a combination ofcuts in public spending, credit squeezes and high interest rates. In the absenceof a nationwide housing programme, or sufficient cheap financing forconstruction, much private building tends to be informal—it is unregulated andnot recorded by official statistics. In 2000-01 there was a rebound inconstruction activity, especially in Guayaquil, with reports of localisedshortages of experienced construction workers, owing to the recent wave ofemigration. Since the 1999 banking crisis, reluctance to entrust savings to thebanking sector has led to a preference for bricks and mortar as a form ofinvestment, and a significant proportion of remittance income has been spenton building homes. The building of the OCP oil pipeline created, at its peak,over 9,000 jobs in the construction industry. Since its completion in 2003, theconstruction sector has suffered a renewed decline in activity, with a heavy tollon employment in the sector.

Financial services

Banks are the primary source of the limited financing available in Ecuador,which has underdeveloped capital markets. Long-term finance has beenprovided by the four state banks: Banco Nacional de Fomento, which typicallyfunds agriculture; Corporación Financiera Nacional, directed at industry; BancoEcuatoriano de la Vivienda, the state mortgage bank; and the Banco del Estado,which concentrates on infrastructure projects. All have favoured large, well-connected borrowers. Reform of the state banking sector, involving a merger ofthese institutions and a change in their focus, is quite likely.

The banking sector is still recovering from a severe crisis. Of the 22 banksregistered (down from 48 in 1998), four are dominant: Produbanco, Banco deGuayaquil, Banco Pacífico and especially Banco Pichincha, which accounts forover one-third of deposits and lending and also owns the country’s leadingcredit card, Diner’s Club. Spreads between deposit and lending rates remainhigh, allowing banks to post high earnings despite the still relatively subdueddomestic economic scenario.

Deposits still outstrip lending, indicating that banks remain reluctant to lend.Instead they have used depositors’ money to build up assets abroad equivalentto one-third of sight desposits of US$3bn. Commercial lending accounts foraround 60% of the total but consumer credit has grown strongly since 2000,financing increased imports, vehicle purchases and construction.

Construction sector recoversfrom crisis

Banks are the main sourceof financing

Ecuador 43


How the banking crisis came about

The private financial system was transformed by deregulation in 1994, whichstimulated a large increase in the number of institutions in operation. In a climateof poor supervision, banks expanded their activities and borrowed heavily abroadto expand credit in the domestic market. Poorly developed risk assessment systems,the proliferation of connected lending and the fact that much of the lending wasdenominated in US dollars left banks particularly vulnerable to a decline in assetquality in the event of recession or a devaluation of the sucre.

Increased political instability from 1997, together with the decline of oil and othercommodity prices, and macroeconomic destabilisation, contributed to a significantslowdown in the rate of deposit growth. Meanwhile, economic stagnation and thedamage caused to production in coastal areas by the El Niño weather phenomenonled to a sharp rise in bad debts among the important agro-export sector. Acombination of chronic exchange-rate depreciation and rising interest ratesexacerbated debtors’ problems, increasing the bad loan ratio. By end-1998 fourfinancial institutions, including the country’s largest bank in asset terms, Filanbanco,had collapsed. In 1999 the government imposed a week-long bank holiday, followedby a year-long deposit freeze, in a forlorn attempt to prevent further collapses.Several banks collapsed. Many of the chief executives of the banks left the countryin order to avoid criminal proceedings. At the height of the crisis, the Agencia deGarantía de Depósitos (AGD), the Deposit Guarantee Agency, was created as part ofa new banking sector support scheme, providing for unlimited deposit insurance.Consequently, by mid-2000, over 90% of depositors had received their money backin full.

The deposit guarantee agency, or AGD, administrates the assets of eight closedbanks which have yet to be wound up. Under the terms of the 12-month stand-by arrangement signed with the IMF in March 2003, these banks were to beliquidated by the fourth quarter of 2003. The AGD missed this target, but, aftera series of delays, began the liquidation process in January 2004. The eightfinancial institutions include Necman, Amerca, Finiver, Valorfinsa, Financorp,Tungurahua, Occidente and Azuay. One more, Finagro, was due to enter theprocess later in 2004. The liquidation process, which involves payment ofworkers, depositors and creditors, is expected to take around three months perinstitution. According to the AGD, six other institutions will be liquidatedduring 2004, among them Banco de Préstamos and Banco del Progreso. Sinceits creation in 1998, the AGD has repaid US$875m to an estimated 753,000depositors. In early 2004, US$83m in payments was still pending to 2,672depositors, of which US$52m was owed to Banco del Progreso customers andUS$31m to Banco de Préstamos customers.

The AGD has come under heavy criticism for not recovering more of thedefaulted loans, a task that has been complicated by political pressure fromlarge debtors and the scope for corruption. Depositors have largely been paidback with government money, rather than with money recovered from debtors.The Inter-American Development Bank (IDB) estimates that the banking crisishas cost the government over US$3.5bn since 1999.

Government grapples withbanking crisis legacy

44 Ecuador


Two of the largest banks prior to the collapse of the financial sector, Filanbancoand Pacífico, remain a significant burden for the government. The statecontinued to keep Filanbanco open until July 2001, when a renewed run ondeposits and continuing losses forced its closure. A list of the debtors publishedsoon afterwards revealed the names of prominent businessmen with links tothe political establishment. In 2003 foreign consultants were appointed tooversee the recovery of loans, prior to the liquidation of the bank, along withthe other closed banks administrated by the AGD. Filanbanco began to payback its depositors in December 2003. Approximately US$460m was due to bereturned to about 3,330 remaining depositors by mid-2004. However, the twocompanies in charge of recuperating the bank’s portfolio have had variousdifficulties in meeting this deadline. The firms maintain that this is largelybecause up to 30% of the portfolio belongs to credits linked to the formerowners of Filanbanco–most of which is held in phantom deposits, making itextremely difficult to trace and recover–while an additional percentage isunidentified. According to the banking superintendency, 68,ooo. Filanbancodepositors had been reimbursed to July 2004.

Banco del Pacífico also remained open, after cash injections from thegovernment in 2001, but its management was handed over to private-sectorconsultants. The bank is to be sold to a foreign buyer, under the terms of the2003 IMF stand-by arrangement.

Capital markets are underdeveloped. However, transactions on the mainexchange, the Bolsa de Valores de Guayaquil (BVG), rose substantially in 2000-01. The exchange is positioning itself as a source of affordable debt finance.Share issues peaked at US$211m in 1994, but had fallen to US$1m by 1999 (andwas only US$10,800 in 2003). Since the financial crisis, few equities have beenactively traded. Government and Central Bank debt issues have traditionallyaccounted for around one-third of transactions. Prospects for the stockmarketwere dealt a blow in 2001, when Congress firmly rejected a proposal to allowprivate-sector insurers to manage social security contributions. In 2002 theConstitutional Tribunal declared proposals for private pensions fundadministrators to be unconstitutional. The bankrupt, inefficient and corruptpublic social security system is regarded as one of the main obstacles toincreasing internal savings rates and providing adequate social services. Sosoon after the banking collapse, however, the public remains wary ofentrusting its savings to the private sector.

Other services

Tourism is the country’s fourth-largest earner of foreign exchange, behind oil,bananas and shrimp. Ecuador has a range of natural attractions in a relativelysmall area—mountains, beaches, tropical rainforest and a vast range of flora andfauna—making it a prime destination for ecotourists. According to the Ministryof Tourism, annual average growth in total tourist arrivals was 6% year on yearin the 1998-2003 period, and the ministry expects a new record of over 825,000visitors in 2004, boosted by Ecuador’s hosting of the Miss Universe competitionin May.

Low savings rates and shallowcapital markets

Tourism’s full potential has yetto be developed

Ecuador 45


The Galápagos Islands remain the destination of choice for foreign visitors,accounting for over one-quarter of income from tourism, followed by Quito, thehighlands and the Oriente. Indian villages, ruins and handicraft markets are themain attractions in the highlands. Statistics are scant, but the Ministry ofTourism estimates that three jobs are indirectly linked to every full-time job inthe tourism industry.

Most visitors to Ecuador are from Colombia, Peru, the US and Germany.International hotel chains are belatedly discovering the country, and the Hilton,Sheraton, Marriott and Radisson groups are among those to have built hotels ornegotiated management agreements in Quito and Guayaquil. This should seethe arrival of more international conference activity in Ecuador in the comingyears. Other opportunities are opening up as a result of the peace accord withPeru (see Politics: International relations and defence). One of the first tangiblesteps towards this was the establishment of direct air links between Lima andseveral cities in Ecuador in 2000. A constraint on the growth of tourism is theinadequacy of airport facilities, but this problem has begun to be tackled withthe refurbishment of the existing international airport in Quito and plans tobuild another one (see Resources and infrastructure: Transport, communicationsand the Internet).

The external sector

Trade in goods

Ecuador is one of the most open economies in the region. Foreign tradeaccounted for an average of 55% of GDP between 1993 and 2003. Until 2000,the merchandise trade balance was typically in surplus, except in years such as1998, when oil prices plunged and a rupture to the main pipeline depressedproduction and export volumes. After 2000, an import boom pushed the tradebalance substantially into deficit, and it only returned to surplus again in 2003,on booming oil exports. The trade regime underwent considerableliberalisation during the 1990s, with reforms stripping away the protectionpreviously enjoyed by manufacturing. Ecuador joined the Andean Community(CAN) in 1992: Ecuador has complied with most of its WTO commitments tokeep its tariff ceilings within permitted limits, but has deferred full complianceon some of its obligations in accordance with the grace period offered todeveloping countries. Restrictions are maintained on the imports of used goods,such as vehicles, clothing and tyres. Prior authorisation is required to importaround 1,300 goods. Regressive measures have, on occasion, been applied toraise revenue, with the most recent case being the imposition of tariffsurcharges in 1998-99 at varying levels. All these surcharges were removed inMarch 2001, but there remains a risk of reimposition at some point in thefuture, to cope with straitened circumstances.

Ecuador’s standard national tariff is slightly below the level of the commonexternal tariff (CET) adopted by the CAN. Import duties range from 0% to 20%,with raw materials from outside the Community attracting the least duty, at 5-10%, and consumer goods the most, at 20%, with the average at around 11-12%.

Trade liberalisation continues,with some setbacks

46 Ecuador


The exception is car imports from outside the Community, which attract a 35%tariff designed to protect the local assembly industry. Up to 130 agriculturalproducts are subject to a price-band system, intended to protect local producers.This system, whereby the import tariff varies in inverse relation to theinternational price of the relevant commodity, was due to be phased out over1998-2001 under WTO rules, but remains in place.

Trade liberalisation: advances and setbacks

1990

The Tariff Law is reformed and import quotas, permits and subsidies are eliminated.Andean Community tariff classifications are adopted.

1992

Ecuador joins the Andean Community (CAN). The tariff ceiling is reduced from 290%to 27%, excluding vehicles, and exchange markets are unified.

1994

The Andean Pact common external tariff (CET) is introduced, with a 0% tariff forimports from Andean Pact countries and a 5-20% tariff for external imports,excluding vehicles. The Organic Customs Law is reformed and independentinternational inspection agencies are employed.

1995

Import and export registration procedures are transferred from the Banco Central delEcuador (BCE, the Central Bank) to private banks, and are simplified through thecreation of a documento único de importación (DUI), a single import document).

1996

Ecuador joins the World Trade Organisation (WTO).

1998

Adjustments to national intellectual property rights (IPRs), in pursuit of compliancewith WTO rules, are approved by Congress in the Intellectual Property Rights Law. A4% import surcharge is imposed on all imports in an effort to reduce the fiscal deficit.

1999

Restrictions on the participation of foreign banks in the local market are lifted.Ecuador is removed from the “priority watch list” for IPRs. The import surcharge isincreased to 10%.

2000

Import surcharges are lifted on specific items.

2001

All import surcharges are removed in March.

2002

Tariffs on a range of inputs used by exporters temporarily lifted by the Noboagovernment.

2003

Tariffs lifted by Noboa government are reimposed by the Gutiérrez administration.

Ecuador 47


2004

Ecuador, along with Peru and Colombia, enters into talks with the US on a new free-trade agreement to replace the 2002 Andean Trade Promotion and Drug EradicationAct (ATPDEA), which expires on December 31st 2006.

In the past 15 years, the export sector has undergone significant changes. Tradeliberalisation in the early 1990s encouraged diversification. Manufacturedexports, which accounted for 12.3% of export earnings in 1991, had risen to26.2% of total earnings by 2003. These were mostly processed, primaryproducts, with the main revenue-earners being petroleum derivatives andproducts such as canned fish (tuna), vehicles, textiles, chemicals and fruitconserves. Earnings from cut flowers rose from US$40m in 1993 to US$295m in2003, benefiting from the preferential access to the US market under the revised2002-06 Andean Trade Promotion and Drug Eradication Act (ATPDEA).

Despite diversification, Ecuador’s export offering is still predominantlycommodity-based, leaving the country highly vulnerable to terms-of-tradeshocks. Ecuador’s terms of trade deteriorated sharply in 1997-99, owing to a fallin global commodity prices. Export earnings recovered strongly in 2000, almostentirely as a result of a steep rise in oil prices, with proceeds from manyagricultural exports falling. In 2002 and 2003 oil revenue again increased on theback of booming international oil prices, whereas cocoa and other agriculturalexports began to recover, on generally firmer global commodity prices.

The pace of import growth has fluctuated with domestic demand. A deepeconomic contraction in 1999 caused imports to fall by up to 50% across allthe main categories, as a large scale depreciation of the currency put importsout of the reach of many consumers. Following dollarisation, imports grewrapidly. The recovery of the real exchange rate and the stabilisation of theeconomy allowed consumers to make long-deferred purchases (in many casesspending remittance income) and permitted firms to reinvest in capitalequipment. The import boom was perpetuated in 2002 by the onset ofconstruction work on the new heavy crude oil pipeline (see Economicsectors: Mining and semi-processing) which sucked in large volumes of capitalgoods and raw materials. Imports eased in 2003 with the completion of thenew pipeline, while non-durable consumer goods imports also slowed fromprevious rates of growth owing to a depreciation of the real effective exchangerate (REER). In 2004, the ongoing problems in the state oil refining industryforced the government to import an ever increasing quantity of fuel andlubricants (at a time of high world prices ), in order to meet the needs of thedomestic fuel market.

Since the liberalisation of trade in the early 1990s, growth of spending on non-durable consumer goods has outstripped that on durables. Even after the 1999crisis, non-durable consumer goods imports for that year stood 95% higher thanin 1993, indicating a local preference for foreign, particularly US, food imports,as well as reflecting shocks to the domestic production chain. In the decadesince 1992, the value of consumer goods imports has risen more quickly thanthat of capital goods or raw materials. The share of import spending accountedfor by consumer goods averaged around a fifth for much of the 1990s but rose

Import behaviour trackseconomic swings

Emphasis still on primarygoods despite diversification

48 Ecuador


sharply following dollarisation and as remittance inflows grew. By 2003, itreached 29%.

The US remains Ecuador’s most important trading partner, accounting for 45.6%of exports in 2003, a similar proportion to that in the early 1990s. With theexception of 1998, when oil exports were disrupted, Ecuador has run a largetrade surplus with the US throughout the past two decades. Typically thesurplus has been in the order of US$600m in the past decade, but it wasdouble that level in 2003. The US renewed Ecuador’s entitlement to tradepreferences under the revised Andean Trade Promotion and Drug EradicationAct (ATPDEA) in November 2002, which runs to December 31st 2006. Thisprovides tariff-free access for a range of Ecuadorean non-traditional exports tothe US, the most important of which is cut flowers. The EU has accounted foraround a fifth fo export earnings in recent years, some of them under theGeneralised System of Preferences, a concessional tariff regime.

The process of regional integration in Latin America, and the establishment ofbilateral ties with Peru, has increased the importance of Ecuador’s trade with itsneighbours. Trade with the Andean Community has increased rapidly since theearly 1990s, but Ecuador’s deficit with other countries in the region haswidened sharply as domestic industry has struggled to compete. A post-dollarisation spurt in some categories of exports (such as vehicles) to the rest ofthe region in 2000-01, the result of an ultra-competitive exchange rate, peteredout as high inflation increased domestic costs. In 2003 according to CentralBank figures Ecuador imported US$926m from Colombia, but exported onlyUS$362m, representing a virtual doubling of the bilateral trade deficit since2000. Ecuador’s exports to Latin American countries outside the AndeanCommunity totalled US$1.8bn in 2003.

Invisibles and the current account

Ecuador has traditionally recorded deficits on its services and income accounts.Earnings from tourism, the country’s fourth largest earner of foreign exchange,have usually produced a small surplus on the travel balance. However, this hasbeen outweighed by services outflows, traditionally associated mainly withimports (insurance and freight) but in recent years also with rising outwardtravel (reflecting the appreciation of the exchange rate). Income credits aregenerally small, reflecting low levels of outward investment. The deficit on theincome account is large, at US$1.45bn in 2003, mainly owing to interest paymentson the sizeable external debt. The deficit on invisibles has almost alwaysoutweighed the merchandise trade surplus, producing a current-account deficit,except in years of unusually high oil prices, as in 1999, 2000 and again in 2002,when imports were also depressed. An exodus of Ecuadoreans to Spain and theUS during the economic crisis iniated a huge rise in workers’ remittances, whichrose from US$650m in 1997 to an average US$1.4bn in 2000-02 and US$1.54bnin 2003, according to Central Bank figures.

The US is Ecuador’s biggesttrading partner

Foreign-debt paymentscause deficits

Ecuador 49


Capital flows and foreign debt

External debt, 2003US$ m % of total

Public medium- & long-term debt 11,378 67.2

Private medium- & long-term debt 2,593 15.3IMF 390 2.3

Short-term debt 2,569 15.2Total debt stock 16,929 100.0

Source: World Bank, Global Development Finance.

A boom in oil exploration in the early 1970s was accompanied by a rapid risein foreign indebtedness, as successive governments contracted foreign loans tofinance a state-led industrialisation programme and as the private sectorborrowed in foreign currency. Total external debt rose from 51% of GDP in 1980to an annual average of 104% of GDP in 1987-94, with around one-half derivedfrom a government bailout of private debtors in 1982-83, in which theadministration assumed the private sector’s debts with commercial banks. Afall in oil prices in 1982-86 saw Ecuador begin to accumulate modest paymentarrears. Arrears on external debt grew, until in May 1994 agreement wasreached with commercial bank creditors on a Brady plan, which was transactedin February 1995. The restructuring convinced the markets that Ecuador wascreditworthy again, and in 1997-98 US$1.4bn in commercial debt alone flowedinto the country, including a US$500m Eurobond issue in 1997.

However, as early as 1996 interest and principal arrears began to accumulate onexisting obligations once more, mainly on Paris Club debt. Economicdeterioration from 1997 brought a renewed deterioration in the country’sexternal debt indicators. The total external debt stock rose from an average of67.5% of GDP in 1995-98 to over 91.8% of GDP in 1999 (under the 2000 base yearmeasure of GDP), as the economy weakened and the sucre depreciated sharply,while low oil prices and the economic crisis undermined the government’spayments capacity. In September-October 1999 Ecuador became the firstcountry to default on its Brady and Eurobond obligations.

By 2000 some kind of restructuring, involving significant debt forgiveness, wasa necessity. The success of the government led by Gustavo Noboa in securing along-awaited deal with the IMF in April 2000 paved the way for such anagreement. In July 2000 a debt negotiation team struck a deal with private-sector creditors to swap US$6.6bn in Brady bonds and Eurobonds (plus debt-service arrears) for two classes of global bond: Global A (US$2.7bn) and GlobalB (US$1.25bn). The deal, supported by the IMF, represented a write-off of 40.6%.The recovery in dollar GDP lowered the total debt/GDP ratio to an estimated 66%in 2001, but the debt-servicing ratio remained heavy, at around 18% of goodsand services exports. Ecuador must now raise the funds to buy back debt, if thedebt burden is not once more to become unsustainable. The country’s riskpremium has fallen since 2001, but remains high, owing to doubts about fiscalsustainability. The country has little access to international capital markets.

Debt accumulation on theback of 1970s oil boom

Arrears accumulate againfrom 1996

Brady bond debt isrestructured in July 2000

50 Ecuador


In September 2000 Ecuador agreed with Paris Club creditors a restructuring ofUS$880m of its bilateral debt, composed of arrears which had accumulated byApril 2000, together with the principal and interest payments due until the endof 2001. Ecuador fell behind again with Paris Club debt service in 2002 after theIMF arrangement, and the scope of the Paris Club agreement, came to an end.After the Gutiérrez administration secured a new IMF deal in March 2003, theParis Club agreed to a new rescheduling in June 2003, which included thepostponement of US$81m of principal maturities falling due between March 1st2003 and March 31st 2004 and reduced servicing over that period to US$272m.The agreement was negotiated under the so-called Houston Terms, wherebycredits are restructured with an 18-year maturity, a three-year grace period, andmarket interest rates. The debt stock owed to the Paris Club at the beginning of2003 was an estimated US$2.73bn, of which US$1.3bn is pre-cut-off debt (debtcontracted before 1983) and is therefore eligible for restructuring. Ecuador alsohas a policy of arranging swaps of debt for social investment on a voluntarybasis with individual creditor governments.

Sweeping changes to the Foreign Investment Law in 1993 simplified investmentprocedures in Ecuador. However, it was the introduction of production-sharingcontracts (PSCs) in the oil sector in that year that was the main stimulus to asharp rise in investment inflows in the mid-1990s. Inflows rose from an annualaverage of US$108m in 1982-92 to US$589m in 1993-99. In a context ofdisorderly public finances and low domestic savings rates, foreign directinvestment (FDI) has been funding a growing share of gross fixed investment(GFI). Inflows of FDI rose from 3.7% of GFI in the 1980s to 15.4% in the 1990s,and an average of 20% in 2001-03.

Major changes to legislation on foreign direct investment (FDI)

January 1993

A new foreign investment code is introduced. The ceiling of 49% foreign equity infinancial sector and insurance holdings is removed, along with a requirement forprior authorisation. Limits on profit and dividend remittances are abolished.Restrictions are maintained on investment in fishing, domestic air transport and themedia, and in defence and border areas.

September 1997

Congress repeals a law imposing discriminatory restrictions on foreign companies intheir dealings with Ecuadorean agents.

April 1998

The National Assembly on Constitutional Reform scraps the remaining restrictionson foreign investment in strategic sectors and declares that foreign investment willenjoy the same rights and treatment as national investment. The only requirementfor foreign investors is that they register with the Banco Central del Ecuador (BCE,the Central Bank).

Paris Club debt restructuring

Foreign investment isliberalised

Ecuador 51


March 2000

The Ley de Transformación Económica (Economic Transformation Law) includesreforms to facilitate the privatisation of state enterprises, with the maximum stake thatmay be purchased by foreign investors rising from 35% to 51%.

July 2004

The Gutierrez administration is forced to temporarily withdraw its proposedHydrocarbons Law–to allow private sector participation in the state-owned oilsector–from congress, due a lack of support.

Since 1986, around 65% of inflows have come from the US and Canada, 18%from Europe and 10% from elsewhere in the Americas. Around 80% of FDI hasbeen directed to the oil sector, with manufacturing, predominantly food,chemicals and timber-processing, receiving most of the rest. Political andeconomic instability, and a lack of progress on economic reform, have deterredFDI inflows to most other sectors of the economy. Data on distribution bygeographical area are scant, but most oil exploration and production activitiestake place in the Oriente region. The Corporación de Promoción deExportaciones y Inversiones (Corpei), the investment promotion agency,publishes data on foreign investment gathered by the Banco Central delEcuador (BCE, the Central Bank), with a breakdown by economic sector andcountry of origin. FDI increased markedly to around US$1.5bn per year in 2001-03 during the construction of the heavy crude oil pipeline, or OCP, by aconsortium led by US and Canadian investors.

Ecuador has made little progress with privatisation. The privatisationprogramme managed by the Consejo Nacional de Modernización del Estado(Conam), the state modernisation body) during the Noboa government,offering opportunities in areas such as infrastructure, telecommunications andpower, failed. Given the political difficulties associated with outrightprivatisation, the Gutiérrez administration subsequently decided to put anumber of state firms under private-sector management instead of selling themoff. However, progress has been extremely slow amid continued congressionalhostility to even this more limited form of private-sector participation. Anabundance of natural resources, low wage and property costs, membership ofthe Andean Community and good relations with the US are sources ofattraction for FDI. However, a skills shortage, legal insecurity, the small size ofthe market and an underdeveloped business infrastructure are deterrents to FDIin several sectors.

Foreign reserves and the exchange rate

In the decade preceding the announcement of dollarisation in January 2000,Ecuador attempted various exchange-rate systems. Each was undermined byexternal shocks such as natural disasters and commodity price fluctuations,together with chronic fiscal deficits, a weak financial system and politicalinstability. Over-dependence on oil earnings for fiscal revenue entrenchedcycles of boom and bust and frequently led governments to depend on largeexchange-rate devaluations to achieve a superficial rebalancing of the public

The sucre is abandoned infavour of the US dollar

52 Ecuador


finances. Dollarisation was formally introduced just under a year after Ecuadorhad finally abandoned a crawling-peg exchange-rate regime in March 1999. Thedecision to dollarise wrought an immediate increase in confidence, andimposed currency stability, but high rates of inflation saw the real exchange rateappreciate strongly in 2000-01, raising concerns over long-term competitivenessthat continued into 2003 and 2004. In particular, the gap between tradeableand non-tradables inflation has hit local producers hard, as they have beenunable to pass on higher input costs to consumers for fear that they wouldsimply switch into cheaper imported alternatives.

Under the dollarised system, the function of reserves is to back sucre-denominated fractional money, the stabilisation bonds issued by the CentralBank and liabilities such as government and multilateral deposits, with theremainder used to support other operational accounts and to capitalise aliquidity fund for the commercial banks. From US$545m at the end of the firstquarter of 2000, when dollarisation began, reserves had grown to US$849m byJune 2004.

High oil prices help to reserveaccumulation

Ecuador 53


Regional overview

Membership of organisations

Ecuador is a member of the UN, the World Trade Organisation (WTO), theOrganisation of American States (OAS), the Inter-American Development Bank(IDB), the IMF, the International Bank for Reconstruction and Development(IBRD), the International Finance Corporation (IFC), the InternationalDevelopment Association (IDA), the World Health Organisation (WHO) and theRio Group.

Ecuador is also a member of the International Sugar Organisation (ISO), theInternational Cocoa Organisation (ICCO), the Sistema EconómicoLatinoamericano (Sela), the Latin American Economic System, the AsociaciónLatinoamericana de Integración (Aladi), the Latin American IntegrationAssociation, the Andean Community and the Non-Aligned Movement.

Ecuador was a member of the Organisation of Petroleum Exporting Countries(OPEC) until November 1992, when it downgraded its participation to observerstatus. Ecuador left the International Coffee Organisation (ICO) in October 1998,after the body voted to make further export cuts to counter falling worldcoffee prices.

Established in 1969 and originally known as the Andean Group, the AndeanCommunity of Nations (CAN) was established in March 1996, after membercountries signed a Reform Protocol of the Cartagena Agreement. The membersare Bolivia, Colombia, Ecuador, Peru, and Venezuela. Chile withdrew in 1974,and Panama holds observer status. In 2003 the combined population of themember states was estimated at 120m, and their total GDP at market-exchangerates was US$244bn.

The Andean Community comprises a free-trade area and an imperfect customsunion. The main objectives are to promote the development of member statesand to form a common market by 2005. Guidelines establishing the principlesof a common foreign policy were approved in 1999, committing theCommunity to open regionalism and to the strengthening of economic andpolitical links with other sub-regional, regional and interregional groups. TheCommunity is also participating in negotiations regarding a Free-Trade Area ofthe Americas (FTAA), a move originally proposed by the US. The Communityhas a number of institutions, including the Latin American Reserve Fund(FLAR), the Andean Development Corporation (CAF), the Andean Parliamentand the Commission of the Andean Community.

The Community has been successful in fostering trade between its members.The value of trade between the member states rose from US$3.6bn toUS$11.6bn between 1991 and 2003. Ecuador’s trade has become closelyintegrated with the Andean Community over the decade. Member countriesaccounted for 22.7% of Ecuador’s imports and 17.5% of its exports in 2003, upfrom 14% and 10.2% respectively in 1994. However, progress towards a commonmarket has been complicated by a series of economic and political setbacks in

Ecuador’s membership ofinternational organisations

The Andean Community

54 Ecuador


the region. Economic difficulties in some Andean countries, including Ecuador,have led to the increased use of unilateral, trade-distorting tariff and non-tariffmeasures, slowing the overall movement towards further intra-regional liberalisation.

Appendices

Sources of information

Banco Central del Ecuador (BCE), Boletín Anuario (annual)

BCE, Cuentas Nacionales (quarterly)

BCE, Información Estadística Mensual (monthly)

Corporación Ecuatoriana de Turismo, Boletín Estadística (annual)

Corporacion de Promoción de Exportaciones y Inversiones (Corpei)

INEC, VI Censo Nacional de Población y V de Vivienda, 2001

INEC, Encuesta Urbana de Empleo, Subempleo y Desempleo (biannual)

Sistema Integrado de Indicadores Sociales del Ecuador. http://www.siise.gov.ec

Centro Latinoamerico de Demografia (Celade), Boletín Demográfico No. 66,América Latina: Población por años calendario y edades simples1995-2005, Santiago

IMF, International Financial Statistics (IFS), Washington DC

UN Economic Commission for Latin America and the Caribbean (ECLAC),Statistical Yearbook 2001, Santiago

UN Food and Agriculture Organisation (FAO), Faostat, Rome

US Energy Information Administration (EIA), An Energy Overview of Ecuador,Washington, DC

World Bank, Global Development Finance (annual), Washington, DC

Enrique Ayala Mora (ed), Nueva Historia del Ecuador, Vol.11, Epoca RepublicanaV, Quito, 1991

Paul Beckerman and Andrés Solimano (eds.), Crisis and Dollarization in Ecuador,World Bank, Washington, 2002.

Corporación de Estudios para el Desarrollo (Cordes, Development StudiesCorporation), Carta Económica, Quito (monthly)

Multiplica, Gestión, Quito (monthly)

Multiplica, Informe Macroeconómico, Quito (monthly)

Spurrier, Walter (ed), Análisis Semanal, Guayaquil (weekly)

www.bce.fin.ec: Banco Central del Ecuador site, containing economic statistics

National statistical sources

Select bibliography andwebsites

International statistical sources

Ecuador 55


www.corpei.org: information from Ecuador’s export and investmentpromotion agency

www.ecuador.org: news and links provided by the Embassy of Ecuador inWashington, DC

www.elcomercio.com: site of El Comercio, a national daily newspaper basedin Quito

www.inec.gov.ec: site of the national statistics agency

http://minfinanzas.ec-gov.net: Ministry of Economy site, incorporating text ofeconomic legislation and multilateral agreements

Reference tables

These reference tables provide the most up-to-date statistics available at the timeof publication.

Population1999 2000 2001 2002 2003

Total population (m) 11.88 11.96 12.16 12.38 12.623Growth rate (%) 1.1 0.6 1.6 1.8 1.8Age profile (% of total) 0-14 34.3 33.8 33.3 32.9 32.9 15-64 61 61.5 61.9 62.3 62.3 65+ 4.6 4.7 4.8 4.8 4.8

Source: Economist Intelligence Unit estimates, on the basis of data from the 2001 census carried out by the Instituto Nacional de

Estadística y Censos (INEC).

Labour force(urban; % unless otherwise indicated)

1999 2000 2001 2002 2003Male 58.8 59.7 n/a 59.5 n/aFemale 41.2 40.3 n/a 40.5 n/a

Unemployed 15.1 14.1 10.4 8.6 9.83Underemployed 49.3 53.3 47.4 32.9 47.43

Economically active population (‘000) 3,756 3,690 n/a 3,801 n/a

Source: Banco Central del Ecuador.

56 Ecuador


Education statistics1997 1998 1999 2000 2001

Illiteracy ratea 4.1 4.8 4.9 4.2 4.4School years (av per person) b 9.5 9.3 9.3 9.3 9.2

Students (no. per instructor)c

All levels 18.5 18.2 17.4 17.3 n/a Primary level 24.9 24.4 23.4 23.4 n/a Secondary level 12.2 12.2 11.7 11.7 n/aUniversity education (%) 22.6 22.0 21.6 21.5 23.1 Male 24.8 24.9 23.5 23.3 24.0 Female 20.5 19.4 19.8 19.9 22.2

Note. Statistics refer to urban population unless otherwise indicated.

a Percentage of population aged 15 years and over unable to read and write. b Population aged 24years and over. c Urban and rural population.

Source: Sistema Integrado de Indicadores Sociales del Ecuador, taken from 2001 census by INEC.

Health statistics1998 1999 2000 2001 2002

Infant mortality rate 19 18 19 n/a 25Hospital beds (no. per 10,000 patients) 1.5 n/a n/a n/a 1.6

Economically active populationwith social security insurance (%) 29.8 28.8 26.9 24.5 n/a

Note. Statistics refer to urban population unless otherwise indicated.

a Deaths per 1,000 live births.

Source: Sistema Integrado de Indicadores Sociales del Ecuador.

National energy statistics1999 2000 2001 2002 2003

Total capacity (m kw) 3.4 3.5 3.5 3.5 3.8 Hydro 1.5 1.7 1.8 1.8 2.1 Thermal 1.9 1.8 1.8 1.8 1.8

Net generation (bn kwh) 10.1 10.3 10.7 11.9 12.7 Hydro 7.1 7.3 7.0 7.5 7.2 Thermal 2.9 3.0 3.7 4.4 4.4

Electricity transmission & distribution losses (bn kwh) 0.6 0.7 - - -

Sources: US Energy Information Administration, An Energy Overview of Ecuador; Corpolec.

Ecuador 57


Non-financial public sector finances(US$ m unless otherwise indicated)

1999 2000 2001 2002 2003Petroleum receipts 1,049 1,460 1,352 1,390 1,664Non-petroleum receipts 2,334 2,516 3,484 4,689 5,090 VAT 591 893 1,456 1,666 1,737 Income tax 144 314 540 586 736 Import duties 310 217 354 414 396Total revenue 3,515 4,126 4,942 6,266 6,908Salaries 991 761 1,169 1,761 2,288

Goods & services 397 410 613 893 948Interest payments 1,183 1,052 985 868 820 On external debt 837 853 777 664 634 On domestic debt 346 199 208 205 186Capital expenditure 1,000 795 1,444 1,580 1,460

Total expenditure incl others 4,165 3,889 4,932 6,101 6,585Budget balance -650 237 10 165 323Ratios (% of GDP)Revenue 21.1 25.9 23.5 25.8 25.3 Petroleum 6.3 9.2 6.4 5.7 6.1

Expenditure 25 24.4 23.5 25.1 24.1 Interest payments 7.1 6.6 4.7 3.6 3.0Budget balance -3.9 1.5 0.4 0.6 1.2


Money supply(US$ bn unless otherwise indicated; end-period)

1999 2000 2001 2002 2003Money (M1) incl others 1.4 1.4 1.9 2.3 2.6 % change, year on year 2.1 1.7 39.9 16.8 13.5

Quasi-money 2.3 2.7 3.0 3.4 4.5Money (M2) 3.6 4.1 4.9 5.7 7.0 % change, year on year -29.7 11.1 21.4 15.1 24.2

Source: IMF, International Financial Statistics.

Interest rates(%; period averages unless otherwise indicated)

1999 2000 2001 2002 2003Lending interest rate (%) 15.8 15.2 15.3 14.2 12.4Deposit interest rate (%) 9.9 8.3 6.6 5.1 5.3

Money-market interest rate (%) 8.5 8.2 6.6 5.1 4.3Long-term bond yield (%) 14.7 7.9 8.1 7.9 8.2

Sources: Banco Central del Ecuador.

58 Ecuador


Gross domestic product(market prices)

1999 2000 2001 2002 2003Total (US$ bn)At current prices 16.7 15.9 21 24.4 27.3At constant (2000) prices 15.5 15.9 16.7 17.3 17.8% change, year on year -6.3 2.8 5.1 3.4 2.7Per head (LCU)At current prices 1,429 1,337 1,729 1,964 2162.3At constant (2000) prices 1,328 1,337 1,378 1,399 1,409% change, year on year -8.3 0.7 3.0 1.6 0.7

Sources: Banco Central del Ecuador; Economist Intelligence Unit.

Nominal gross domestic product by expenditure(US$ bn at current prices; % of total in brackets)

1999 2000 2001 2002 2003Private consumption 11.0 10.2 14.5 16.8 18.6

(66.2) (64.0) (68.9) (69.3) (68.2)Government consumption 2.1 1.6 2.1 2.5 2.8

(12.5) (9.8) (10.1) (10.5) (10.2)

Gross fixed investment 2.8 3.3 4.5 5.5 5.8(17.0) (20.5) (21.6) (22.8) (21.3)

Stockbuilding -0.4 -0.1 0.9 1.2 1.4(-2.2) (-0.4) (4.1) (4.9) (5.0)

Exports of goods & services 5.3 5.9 5.6 5.8 6.8(31.5) (37.1) (26.7) (24.0) (25.0)

Imports of goods & services 4.2 4.9 6.6 7.6 8.1(25.0) (31.0) (31.4) (31.4) (29.7)

GDP 16.7 15.9 21.0 24.3 27.3


Real gross domestic product by expenditure(US$ bn at constant 2000 prices; % change year on year in brackets)

1999 2000 2001 2002 2003Private consumption 9.8 10.2 10.8 11.3 11.6

(-7.0) (3.8) (5.4) (4.8) (2.7)Government consumption 1.5 1.6 1.6 1.6 1.6

(-5.5) (4.7) (0.5) (3.2) (1.1)

Gross fixed investment 2.9 3.3 3.7 4.3 4.2(-27.7) (12.1) (12.1) (17.6) (-1.6)

Stockbuilding -0.4 -0.1 0.7 1.0 1.1(-7.9)a (2.4)a (4.9)a (1.9)a (0.5)a

Exports of goods & services 6.0 5.9 5.8 5.9 6.1(7.8) (-1.0) (-1.3) (0.9) (3.2)

Imports of goods & services 4.3 4.9 5.8 6.8 6.8(-29.5) (15.8) (17.2) (17.2) (0.8)

GDP 15.5 15.9 16.7 17.3 17.8(-6.3) (2.8) (5.1) (3.4) (2.7)

a Change as a percentage of GDP in the previous year.


Ecuador 59


Real gross domestic product by sector(US$ bn at constant 2000 prices)

1999 2000 2001 2002 2003Agriculture, forestry & fishing 1.69 1.69 1.70 1.83 1.85Mining & quarrying 3.18 3.43 3.49 3.37 3.58

Manufacturing 1.20 0.81 0.98 0.98 1.07Electricity, gas & water supply 0.16 0.17 0.18 0.18 0.17

Construction 0.95 1.13 1.17 1.34 1.35Commerce, hotels & restaurants 2.39 2.48 2.60 2.71 2.75

Transport & communications 1.32 1.41 1.41 1.44 1.44Financial & business activities 4.19 4.33 4.85 5.11 5.18General government 0.76 0.83 0.85 0.88 0.87

Care & other service activities 0.03 0.03 0.03 0.03 0.03Imputed bank services -0.38 -0.38 -0.51 -0.54 -0.52

Total 15.50 15.93 16.75 17.32 17.81


Prices and earnings(% change, year on year)

1999 2000 2001 2002 2003Consumer prices (av) -29.7 -7.5 37.6 12.5 7.9

Average nominal wages -40.9 -1.7 9.9 9.9 8.0Average real wages -16.0 6.3 -20.1 -2.3 0.1Unit labour costs -35.4 0.0 13.7 9.0 7.8


Assets and liabilities of deposit money banks(US$bn; end-period)

2000 2001 2002 2003Total assets 5.37 6.34 5.79 6.67 Loan portfolio 1.91 2.50 2.71 3.00 Commercial credit - 2.36 1.88 2.12 Total liabilities 6.33 7.46 5.24 5.99 Deposits 4.50 - 4.33 5.13 Sight deposits 2.18 3.04 3.04 3.54 Term deposits 1.28 1.31 1.27 1.57

Source: Superintendencia de bancos y seguros.

60 Ecuador


Tourism statistics(tourist arrivals in ‘000; by country of origin)

1999 2000 2001 2002 2003Total 518 627 609 683 760 North America 142 157 178 172 185 Europe 107 104 129 113 134 Japan 4 4 4 4 5 Andean Community 208 298 228 320 354 Colombia 142 192 155 197 224 Peru 53 91 58 107 110 Venezuela 11 12 12 12 12 Bolivia 2 3 3 3 4 Rest of South America 34 36 40 43 48 Caribbean & Central America 12 13 19 15 17 Others 11 16 12 16 17Tourism earnings (US$ m) 343 402 430 447 406

Outgoing tourism (‘000) 386 520 553 627 624

Source: Andean Community, Series Estadísticas de la Comunidad Andina 1991-2001.

Exports(US$ m; fob)

1999 2000 2001 2002 2003Oil & derivatives 1480 2442 1900 2055 2606

Banana & plantain 954 821 865 969 1099Shrimp 607 285 282 253 275Coffee & derivatives 78 46 44 42 62

Cocoa & derivatives 106 77 87 129 157Tuna & other fish 69 72 87 88 88

Non-traditionals 1156 1183 1415 1500 1747 Canned fish 263 232 269 343 386 Flowers 180 195 195 291 295

Total goods fob 4451 4928 4678 5036 6038


Ecuador 61


Imports(US$ m; cif)

1999 2000 2001 2002 2003Consumer goods 621 821 1,419 1,802 1,868 Non-durable 445 493 765 970 1,068 Durable 177 328 654 832 800Fuels & lubricants 244 298 297 284 664

Raw materials 1,335 1,658 1,983 2,320 2,212 For industry 1,047 1,330 1,549 1,702 1,738 For agriculture 200 237 255 266 288 For construction 88 91 180 352 186Capital goods 815 942 1,661 2,022 1,789 For industry 549 564 940 1,221 1,177 Transport equipment 247 351 679 769 575 For agriculture 19 27 42 32 37Other 2 2 3 2 1

Total 3,017 3,721 5,363 6,431 6,534


Main trading partners(% of total)

1999 2000 2001 2002 2003Exports fob to:United States 41.1 45.2 45.0 43.2 45.6Colombia 5.2 5.4 6.2 6.2 6.6South Korea 4.7 6.0 5.8 5.7 6.0Germany 5.7 4.6 5.3 5.8 5.9Imports cif from:United States 36.2 30.1 29.1 27.5 24.4Colombia 12.0 13.9 14.4 13.9 16.6Brazil 3.8 4.0 4.5 7.2 8.6Venezuela 5.9 6.9 3.9 5.8 7.3

Source: IMF, Direction of Trade Statistics.

62 Ecuador


Balance of payments, IMF series(US$ m)

1999 2000 2001 2002 2003Goods: exports fob 4,516 5,057 4,781 5,199 6,196Goods: imports fob -2,929 -3,658 -5,179 -6,196 -6,268

Trade balance 1,587 1,399 -398 -997 -72Services: credit 729 849 862 923 899

Services: debit -1,158 -1,270 -1,434 -1,632 -1,590Income: credit 76.0 70.0 47.0 30.0 28.0

Income: debit -1,383.0 -1,477.0 -1,412.0 -1,335.0 -1,491.0Current transfers: credit 1,188.0 1,437.0 1,646.0 1,659.0 1,808.1Current transfers: debit -99.0 -85.0 -6.0 -5.0 -5.8

Current-account balance 941.0 926.0 -696.0 -1,358.0 -456.0Direct investment in Ecuador 648.0 720.0 1,330.0 1,275.0 1,550.0

Direct investment abroad 0.0 0.0 0.0 0.0 0.0Inward portfolio investment

(incl bonds) -46.0 -5,583.0 117.0 0.0 10.0Outward portfolio investment 0.0 0.0 0.0 0.0 0.0

Other investment assets -725.0 -1,274.0 -1,308.0 -1,532.0 -Other investment liabilities -1,221.0 -465.0 868.0 1,241.0 -

Financial balance -1,344.0 -6,602.0 1,007.0 984.0 1,560.0Capital account nie credit 11.0 8.0 17.0 24.0 -Capital account nie debit -9.0 -10.0 -84.0 -4.0 -

Capital account nie balance 2.0 -2.0 -67.0 20.0 0.0Net errors & omissions -521.0 -15.0 -399.0 -3.0 -

Overall balance -944.0 -5,697.0 -259.0 -221.0 -Financing (– indicates inflow)Movement of reserves -101.4 708.2 106.0 65.7 -152.7Use of IMF credit & loans 0.0 149.5 48.1 97.9 84.6


Foreign direct investment by country of origin(US$ m; official estimates)

1999 2000 2001 2002 2003Total 636 720 1,330 1,275 1,555 US 230 235 317 392 204 Italy 64 67 87 109 54 Spain 0 86 85 87 49 Argentina 88 25 64 58 21 Other countries 382 413 553 646 328


Ecuador 63


Foreign direct investment by economic sector(US$ m; official estimates)

1999 2000 2001 2002 2003Total 636 720 1,330 1,275 1,555 Petroleum & mining 615 680 1,120 1,063 828 Business services 2 15 12 63 89 Commerce 8 13 54 45 50 Manufacturing 8 10 59 57 71 Transport & communications 2 0 11 22 25 Other 1 2 74 25 491

Sources: Corpei; Banco Central del Ecuador.

External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1999 2000 2001 2002 2003Public medium- & long-term 13,556 11,337 11,251 11,243 11,378Private medium- & long-term 1,570 1,435 1,656 2,586 2,593

Total medium- & long-term debt 15,126 12,772 12,908 13,828 13,970 Official creditors 5,741 6,065 6,042 6,134 6,641 Bilateral 2,390 2,628 2,506 2,629 2,665 Multilateral 3,351 3,437 3,536 3,505 3,976 Private creditors 9,385 6,708 6,866 7,694 7,329Short-term debt 1,130 797 1,384 2,316 2,569 Interest arrears 82 3 2 2 2Use of IMF credit 0 148 190 308 390Total external debt 16,257 13,717 14,481 16,452 16,929Principal repayments 1,179 1,072 1,074 1,123 1,234Interest payments 1,078 822 982 1,070 817 Short-term debt 87 102 95 184 106Total debt service 2,256 1,894 2,055 2,193 2,050Ratios (%)Total external debt/GDP 97.5 86.1 68.9 67.7 62.0Debt-service ratio, paida 35.2 26.0 28.9 28.9 23.7

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves(US$ m; end-period)

1999 2000 2001 2002 2003Total reserves incl gold 1,887.8 1,179.6 1,073.6 1,007.9 1,160.6Total international reserves excl gold 1,642.4 946.9 839.8 714.6 812.6Gold, national valuation 245.4 232.7 233.8 293.3 348.0


64 Ecuador


Exchange rates(US$ per unit of currency unless otherwise indicated; annual averages)

1999 2000 2001 2002 2003US$ 1.00 1.00 1.00 1.00 1.00Bs 0.0017 0.0015 0.0014 0.0009 0.0006

CoPs 0.0006 0.0005 0.0004 0.0004 0.0003Ns 0.296 0.287 0.285 0.284 0.287

€ 1.07 0.92 0.90 0.94 1.13C$ 0.673 0.673 0.646 0.637 0.714


Editors: EileenGavin (editor); JustineThody (consulting editor)Editorial closing date: August 23rd 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

Ecuador - International University of Japan

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