Ecuador 1999-2000

COUNTRY PROFILE

Ecuador

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Comparative economic indicators, 1998

EIU Country Profile 1999-2000 © The Economist Intelligence Unit Limited 1999 Ecuador 3

November 5th 1999 Contents

5 Basic data

6 Political background 6 Historical background 10 Constitution and institutions 11 Political forces 14 International relations and defence

14 Resources and infrastructure 14 Population 16 Education 17 Health 17 Natural resources and the environment 18 Transport and communications 20 Energy provision

22 The economy 22 Economic structure 22 Economic policy 25 Economic performance 28 Regional trends

28 Economic sectors 28 Agriculture, forestry and fishing 30 Mining and semi-processing 31 Manufacturing 32 Construction 32 Financial services 34 Other services

35 The external sector 35 Trade in goods 37 Invisibles and the current account 38 Capital flows and foreign debt 40 Foreign reserves and the exchange rate

42 Appendices 42 Sources of information 43 Reference tables 43 Population 43 Labour force 43 Transport statistics 44 Non-financial public-sector finances 44 Money supply 44 Interest rates

45 Gross domestic product 45 Gross domestic product by expenditure 46 Gross domestic product by sector 46 Prices and earnings 47 Agricultural gross domestic product 47 Agricultural production 47 Manufacturing gross domestic product 48 Construction statistics 48 Deposit money banks 49 Exports 49 Imports 49 Main trading partners 50 Balance of payments, IMF series 50 Balance of payments, national estimates 51 External debt, World Bank series 51 External debt, national estimates 52 Foreign reserves 52 Exchange rates

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Ecuador

Basic data

Land area 276,840 sq km

Population 11.5m (1998)

Main towns Population in ‘000 (1990 census)

Guayaquil 1,764 Quito (capital) 1,282 Cuenca 227 Machala 166 Portoviejo 164 Esmeraldas 136

Climate Tropical on the coast and in the eastern region. Temperate in the central mountain zone

Weather in Quito Annual average temperature, 16°C; hottest months, December and January, (altitude 2,879 metres) 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 mm average rainfall

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

Measures Metric system; also local units including: 1 vara=84 centimetres=33.1 inches

Currency 1 sucre (Su)=100 centavos. Average exchange rate in 1998: Su5,447:$1; exchange rate on October 1st 1999: Su12,850:$1

Time 5 hours behind GMT

Public holidays New Year’s Day (January 1st), Epiphany, Carnival (February), Maundy Thursday, Good Friday, Easter Saturday, Labour Day (May 1st), Battle of Pichincha (Quito only, May 24th), St Peter and St Paul (June 29th), Bolívar’s birthday (July 24th), Founding of Guayaquil (Guayaquil only, July 25th), Independence of Quito (August 10th), Independence of Guayaquil (Guayaquil only, October 9th), Discovery of America (October 12th), All Saints’ Day, All Souls’ Day, Independence of Cuenca (Cuenca only, (November 3rd), Foundation of Quito (Quito only, December 6th), Christmas Day

Political background

Jamil Mahuad assumed the presidency on August 10th 1998 after narrowly defeating his main opponent in a second-round election. His party, the centrist Democracia Popular (DP), is the largest in the unicameral Congress, but does not have an overall majority. The next presidential election is due in 2002.

Historical background

Independence— Prior to the arrival of the Spanish in 1531, the territory that is now Ecuador was dominated by regional trading confederacies. For 80 years it was the northern outpost of the Inca empire, which introduced the Quechua language. The country gained independence from Spain in 1822 and temporarily joined Venezuela, Colombia and Panama in Simón Bolívar’s Grancolombian Federation. In 1830 it left to become an independent nation.

—leads to political The period after independence was characterised by government instability instability and economic and political rivalry between the coastal and highland regions. Political power was concentrated in the hands of a highland land-owning class allied with the Catholic Church, yet the growth of the banking sector and a rapid expansion in cocoa production created a wealthy coastal banking and agricultural middle class seeking greater political power. State power remained decentralised at a regional level until Gabriel García Moreno came to power in 1860 and attempted to centralise public administration and tax collection. External shocks, in the shape of a collapse in the cocoa market in the 1920s and the Great Depression of the 1930s, were at the root of severe instability from 1931 to 1948. Of 21 governments, none survived to complete a full term in office. José María Velasco Ibarra was a particularly important figure during this period. A populist who was first elected in 1933, he was to hold office a total of five times (the last time in 1968-72), and was overthrown four times. From 1948 to 1960, however, Ecuador enjoyed 12 years of stable civilian rule. Increasing banana exports helped to finance development policies, and also shaped the emergence of growers as a powerful economic group.

Modernisation and the A move towards industrial development took place in the 1960s. The influence military of the Cuban revolution contributed to growing social unrest, leading the military government of 1963-66 to take a strongly anti-Communist stance. Great emphasis was placed on economic modernisation, and the role of the state in the economy was expanded. Another military dictatorship from 1972 began the exploitation of the extensive oil reserves discovered in the late 1960s. The oil boom was accompanied by the accumulation of high levels of indebtedness to foreign banks as governments used the creditworthiness conferred by oil to contract loans to finance a programme of state-led industrialisation. In 1978 a referendum approved a new constitution which was to form the basis for a return to democratic elections and civilian rule in 1979.

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Democratic governments Jaime Roldós of the populist Concentración de Fuerzas Populares (CFP) was face economic crisis— elected president in the 1979 polls. The past two decades have been characterised by—mostly failed—attempts at reform as successive governments have struggled to forge consensus behind economic policy in Ecuador’s polarised and fragmented political environment. Mr Roldós was killed in a plane crash in 1981, giving him the status of political martyr even though his reformist intentions had been undermined by conflict within his government. Mr Roldós was succeeded by his more moderate vice-president, Osvaldo Hurtado of the centrist Quito-based Democracia Popular (DP). Mr Hurtado was able to provide more organised government but faced economic difficulties. Falling oil prices meant that the government was unable to meet rising spending commitments, in particular those associated with servicing the external debt.

—and initiate structural A shift to the right followed in 1984 with the government of the centre-right reforms Frente de Reconstrucción Nacional, led by León Febres Cordero of the Guayaquil-based Partido Social Cristiano (PSC). Often authoritarian and corrupt in its methods, with some notorious cases of human rights abuses, the administration moved away from the state intervention of the military regimes of the 1970s, liberalising and opening the economy. Although the government was unpopular, an attempted military coup in March 1986 proved unsuccessful. A left-wing alliance won a majority in the mid-term congressional election in 1986, amid worsening relations between Congress and the executive. The situation deteriorated further when oil prices collapsed and oil exports were suspended for six months after an earthquake damaged the cross-country oil pipeline in March 1987.

Although the left regained the presidency in the 1988 election, under Rodrigo Borja of Izquierda Democrática (ID), the administration implemented tight fiscal and monetary policies which weakened growth. The government’s popularity suffered because of shortages of basic commodities, high inflation and rising unemployment. Once again, a mid-term election resulted in the loss of the regime’s congressional majority, and relations between the executive and the legislature deteriorated further. At the same time there was an upsurge in social unrest. Indigenous groups began to have a greater impact on the political scene, seeking land titles and recognition of Ecuador as a plurinational state. Disillusionment was reflected in the 1992 election, in which both presidential finalists were from the centre-right.

Political stalemate under The priorities of the new government of Sixto Durán Ballén were to reduce Mr Durán Ballén— inflation, curb the public-sector deficit, modernise the state sector and normalise relations with foreign creditors. But it was unable to create a consensus in favour of its reforms among key interest groups. Trade unions were unhappy about the government’s privatisation plans, which implied huge redundancies and public spending cuts. This led to strikes and demonstrations, which disrupted public services. The government also lacked a majority in Congress, which led to the blocking of legislation on key issues such as privatisation, and the frequent impeachment of government ministers. Government weakness and internal divisions worsened when the vice-

president, Alberto Dahik, fled to Costa Rica in October 1995 to avoid arrest on corruption charges. This further discredited a government already widely unpopular because of its reform plans and the impact of austerity measures.

—and chaos under Popular disillusionment with the Durán-Ballén government was reflected in Mr Bucaram the outcome of the 1996 presidential election. The PSC candidate, Jaime Nebot, who promised policy continuity with the outgoing government, was defeated in the second round by Abdalá Bucaram of the populist Partido Roldosista Ecuatoriano (PRE). Mr Bucaram’s claim that he would eliminate economic and political “oligarchies” from power and reduce poverty led to victory in 20 out of 21 provinces, with his strongest vote in both rural and urban marginal areas. But with only 19 seats in Congress out of a total of 82 (the number of seats was expanded to 121 in 1998), the PRE was forced into a broad centre-left coalition which included members of three of the four largest parties in Congress.

It was not long before Mr Bucaram’s colourful, heavy-handed and uncouth style of government began to antagonise both coalition members and voters, while his inability to formulate a coherent economic programme compounded growing political restlessness. In February 1997 a nationwide general strike in protest against Mr Bucaram’s cronyism, authoritarian tendencies and contradictory economic policies was widely supported. Protesters in Quito forced Mr Bucaram to barricade himself in the presidential palace under heavy military protection. Almost immediately, Congress voted by 44 votes to 34 to dismiss Mr Bucaram from office on the grounds of “mental incapacity”. Although the constitutional basis for taking this step was unclear, the military withdrew its support for the Bucaram administration, forcing the president to flee the country. After a brief power struggle between Congress and the vice- president, Rosalía Arteaga, the legislature appointed its leader, Fabián Alarcón, to serve as interim president until August 1998.

Constitutional reform Although Mr Alarcón had long been regarded as a skilful politician, the begins under Mr Alarcón circumstances under which his appointment was made did not provide him with a strong mandate for government at the outset of his term. To remedy this situation, Mr Alarcón held a referendum in May 1997 asking the electorate to support his appointment as interim president. Although this gamble paid off, it soon became obvious that the interim president was both unable and unwilling to provide decisive government. Instead of using his brief term to attempt to push through important economic measures which past incumbents had found too politically difficult to implement, Mr Alarcón concentrated on strengthening his personal support base and that of his small party, the populist Frente Radical Alfarista (FRA), with a view to regaining the presidency for a full term in 2002 (the constitution barred him from seeking the presidency in the 1998 election). This focus on laying the groundwork for a political comeback made Mr Alarcón reluctant to implement the expenditure cuts needed to redress the country’s serious fiscal imbalance. In fact he worsened it by making substantial concessions to powerful public-sector unions and regional lobbies. Towards the end of his term Mr Alarcón became embroiled in accusations that he and members of his administration had

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misappropriated state funds while in power and approved the appointment of over 1,000 pipones (individuals on the state’s payroll but doing little or no work) as congressional advisers during his time as leader of the legislature. Investigations into these allegations led to Mr Alarcón’s imprisonment on fraud charges in 1999, although he was released within a few months and investigations remain inconclusive.

Mr Mahuad assumes the Jamil Mahuad, the reform-minded former mayor of Quito and candidate for presidency on a wave of the centrist Democracia Popular (DP) was elected president in July 1998, after optimism— narrowly defeating Alvaro Noboa, the populist PRE’s candidate, in a second round of voting. The PSC was left without a presidential candidate after Jaime Nebot turned down the party nomination. High expectations surrounded Mr Mahuad’s arrival at the presidency. He came to power on a wave of popularity built during two consecutive terms as mayor of Quito and boosted on a national level by the signing of a final peace agreement with Peru in October 1998 (see International relations and defence). Mr Mahuad also benefits from greater security of tenure than his predecessors thanks to the abolition of mid- term congressional elections and the scrapping of congressional deputies’ power to impeach ministers (see Constitution and institutions).

—but it is as difficult as But Mr Mahuad was unable to exploit this initial position of strength to set in ever to forge congressional motion a reform programme during his first year. Governability has remained a support for reform serious problem, with the opposition-dominated Congress finding new ways to force the resignation of government ministers and hold the government to ransom. Mr Mahuad began his term by seeking to build consensus behind his far-reaching programme of economic liberalisation and structural reform. Such efforts were arguably doomed from the start, as while leftist parties might support tax increases they would oppose most privatisations, and while the powerful PSC might favour the dismantling of the state it staunchly opposes higher taxes. Since the collapse of a short-lived alliance with the PSC in March 1999, Mr Mahuad has been forced to engage in laborious negotiations with a motley array of populist, conservative, leftist and centre-left parties on an issue- by-issue basis. However, given his government’s lack of a majority, alliance- building is the only way lasting reforms can be achieved.

In the meantime, the deterioration of the economy has fuelled discontent and caused Mr Mahuad’s approval ratings to plummet, further undermining his authority. By October 1999 (little more than a year into Mr Mahuad’s term), three finance ministers had resigned owing to a combination of opposition manoeuvring (mainly from the PSC) and policy disagreements within the government, and Mr Mahuad’s popularity had sunk to an all-time low. Two more developments have compounded Mr Mahuad’s problems. First, fissures have emerged within his own DP (see Political forces). Second, long-standing tensions between the highlands and the coast have resurfaced, fuelled by deteriorating economic conditions (the Guayaquil business community was particularly badly hit by El Niño. The two main Guayaquil-based parties, the PSC and the PRE (which between them hold 47 of the 121 seats in Congress) have become increasingly parochial since 1998 and prone to blaming most of the country’s problems on mismanagement and corruption on the part of a

bloated central bureaucracy. The regionalist issue is also used by Guayaquil business elites to rally support behind their efforts to oppose government policies such as tax increases.

Constitution and institutions

The 1979 constitution is Since 1830 there have been 19 different constitutions, all of them subject to reformed in 1998 countless amendments. The 1979 constitution underpinned the return to civilian democracy and established a unicameral parliament and presidential government. It was reformed most recently in 1998, when a popularly elected national constituent assembly (the National Assembly) introduced a series of reforms designed to improve governability, give the Banco Central del Ecuador (the central bank) autonomy and clarify the legal framework for private (including foreign) investors (see Economic policy). Scrapping Congress’s power to impeach ministers and abolishing mid-term elections were the two most important political reforms. Previously, reform programmes had often been undermined by Congress’s impeachment of ministers, while mid-term elections have regularly decimated the government’s support base in Congress, impeding the passage of legislation in the second half of the presidential term. The legislature was also expanded and measures were introduced to try to reduce fragmentation (see below).

A traditionally weak The president is elected for four years and may not be re-elected immediately. presidency— He can be impeached by a two-thirds majority. The 1998 constitutional reforms were designed to strengthen the power of the executive vis-à-vis the legislature. However, less than a year after their implementation, it has become clear that these reforms fall short of what is necessary to improve governability and promote stability. Although Congress can no longer impeach ministers at will, its members, especially the leaders of powerful blocs, have shown they are still able to weaken the government.

—and a powerful Congress Deputies to the unicameral Congress are elected to four-year terms at the same time as the presidential elections. Under the 1998 constitutional reforms, Congress was expanded from 82 to 121 members. Of these, 20 are national congressmen elected through proportional representation and the rest are provincial legislators elected by simple majority. Marginal and sparsely populated constituencies were previously over-represented as every electoral district, regardless of its size, was entitled to at least two deputies. The expansion of the chamber has increased the number of deputies in the more densely populated districts, a reform designed to dilute the congressional power of regional-based fiefdoms.

The congressional year begins on August 10th, when coalitions are established and a congressional president is elected. The latter has considerable power over legislation as he can call extraordinary congressional sessions and determine the agenda for discussion. He is a key negotiator between the executive and the legislature. The formal parliamentary session is short, lasting only to early October. However, extraordinary sessions are then called to continue congressional business. Legislative commissions continue to sit even when

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Congress is in recess. Despite the fact that Ecuadorean voters tend to back the traditional parties, a proliferation of small parties forming shifting coalitions has contributed to the fragmentation of Congress in recent years. The 1998 constitutional reforms sought to reverse this by striking from the party register any political party that fails to win less than 5% of the national vote in two consecutive elections. Independents have been allowed to run for Congress and other official positions since 1996.

A new Supreme Court Judicial and regulatory bodies in Ecuador have traditionally been highly politicised. Congress appoints officials to the Electoral Supreme Tribunal and Tribunal of Constitutional Guarantees, as well as the superintendents of banks and companies, the state attorney-general, procurator-general and comptroller- general. Until recently, Congress was also responsible for appointing judges to the Supreme Court for fixed terms. This practice changed in July 1997 when Congress voted to dismiss the 31 members of the Supreme Court, including its president, following demands for the modernisation of the judiciary expressed through the May 1997 referendum. In early October 1997 a new Supreme Court was appointed. The judges, who will serve for life, were selected by Congress from a shortlist presented by a commission, which in turn received nominations from 12 electoral colleges representing different civic groups as well as individuals. However, court rulings with respect to corruption charges brought against the former president, Mr Alarcón, have been inconclusive, and the depoliticisation of the institution remains far from complete. As before, the Supreme Court is responsible for appointing the judges of provincial superior courts.

Political forces

A diverse party system Ecuador’s largest political parties in terms of congressional representation are the centrist Democracia Popular (DP), the right-of-centre Partido Social Cristiano (PSC), the populist Partido Roldosista Ecuatoriano (PRE) and the left- of-centre Izquierda Democrática (ID). All have held power at some time since the transition to democracy in 1979.

The ruling DP developed in the 1970s out of the Partido Demócrata Cristiano, founded by university students and Christian trade unionists in the 1960s. Although it has clear left-wing roots, the party has evolved to espouse free- market policies while emphasising a concern for social issues. It derives its greatest support from the highland middle classes. Traditionally a relatively small and compact organisation controlled by a clique of Quito intellectuals gathered around Oswaldo Hurtado, the former president (1981-84), the party sharply increased its representation in Congress at the 1998 general election thanks to a wave of support for Jamil Mahuad. But, as has occurred with many other parties in Ecuador, rapid expansion has come at the cost of internal party discipline. There now are at least three major tendencies within the DP. The most threatening to party unity is that led by Juan José Pons, the congressional president. His grouping, most of whose members come from the Pacific Coast, is sympathetic to the PSC’s policies.

Balance of power in Congress (no. of seats) Democracia Popular (DP, the party of government) 33 Partido Social Cristiano (PSC; increasingly populist) 26 Partido Roldosista Ecuatoriano (PRE; populist) 21 Izquierda Democrática (ID; centre-left, social democrat) 16 Movimiento Pachakutik-Nuevo País (new left; minorities) 6 Frente Radical Alfarista (FRA; right-wing, populist) 4 Movimiento Popular Democrático (MPD; Marxist) 2 Partido Conservador (PC; right-wing) 2 Concentración de Fuerzas Populares (CFP; populist) 1 Independents 10 Total 121 Source: Political database of the Americas, Georgetown University/Organisation of American States (OAS).

The PSC was founded in the 1950s in Quito by a group of upper-middle-class Roman Catholics, but the coastal area around Guayaquil quickly developed as the party’s main stronghold. It has become clear that the reformist agenda which the PSC has espoused in the past, such as when Mr Nebot ran for the presidency in 1996, has been superseded by the stronger impulse of regionalist and clientelistic considerations. Since it broke its short-lived congressional alliance with the DP in March 1999 it has opposed the Mahuad administration on every key issue, making sector-specific and narrow regional demands. The PSC is firmly united behind the somewhat autocratic leadership of León Febrés Cordero, Guayaquil´s mayor. Mr Febrés Cordero’s failing health, however, may force him to abandon his plans to run for re-election in 2000. The prospect of his retirement could open the way for a bloody succession struggle in the PSC.

The populist PRE was founded in memory of Jaime Roldós, the former president, who was killed in a plane crash in 1981. It is strongest on the coast and in marginal urban and rural areas. It was discredited by Abdalá Bucaram’s brief presidency (1996-97; see Historical background). The party remains ob- sessed by the return from exile and rehabilitation, of Mr Bucaram and appears to have little interest in participating in serious policy formulation.

The ID, founded in 1970, has a moderate reformist wing and a more radical element. Presided over by Rodrigo Borja, the former president (1988-94) and headed in Congress by General Paco Moncayo, the former army commander- in-chief, the ID is the only major opposition party in favour of higher taxes— especially for business and the wealthy—but its preference for big government and concern to protect public-sector job security is a major stumbling-block to agreement with the government on issues such as privatisation and government modernisation.

The Movimiento Pachacutik is an umbrella group of indigenous organisations, social movements and trade unions which was formed in 1996 and achieved immediate electoral success that year, winning several seats in Congress. It is still the main formal political vehicle for indigenous groups, organised in the Confederación de Nacionalidades Indígenas del Ecuador (Conaie). Pachakutik has become ever more doctrinaire during Mr Mahuad’s

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term. It opposes taxes that may hit the poor and strongly rejects privatisations, pushing only for achieving a bigger share of the budget for welfare and projects aimed at helping minorities.

The military is an Since leaving power in 1978, the military has continued to play an important important political political role. It exerts pressure behind the scenes, especially at times of powerbroker political instability. In contrast to the political establishment, which is widely regarded as self-serving, unscrupulous and corrupt, the military is generally viewed as efficient and honest. Its reputation was enhanced by its success on the battlefield against Peru in 1995. Deep respect for the military among the population is also due to its role in providing education, infrastructure and health facilities in marginal rural communities, especially in the Amazon region, during the years of military rule. The military is frequently called on to act as a broker in times of political crisis, such as severe labour unrest or an impasse between the president and Congress, most recently in February 1997 when the military played a key role in negotiating the agreement that brought a swift end to the constitutional crisis after Mr Bucaram’s ousting.

The armed forces face a period of adjustment now that a permanent peace agreement with Peru has been signed, resolving the issue that had been its primary focus. Military planners have issued a series of tentative proposals to justify their budget allocation—although this has been reduced—including assuming a greater role in fighting crime, increasing security along the border with Colombia in order to prevent the spillover of guerrilla activities, supporting development and enhancing civic action.

Main political figures

Jamil Mahuad: Prior to his election, Mr Mahuad was mayor and the leader of the powerful PSC bloc in Congress, Mr Nebot of Quito, where he established a reputation as an able public wields considerable influence. He has a reputation for being administrator, a consensus-oriented politician and a skilful single-minded and stubborn, and is regarded as having little negotiator. On taking power, Mr Mahuad appointed able patience for consensus building. technocrats to his economic cabinet, but within six months many had resigned either because of unbearable pressure León Febres Cordero: Although aged and ill Guayaquil´s mayor from the opposition (mainly the Partido Social Cristiano— and a former president (1984-88) remains one of the most PSC) or owing to policy disagreements within the government. powerful politicians in the country. He enjoys the solid backing of most of Guayaquil, the country’s largest and richest. Mr Febres Juan José Pons: Although a member of the ruling Cordero continues to wield considerable political clout and is still Democracia Popular (DP), the loyalties of the current speaker in a position to exert decisive influence over his party, the PSC, of the House have become increasingly divided in 1999 and over many national-level political issues. between his party and his Guayaquil-based network of supporters, who strongly oppose Mr Mahuad’s policies. Many Paco Moncayo: The retired former chairman of the joint chiefs- of Mr Pons’s opinions seem to be closer to the opposition PSC of-staff was elected to Congress in May 1998 as an Izquierda than to his own DP. However, Mr Pons remains a key actor in Democrática (ID) legislator, quickly becoming the ID’s leader in forging support behind crucial legislation. the legislature. As army chief, Mr Moncayo played a crucial role in the 1995 war against Peru and is regarded as a war hero. He is a Jaime Nebot: A lawyer from Guayaquil and head of the PSC. staunch nationalist and moderate leftist. He and his party are Mr Nebot came second in his second attempt to win the opposed to most free-market reforms and neo-liberal policies. But presidency in 1996, and disappointed his party by refusing to Mr Moncayo has presidential ambitions, and this should ensure run in 1998. As a protégé of Mr Febrés Cordero (see below) that he shows some flexibility.

International relations and defence

The conflict with Peru has A border conflict with Peru over a remote Amazonian zone, which lasted more shaped foreign policy for than five decades and led to war in 1941 and brief clashes as recently as 1995, decades— finally came to an end when Mr Mahuad signed a permanent peace agreement with the Peruvian president, Alberto Fujimori, in October 1998. The final agreement defines a permanent border, and awards Ecuador unlimited (but not sovereign) perpetual navigation rights on the Amazon River. It will also allow the two countries to lower defence expenditure, which has risen considerably over the last decade. (Between 1985 and 1994 there was a 57% real increase in defence spending in Ecuador, while the armed forces increased in size by 35%.)

—and a re-orientation is The signing of a final peace treaty between Peru and Ecuador constitutes a under way following the major turning point for the country’s foreign policymakers. For most of peace agreement Ecuador’s history, foreign policy has been preoccupied with border disputes, mostly with Peru. In the longer term commerce and trade are likely to form a growing part of the foreign ministry’s responsibilities. To some extent, the ministry has already begun to adjust its focus and reinforce its commercial departments. The development of closer ties with the country’s regional neighbours is likely to draw considerable domestic support, as there is little trace of isolationism or nationalism to be found in contemporary discussions about the future role of Ecuador’s foreign policy establishment.

International organisations Ecuador is a member of many international organisations, including the UN, the World Trade Organisation (WTO), the Organisation of American States (OAS), the Inter-American Development Bank (IDB), the IMF, the International Bank for Reconstruction and Development (IBRD) and its affiliates, the International Finance Corporation and the International Development Association (IDA), the World Health Organisation (WHO), and the Rio Group. Other international bodies of which Ecuador is a member include the International Sugar Organisation (ISO), the International Cocoa Organisation (ICCO) and the Latin American Economic System (SELA). It is also a member of the Asociación Latinoamericana de Integración (ALADI), the Andean Community and the Non-Aligned Movement. Ecuador was a member of OPEC until November 1992, when it downgraded its participation to observer status. Ecuador left the International Coffee Organisation (ICO) in October 1998 after the body voted to make further export cuts to counter falling world coffee prices.

Resources and infrastructure

Population

Ecuador’s population was 10.3m at the 1990 census, and is expected to reach 12.6m by 2000. It grew by an average rate of 2.5% per year between 1982 (when the previous census was taken) and 1990, and by an estimated 1.9% per year in 1994-98, bringing Ecuador’s population to some 11.5m by the end of 1998 (for historical data on population, see Reference table 1).

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Social indicators lag behind The infant mortality rate fell from 60.4 per 1,000 children born alive in 1982 to regional counterparts 34 in 1996, while the birth rate rose from 2.5% of the population to 3.2%, and the death rate from 0.6% to 0.8% of the population. However, these remain among the poorest indicators in South America after Peru and Brazil.

Urbanisation Between 1982 and 1990 the urban population increased from 49.2% to 55.4% of the total population, and it is expected to reach 61.9% by the end of 2000, according to the United Nations. The coast remains slightly more densely populated than the highlands. The three principal cities, Quito, Guayaquil and Cuenca, accounted for a roughly constant 30% of the total population for most of the 1980s and 1990s, and the relative increase in the urban population is due instead to migration towards major secondary cities such as Loja, Santo Domingo and Machala—a trend that is expected to continue.

Population indicators, Nov 1990 census (% of total) By age 0-14 38.8 15-24 20.3 25-59 34.5 60+ 6.4 By region Highlands 45.6 Coast 49.7 Amazon 3.9 Galapagos & others 0.8 Sources: Instituto Nacional de Estadística y Censos (INEC); Banco Central del Ecuador, Boletín Anuario.

Age and employment The population is young, with some 36.4% aged 0-14 in 1995, and this proportion is expected to diminish only slightly, to 33.8%, in 2000. According to population projections compiled by the UN, the demographic outlook for Ecuador during the first decade of the 21st century is a cause for concern. Despite a forecast slowdown in population growth, from an annual average of 1.97% in 1996-2000 to an annual average of 1.53% in 2006-10, the labour force is expected to grow at a faster rate than the population as a whole. Even on the most optimistic economic projections, the formal economy will not expand rapidly enough to allow all the additional entrants to the labour market to be absorbed.

The country’s failure to embark on a sustainable growth path has caused employment to fall, forcing a growing proportion of the economically active population into the informal sector (for historical data on the labour force, see Reference table 2). This trend has been made more acute because of barriers to labour market entry erected by powerful trade unions—particularly in the extensive public-sector workforce—and a pro-labour legal framework. Economic slow down in 1998 and recession in 1999 have prompted heavy job losses in construction, agro-industry, commerce, manufacturing and financial services.

Rural-to-urban migration has increased the supply of unskilled labour in urban areas. Private studies indicate that the share in income of the poorest 20% of the urban population dropped from 2.55% to 1.68% between 1988 and 1993.

In 1998 the highest 10% of income earners accounted for 37.6% of total consumption, while the lowest 20% of income earners accounted for just 5.4%, according to the World Bank.

Unemployment (% of economically active population) 1997 1998 1999 Year Year April Sep Unemployment 9.2 11.5 12.9 18.2 Underemployment 40.4 42.2 48.6 54.4 Sources: Ministerio de Trabajo; Bloomberg; Hoy.

Race Indigenous people account for an estimated 43% of the population. The mestizo population includes descendants of foreign immigrants who have intermarried with indigenous people. These immigrants have included Spanish colonialists and other European settlers; Arabs, especially Lebanese, who arrived at the beginning of this century and form an economically and politically powerful community, particularly on the coast; Chinese; and other Latin Americans, especially from neighbouring Colombia. Two areas of northern Ecuador, around the port of Esmeraldas and in the Chota valley near the Colombian border, have a mainly black population, descendants of slaves of African origin.

Education

Universal education is Since the 1970s successive Ecuadorean governments have sought to reduce underfunded illiteracy and increase the output of trained professionals through the provision of free education. Considerable advances were made during the oil boom years of the 1970s, but since the early 1980s state resources available for education have been squeezed. Although the constitution requires 30% of the budget to be spent on education, parents have increasingly been required to contribute towards fees, materials and uniforms. The number of institutions, teachers and pupils has continued to rise at the expense of educational quality. Only a small proportion of the population can afford private education, which is concentrated in urban areas at secondary and university levels.

According to the 1990 census, 10.2% of the population aged ten and over were illiterate (compared with 14.8% in 1982) and 87% of children aged 6-11 years were in education, although there are high rates of absenteeism, repetition and irregular attendance, especially in rural and the poorest urban areas. Poor health and nutrition, and a lack of transport, materials and teachers, compound these problems, which are further aggravated by antiquated teacher-training methods. Teachers are also underpaid and strikes cause repeated disruption.

Secondary education Only the first three years of secondary school are compulsory, but provide many children with inadequate preparation for work. The subsequent three years are intended to prepare pupils for further study or provide technical training. Most students graduate in science, social science or business studies.

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In technical colleges pupils favour business administration over industrial and agricultural studies. Although the proportion of children aged 12 -14 years in secondary education totalled 63.9% in 1990, the value of this education is limited by a shortage of institutions, inadequate teacher training, the pupils’ disparate academic backgrounds and an excess of theoretical material over technical fieldwork.

Higher education The tertiary education sector has also seen a rapid rise in the number of institutions, pupils and teachers since the 1970s. The proportion of the population over 24 who have attended higher education rose from 6.8% in 1982 to 12.7% in 1990. A policy of free entry to state universities combined with budget cuts, however, has inevitably led to a decline in quality. Most university courses are directed towards training professionals for the services sector and bureaucracy rather than for industry.

Health

Treatment rather than Owing to financial constraints, public healthcare has tended to concentrate on prevention treatment rather than prevention, although vaccination programmes since the 1970s have considerably reduced the incidence of measles, polio, diphtheria, tetanus and whooping cough. The diseases that most affect the Ecuadorean population are those related to inadequate nutrition and poor sanitation and housing, especially in marginal urban and rural areas. There has been a resurgence of cholera, dengue fever, malaria and rabies in recent years. Urbanisation and the shift of employment towards more sedentary, office- based activities have also led to an increase in the diseases more prevalent in developed countries, such as heart disease and stress-related illnesses.

Spending cuts Healthcare has been one of the public service areas affected by government drives to cut fiscal spending since the early 1980s. According to the World Bank, Ecuador had one of the lowest levels of expenditure on health in Latin America in 1990-95, at 2% of GDP (compared with 4.3% in Argentina and 6.3% in Costa Rica). Compounding this is the fact that limited funds are not targeted effectively. The Ministry of Health allocates funds primarily on the basis of historical spending levels and political pressures. Most of the budget is spent on salaries, yet services are frequently disrupted by strikes over low wages and poor working conditions, leading to shortages of equipment and medicines. Public-health benefits are provided by the Instituto Ecuatoriano de Seguridad Social (IESS, the social security department). However, only 17% of the population—mostly state employees—are affiliated. Private health- insurance schemes have marketed their services aggressively in recent years.

Natural resources and the environment

Ecuador is situated on the Pacific coast of South America, and influences on its climate include the Andean mountain range and the warm El Niño and cold Humboldt currents. Its total area of 276,840 sq km includes the Galapagos archipelago, 1,552 km off the coast. Owing to the country’s location on the

equator, there are no extreme variations in climate during the year and there are approximately 12 hours of daylight all year round. There are essentially three regions on the mainland—the western coastal plain, the central highland corridor of volcanoes and the eastern rainforest in the Amazon basin.

Biodiversity On the coast the rainy season lasts from January to May and the rest of the year is dry. In the highlands the rainy season lasts from October to June. Rainfall is heavier throughout the year in the Amazon region. Around 78% of the country has a tropical or subtropical climate, 20% is temperate and there are 23 different microclimates, resulting in a high level of biodiversity. The alluvial soils of the coast and the Oriente are the most fertile and are good for growing a wide range of crops.

Agricultural resources Ecuador is predominantly agricultural. Around 8.29m ha of land has the potential for agricultural use, of which 74% lies in tropical and subtropical zones. Large oil and gas reserves are located in the Oriente, although there is also gas in the Gulf of Guayaquil. Water is an important potential source of hydroelectric energy.

Fishing resources Inland rivers and lakes, as well as the coastline, provide a wide variety of fish and sea products. Fresh-water prawn production for export has expanded rapidly in recent years, especially in the Gulf of Guayaquil, and in Esmeraldas and Manabí provinces.

Environmental conditions

Principal problems: Oil spillage; urban fumes and lack of waste-disposal facilities; destruction of coastal mangrove swamps for prawn farming; deforestation and soil erosion; indiscriminate use of pesticides; mercury contamination in unauthorised mining areas; and overfishing.

Legal framework: 1976 Law for Environmental Control and Protection and many sector-specific regulations. The technical capacity, personnel and political will necessary to fulfil regulations is lacking, however. Control is dissipated among a number of organisations.

Transport and communications

Fresh investment is needed Most transport in Ecuador is by road. The number of vehicles registered rose by to upgrade the transport 30% to 561,864 between 1993 and 1997 (see Reference table 3), although this infrastructure figure understates the true quantity owing to vehicle tax evasion. The Durán Ballén government’s National Highway Plan improved 35 major provincial motorways with an overall investment of around $500m, partly financed by multilateral and bilateral credits. But most of the road network is in poor condition owing to a lack of public funds. The condition of the transport infrastructure in the lowlands around Guayaquil deteriorated sharply in 1997-98 owing to El Niño-induced flood damage. Legislative reforms and private-sector

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(including foreign) funds are needed to boost investment. Such developments are expected in 2000, provided economic conditions improve. Once the necessary legislation is in place, a backlog of opportunities for investors should encourage work on projects to upgrade the port, airport, rail and road systems.

The rail system is in decline The railway system, built at the turn of the century, is now virtually derelict. Service is irregular and the track and rolling stock are in urgent need of modernisation. The state modernisation body, Consejo Nacional de Modernización del Estado (Conam), plans to wind up the state railway company, which requires an annual state subsidy of around $8m, and is seeking private purchasers or subcontractors.

New airports are needed at Ecuador’s two main airports are in Quito and Guayaquil. Although they were Quito and Guayaquil originally built outside the cities, urban expansion in recent decades means that they are now very close to the centres. Besides preventing the airports from expanding capacity, this situation presents serious safety concerns, as high- lighted in September 1998 when there was a serious accident involving a Cuban aircraft taking off from Quito airport. Contracts for the construction of new airports are expected to be tendered out during 2000.

There are three national airlines: TAME, SAETA and Ecuatoriana. TAME (military-owned) is the principal domestic airline, but it also began flying to Chile, Panama and Cuba in 1996. SAETA, a private airline, operates internationally, mainly to the US, and has a domestic wing, SAN SAETA. The former state airline, Ecuatoriana, was grounded in 1993, benefiting various US airlines. Ecuatoriana’s privatisation in 1995 and return to international operations in June 1996 have since led to tough competition.

Telecommunications: Ecuador has an average of eight telephone lines per 100 inhabitants, just over privatisation has been one-third of the Latin American average of 20. Service is concentrated in urban difficult areas. Years of underinvestment have led to a poorly maintained and inadequate infrastructure. The Durán Ballén government introduced the legal framework for the privatisation of the state-owned telecommunications sector. However, opposition from interest groups and a lack of political will has led to repeated delays in the privatisation process. In 1997-98 there were two failed attempts to sell a 35% stake in each of the two regional companies (Andinatel and Pacifitel, the highland and lowland businesses respectively) into which the state telecoms enterprise was divided. In 1997 the auction was abandoned when only one operator presented a bid. In 1998 the two principal bidders withdrew at the last minute saying that the government had failed to address their concerns, notably with regards to the uncertain regulatory environment. A fresh attempt is expected to be made in 2000. The authorities are now convinced that at least 51% of the shares must be offered in order to attract investor interest.

Port modernisation is Ecuador’s four main ports are Guayaquil, Esmeraldas, Manta and Puerto under way Bolívar. Two additional ports, at Balao and La Libertad, are equipped to accommodate oil tankers. Manta is the main channel for the export of coffee and cocoa, Puerto Bolívar is the main banana port and most of the rest of the

country’s foreign trade is channelled through Guayaquil. Esmeraldas is the main oil terminal. As elsewhere, modernisation of the sector has been held back by delays in passing necessary legislation. The aim is to subcontract port services to the private sector. Customs control, which was tightened as inspection was handed over to the private sector under the Durán Ballén government, deteriorated following its re-nationalisation under Abdalá Bucaram. Efforts to resume the modernisation of the customs sector have continued under President Jamil Mahuad, but the exigencies of economic stabilisation have had to take preference, and progress has been slow.

Energy provision

Oil production growth is Oil production in Ecuador took off in the 1970s and has since risen steadily held back— from an average of 78,000 barrels/da in 1972 to 388,000 b/d in 1997. However, the fall in international oil prices in 1997 and the effects of underinvestment in Petroecuador, the state oil company during the Alarcón administration, caused production to fall slightly in 1998-99. Arrears with contractors and suppliers contributed to the neglect of maintenance work at fields and 1999 output is unlikely to exceed 370,000 b/d, its lowest level since 1993. Export volumes increased from 25m barrels to 91m barrels between 1992 and 1997; this represents a slower rate than production expansion owing to growing domestic consumption and internal transport bottlenecks. At the end of 1993 proven reserves amounted to 3.7bn barrels. Crude exports, which come mainly from Oriente, are of medium heaviness, 27°API, although the most recent discoveries have been of heavy crude.

Most oil exploration and production activity is found in the east of the country, in the rain forests of the Amazon basin. Principal refining facilities are located at Esmeraldas on the northern coast and at La Libertad in the south. The main fields are: Shushufindi, Sacha (the two largest), Libertador, Auca, Lago Agrio, Cononaco and Cuyabeno. Since the foundation of the state oil company, CEPE (now Petroecuador) in 1972, the state has dominated production. In 1989, however, 13 risk-service contracts were signed with private operators, seven of which are still in force (with Occidental, Arco, Oryx, Tripetrol, Elf, Braspetro and Maxus). Most of these have started producing since 1990, reducing Petroecuador’s share of production in 1998 to under 80%. In 1993 a further reform to the Hydrocarbons Law introduced production-sharing contracts (PSCs), six of which were signed with the private sector in 1994, followed by a further two in 1996. In 1999 Petroecuador began efforts to attract private operators into joint-ventures in the Shushufindi and Sacha fields.

—by refining and transport The increasing production of derivatives has created the need for expanded bottlenecks transport and refining facilities. Refining capacity has increased from some 31,500 b/d in 1972 to 157,000 b/d in 1995 but is still insufficient to meet domestic demand, leading Ecuador to import fuel. Recent programmes have been aimed at further increasing capacity, producing lead-free and high-octane fuel and diesel, and processing heavier crude.

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Lack of transport capacity has been the principal obstacle to increased oil production in recent years. Plans to expand pipeline capacity have been repeatedly disrupted by political opposition to handing this “strategic” national asset over to private-sector management. Since mid-1998 work has been under way to improve pumping along the existing cross-country pipeline, the Sistema del Oleoducto Trans-Ecuatoriano. However, this project will lift capacity only modestly. Two other projects envisage expanding the capacity of SOTE and constructing a new cross-country pipeline to transport heavy crude. Petroecuador in partnership with Arco, the US oil company, began work on the expansion project in mid-1999. This should take total transport capacity to around 440,000 b/d by early 2000. Substantial increases in production will therefore have to wait for the construction of a second oil pipeline, which is expected to be undertaken by a consortium of foreign companies already operating in Ecuador. This project, which is expected to require investment of some $400m over 18-20 months, is not, however, likely to get under way until mid-2000 at the earliest.

Gas production Ecuador has the refining capacity to process only around 20% of the natural gas produced in the Oriente oilfields, and imports are necessary to meet about 50% of national demand. The existing national network of poliducts transporting gas and other derivatives is 1,300 km long, but there are plans to increase this to 2,000 km. Mr Mahuad’s government plans to restructure the sector with the help of private investors. It has already abolished the state subsidy on domestic gas consumption.

Investment is sought in Hydroelectric resources are estimated to represent 70% of Ecuador’s commer- electricity generation cial energy resources, but only 3% is actually tapped for generation. The country is dependent for around 65% of its electricity on the Paute hydroelectric plant, but low rainfall, inadequate water storage and the accumulation of silt due to deforestation have reduced generating capacity. At the same time the contribution of thermal stations has declined markedly owing to poor maintenance and a lack of investment in new technology.

National energy balance, 1998 (m/tonnes oil equivalent) Elec- Oil Gas Coal tricity Other Total Primary production 19.7 0.1 0.0 1.7a 1.2 22.7 Imports 0.8 0.0 0.0 0.0 0.0 0.8 Exports 13.5 0.0 0.0 0.0 0.0 13.5 Primary supply 7.0 0.1 0.0 1.7a 1.2 10.0 Losses & transfers –1.8 –0.1 0.0 –1.9 0.0 3.8 Transformation output 0.0 0.0 0.0 0.9b 0.0 0.9 Final consumption 5.2 0.0 0.0 0.7b 1.2 7.1

Note. Losses and transfers comprise input to transformation processes (electricity generation, gas manufacture, liquids from coal etc.), plus energy industry fuel and losses. In the electricity column primary electricity output and imports/exports of electricity are expressed as input equivalents, on an assumed generating efficiency of 33%.

a Input basis. b Output basis. Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1998 Real GDP growth (%) 0.4 Consumer price inflation (av; %) 36.0 Current-account balance ($ bn) –2,017.5 Exchange rate (av; su:$) 5,446.6 Population (m) 11.55 Foreign debt (year-end; $ m) 15,282.37 Source: EIU, CountryData.

Ecuador remains predominantly agricultural, with agriculture, forestry and fishing accounting for on average 18% of GDP during the last ten years. Since serious commercial exploitation began in 1972, the oil sector has become extremely important and is the area to which most longer-term foreign investment is attracted. The contribution of the oil and mining sector to GDP has grown steadily during the 1990s from 11.7% in 1990 to over 14% in 1997-99. Trade liberalisation has stripped away the protection previously enjoyed by manufacturing industry which has been facing difficult trading conditions owing to high interest rates and scarce credit. Its share of GDP dropped from 18.1% in 1987 to around 16% in 1994-98. Trade and tourism have represented an average of 15% of GDP over the last ten years.

Comparative economic indicators, 1998 Ecuador Colombia Peru US Chile GDP ($ bn) 20.0 94.0 62.4 8,759.9 73.0 GDP per head ($) 1,708 2,297 2,517 32,409 4,922 Consumer price inflation (av; %) 36.0 20.4 7.3 1.6 5.3 Current-account balance ($ bn) –2.0 –5.9 –3.8 –220.6 –4.1 % of GDP –10.2 –6.2 –6.1 –2.5 –5.7 Exports of goods fob ($ bn) 4.2 11.4 5.7 672.2 14.8 Imports of goods fob ($ bn) 5.2 14.0 8.2 917.2 17.3 External debt ($ bn) 15.3 34.7 30.6 37.8 n/a Debt-service ratio, paid (%) 36.3 34.2 34.2 21.5 n/a Source: EIU, CountryData.

Economic policy

Reform programmes Ecuador has a history of high inflation, a volatile GDP growth profile and in repeatedly founder on recent years has suffered repeated currency crises. The political environment political difficulties— has held back reform, leaving natural phenomena and the price of oil to determine fluctuations in GDP growth. Since the mid-1980s successive governments have attempted to liberalise the economy and reform the public finances. However, political pressures from protected national producers and powerful public-sector unions have repeatedly led to the loosening of policy,

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especially in the run-up to elections. A vicious cycle was established of devaluations and austerity packages followed by a slackening of fiscal policy and accelerating inflation. (See Reference table 4 for historical data on government finances, Reference table 5 for data on monetary aggregates and Reference table 10 for prices and earnings.)

Central government finances, 1998 (% of GDP) Revenue 16.2 Expenditure –18.9 Balance –2.7 Source: IMF, International Financial Statistics.

—as modest progress under The Durán Ballén government (1992-96) attempted to introduce a far-reaching Mr Durán Ballén— reform programme of economic liberalisation and privatisation. The country’s long-delayed entry into the Andean Pact free-trade area (now the Andean Community) was implemented, in January 1993 a new foreign investment code was announced, and considerable changes occurred in the financial sector (see Financial services). However, political opposition, divisions within the government itself and a short border war with Peru in January 1995 stymied the planned privatisation programme.

—gives way to stalemate Repeated delays in the presentation of his promised economic plan meant that under Mr Bucaram and Abdalá Bucaram implemented little in terms of economic policy during his six Mr Alarcón — months as president. His tentative plans to introduce a currency board put him in direct conflict with those who had elected him on a clearly populist platform, and the preparatory increases in utility tariffs triggered the protests that ultimately led to the president’s ousting.

Mr Bucaram’s drastic plans were scrapped by Fabián Alarcón as soon as he assumed office as interim president. Despite promises to lay the foundations for a recovery in production by stabilising the macroeconomic environment, it soon became apparent that political expediency (see Political background) would keep Mr Alarcón from implementing the necessary policies. A lack of fiscal discipline, together with the collapse in world oil prices in late 1997 and early 1998, put increasing pressure on public finances, fuelling inflation and ultimately leading to a moderate devaluation of the sucre in March 1998.

—leaving Mr Mahuad Despite the high expectations that surrounded Jamil Mahuad’s assumption of struggling to tackle a the presidency in August 1998 (see Political background), Mr Mahuad, too, has backlog of reform— struggled to implement his platform. Within weeks of taking office, Mr Mahuad sought to demonstrate his government’s determination to under- take a far-reaching reform programme by eliminating subsidies on electricity and domestic gas utilities, replacing these with “poverty coupons” to compensate the poorest families. But efforts at tax reform have been less successful, and congressional wrangles over these, combined with efforts to respond to the crumbling of the financial system (see Financial services) and a growing debt crisis prevented any progress on privatisation during the government’s first year in office.

In late 1998 the Partido Social Cristiano (PSC), whose campaign had been fought on a platform of no more taxes, succeeded in imposing its own brand of tax reform, consisting of the suspension of all income and corporation taxes in favour of a new 1% tax on capital in circulation; these changes took effect in January 1999. Subsequent government efforts to introduce new taxes—on corporate assets, luxury vehicles and import tariff surcharges—also failed because of PSC obstructionism. Only the increase in international oil prices after April 1999 kept the fiscal deficit within an estimated 4-4.5% for the year. Since April 1999 the government has sought to gain the support of the leftist parties, spearheaded by Izquierda Democrática, for more far-reaching tax reform.

—amid deep economic As reform has stalled, the economy has become mired in its worst economic contraction and a major crisis for decades. After expanding by an annual average of only 2.5% in debt crisis 1994-98, the economy is expected to contract by at least 8% in 1999 (see Economic performance). The recession has made fiscal reform all the more difficult and has contributed to the virtual collapse of the financial system. Meanwhile, the country’s domestic debt has burgeoned. The issue of bonds to finance the fiscal deficit caused the domestic debt to grow rapidly in 1996-98, bringing the total domestic debt stock to around $1.2bn (6% of GDP) in late 1998. Since then, the issue of government bonds in order to inject capital into the ailing banking sector has added another $1.5bn, bringing the total domestic debt to $2.8bn (over 20% of GDP) by September 1999. Some 80% of this debt is denominated in US dollars, and most is short-term and held by domestic banks or local governments.

The sharp weakening of the currency in 1997-98—which saw the dollar: sucre rate rise from an average of Su3,189:$1 in 1996 to Su5,446:$1 in 1998 and an estimated Su11,616:$1 in 1999—has exacerbated the difficulties of servicing this domestic debt and caused a drastic deterioration in the country’s external debt ratios. A default on Brady bonds and Eurobonds in late 1999 (see Capital flows and foreign debt) and the government’s 2000 budget proposals—which envisaged that over 50% of spending would be on debt service—has underlined the severity of the crisis.

The key issues remain to Ecuador’s record of economic and political instability, the recent financial crisis be tackled and Congress’s continued resistance to reform make a deal with the IMF imperative if the country is to be able to begin to restore confidence and access the development funds it needs to grow. More rapid progress on reconstructing El Niño-related flood damage is urgently needed, but awaits disbursement of multilateral funds which would be forthcoming with an IMF agreement. The lack of progress to date makes the Mahuad government’s task in 2000 all the more difficult. To restore credibility, it needs to tighten fiscal policy in a recessionary environment in addition to attempting to overcome the traditional political obstacles to privatisation and economic liberalisation. While an alliance with the leftist parties represents the administration’s best chance to secure sufficient tax reforms to facilitate a stand-by arrangement with the IMF, the PSC remains the only major political force likely to provide backing for a privatisation programme. The approach of provincial elections scheduled for May 2000 merely compounds these formidable difficulties. Even

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assuming that the necessary stabilisation measures are achieved, the extreme fragility of the financial system is likely to hold back the development of domestic industry for years to come.

Important economic policy initiatives of recent years

1992: Ecuador leaves OPEC in November, gaining complete freedom to produce and export oil.

1994: The Financial Institutions Law deregulates the financial sector, leading to a proliferation of institutions and intense competition for deposits. Interest rates are pushed up, and aggressive marketing of credit leads to accelerating growth in money supply.

1994: A crawling-peg exchange-rate system is introduced.

1995: A Brady Plan debt-restructuring agreement is completed in February. In August Congress approves the sale of 35% of the state telecommunications institute to private operators and 10% to the workforce.

1996: Ecuador joins the World Trade Organisation (WTO) in January and removes all remaining non-tariff barriers, while a maximum tariff 10 percentage points above the Andean Pact common external tariff is allowed.

1998: State subsidies on electricity and domestic gas are abolished in September. In November a deposit guarantee agency (AGD) is created and charged with overseeing the clean-up of the financial system. During the subsequent nine months, $1.5bn in government bonds are issued to the ailing financial sector and 70% of the banking system is brought under state control

1999: Income and corporate taxes are suspended in January in favour of a new 1% tax on the circulation of capital. The currency is floated in March. Ecuador opts not to pay Brady bond coupons in September and Eurobond coupons in October as the debt crisis mounts.

Economic performance

Oil-sector fortunes Since Ecuador began producing oil in the early 1970s, economic growth has shape growth largely tracked the performance of this sector. The political environment has held back attempts to diversify, leaving natural phenomena and the price of oil to determine fluctuations in aggregate output. Thus between 1970 and 1979 GDP grew at an annual average rate of 7.5%, thanks largely to the growth of the oil sector while a sharp drop in oil output following an earthquake caused a 6% contraction in GDP in 1987. Growth picked up in 1990-91 as higher world oil prices boosted the export sector and increased fiscal revenue but slowed in 1992 and 1993 as a result of high interest rates, a tighter fiscal stance, a real appreciation in the sucre and slow growth in the world economy. Ecuador’s departure from OPEC in 1992 allowed significant oil production increases in 1993, underpinning an acceleration of growth in 1994. Economic

stabilisation and moderate deregulation during the Durán Ballén administration, as well as debt renegotiations, made Ecuador a more attractive target for foreign investment, but trade liberalisation has resulted in tough competition for local manufacturers.

The 1994 credit boom— By the last quarter of 1994 GDP growth had accelerated to an annualised rate of 6.3%. Expanding credit, rising consumer demand and expectations of continued consumer confidence boosted manufacturing growth, which almost doubled compared with 1993. The construction sector recovered and services, especially financial services, boomed. The downside to this was a deterioration in the current-account balance, as an overvalued exchange rate sucked in cheap imports.

—leads to bust in 1995— A series of external shocks, internal energy supply difficulties and increased political instability brought an abrupt end to this nascent boom in 1995. The costs of the conflict with Peru strained the public-sector budget, and armaments imports contributed to a widening of the current-account deficit. Electricity rationing due to drought at the principal hydroelectric plant disrupted production and imposed alternative generation costs. Political uncertainty increased following the flight of vice-president Alberto Dahik to Costa Rica amid a corruption scandal (see Historical background), and interest rates were raised to prevent capital leaving the country. Producers and the financial sector struggled against lower liquidity, rising interest rates and bad debts. The export sector was unable to compensate fully for these difficulties, with major products such as bananas, oil, coffee and prawns facing poor international trading conditions or domestic production problems.

—and sluggish growth in Since 1995 GDP growth rates have been very low, and in some years have fallen 1996-98 gives way to deep below population growth. Growth has been constrained by a number of factors recession in 1999 such as the border conflict with Peru, political instability, electricity shortages, macroeconomic instability, depressed international oil prices in 1997-99, and external financing problems resulting from crises in other world economies. After Mr Bucaram had taken office in August 1996, uncertainty continued to be fuelled by repeated delays in the announcement of an economic package and, subsequently, by doubts over the viability of the planned currency board. Low domestic demand caused a sharp contraction in import levels, swinging the current account into surplus for the first time in ten years in 1996. The contraction in imports allowed GDP to expand by 2% that year, despite the problems.

In 1997-98 consumption remained stagnant and investment displayed only a modest improvement amid continued political instability and a slow down in global growth. On the supply side, oil production began a slow decline owing to a transport bottleneck, and towards the end of 1998 manufacturing was hit once again by electricity shortages. Agriculture performed well throughout most of 1997, with strong output rises particularly visible in bananas and prawns, but excess rainfall and flooding caused by the arrival of the El Niño climatic pattern in late 1997 devastated key export crops on the coast, destroyed infrastructure and left thousands homeless until the early months of 1998.

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The banking and currency crises of 1998-99 were the main factors behind the transition from stagnation to deep recession in 1999. The excessively high interest rates used to defend the currency exacerbated debtors’ problems, leading to an escalation of loan defaults and further bank collapses. The emergency freeze on bank deposits imposed in March compounded slowing domestic demand, which has since fallen sharply. GDP is expected to contract by at least 8% for the year as a whole, which would take aggregate output back to below 1994 levels. (For historical data on aggregate GDP, output and demand, see Reference tables 7-10.)

Real growth in gross domestic product (% change) Annual average 1998 1994–98 Private consumption 2.0 2.3 Public consumption 0.2 0.2 Gross fixed investment 6.3 4.4 Change in stocks 0.5 0.2 Exports –3.2 3.7 Imports 5.5 4.8 GDP 0.4 2.5 Source: Banco Central del Ecuador, Información Estadística Mensual.

Persistently high The main causes of Ecuador’s persistently high level of inflation—which inflation— averaged 37.6% per year in 1990-98—have been the budget deficit, exchange- rate weakness and a lack of confidence in economic policy. The Durán Ballén government succeeded in lowering the annual average rate from 54.6% in 1992 to 22.9% in 1995, through a combination of fiscal austerity and a nominal exchange-rate anchor (see Reference table 10). However, price pressures were stirred once again in early 1997 by the rises in utility prices, causing average inflation to reach 30.7%. Inflation rose again in 1998, to an average of 36%, fuelled by lax fiscal policies under Mr Alarcón in the first half of the year, and President Mahuad’s abolition of state subsidies on utilities in September. Inflation is expected to average over 50% in 1999, mainly as a result of chronic currency weakness (see Foreign reserves and the exchange rate), which outweighed the impact of the huge contraction in domestic demand and the bank deposit freeze imposed in March (see Financial services).

—has eroded real wages— The official monthly minimum wage and associated benefits are revised intermittently by a committee consisting of representatives of the government, unions and employers—usually twice a year. In the second half of the 1980s and early 1990s nominal increases failed to keep pace with inflation. The real average wage index (1990=100) fell from 162.2 in January 1986 to a low of 65.1 in 1992, when inflation averaged 55%. Lower inflation in 1993-97 brought a steady rise in the real wage index, to 109 in 1997, but it has since fallen back, to 102 in 1998 and an average of 93.2 for January-September 1999. Economic stagnation in 1998 and contraction in 1999 has also prompted unemployment to spiral (see Population).

Wage and price Inflation Annual average 1998 1994–98 Consumer prices (% change) 36.0 28.2 Real minimum wage index (Sep 1994-Aug 1995 = 100) 101.7 103.2 Source: Banco Central del Ecuador, Información Estadística Mensual.

Regional trends

An upsurge in regionalist Opinion has been moving in recent years towards the devolution of greater sentiment financial and administrative control to the provinces. A constitutional reform to this effect was defeated in the November 1995 referendum only because the majority of the population used the referendum to express a protest vote against the government, although the measure itself had majority support. There are also growing pressures for central government allocation of funds to be distributed more evenly on the basis of the size and needs of the local population. At present, distribution is determined by political pressures at the centre and by historical precedent.

The increasing parochialism of the two main Guayaquil-based parties, the Partido Social Cristiano (PSC) and the Partido Roldosista Ecuatoriano (PRE) is an important influence in the growing demands for greater decentralisation. Strong regionalist sentiment has long been present in Guayaquil, but such sentiment has intensified in 1998-99, in part because of the severe economic conditions suffered by the Guayaquil business community (see Political background). The increase in such sentiment represents the resurgence of a powerful challenge to governability.

Economic sectors

Agriculture, forestry and fishing

A major sector— Around one-third of Ecuadorean territory is used for agricultural purposes. The more modern agro-export sector is concentrated on the coast, where forests and swamps have been converted into plantations producing bananas, coffee, cocoa, rice and other export fruits or prawns. The principal agricultural crops for export—bananas, coffee and cocoa—are grown on the coastal plain, with the banana industry centred in the south-western province of El Oro. Prawn farms are concentrated around the Gulf of Guayaquil. Production for national consumption, including the dairy sector, grains and vegetables, is mostly in the highlands.

Ecuador is the world’s largest banana producer. Production expanded rapidly in the early 1990s on the back of the rapid growth of the global market, particularly in the former Soviet Union, China and eastern Europe. Many Ecuadorean producers invested heavily in infrastructure and technology.

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Increased output in Ecuador underpinned a large increase in global production in 1997-99. At the same time, falling demand as a result of a global economic slow-down produced a glut of bananas, pushing down the price. As a result, most Ecuadorean producers are highly indebted. The sunk costs of investment make it difficult to switch to other crops to respond to fluctuations in demand. Over the past decade prawn cultivation has grown rapidly and Ecuador is now the world’s fourth largest producer after Thailand, the US and India. Most production is concentrated in the provinces of Guayas and Esmeraldas. Prawn is also Ecuador’s third largest export earner after oil and bananas. However, the industry entered into a temporary decline in 1999, owing to the spread of the white spot virus and the liquidity problems facing producers. Production is expected to decline sharply in 2000, with the sector’s prospects improving in 2001 only providing farmers can secure the funding to complete drainage and restocking of virus-stricken pools.

Cocoa used to be the country’s main export crop until bananas took over in the 1940s. It still contributes around $100m a year in export earnings, although this fell sharply in 1998 mainly because of crop damage due to excess humidity caused by El Niño. The sector has been staging a strong recovery in 1999, with most crops having recovered from El Niño and new plantations further boosting output in 2000. Coffee production has continued to struggle under the residual effects of the severe flood damage caused by El Niño, with export earnings falling in 1998-99 as a result of lower output and falling prices. Output is expected to recover somewhat in 2000, but with the price prospects for coffee remaining bleak, production is unlikely to rise significantly.

In recent years highland farmers have also sought to develop the export potential of vegetables and cut flowers; the latter was one of the most rapidly growing exports until the global economic slowdown—and particularly the Russian crisis—hit demand in 1998-99 (see Reference tables 11 and 12 for historical data on agricultural production).

—which is held back by Agriculture is Ecuador’s largest employer, but holdings are generally small, and financial problems — productivity and mechanisation rates are low. Infrastructure is inadequate and irrigation systems are in need of extension. The country is largely dependent on foreign aid to increase levels of productivity and mechanisation. Credit to the agricultural sector is channelled through the Banco Nacional de Fomento (BNF, the state development bank). Farmers have struggled to service loans at the high interest rates of recent years, however, and the situation reached crisis point in 1998-99 when debt defaults by flood-stricken producers contributed to the collapse of many banks (see Financial services).

—low efficiency— Security of tenure has been improved by the 1994 Agrarian Development Law but factors such as land shortages and overfarmed small-scale holdings continue to deter investment and productivity increases. They have also driven the rural population to the cities in search of alternative employment and led to the occupation of land in rural and urban areas. Colonisation of the Oriente, which accounts for about 50% of Ecuador’s territory but only 4% of its population, has risen, but this is increasingly opposed by indigenous groups. The Instituto de Desarrollo Agrario (Inda; the Agrarian Development

Institute) has lacked the financial autonomy, technical resources and freedom from political pressures necessary for it to carry out its plan to issue land titles on a massive scale.

—and poor infrastructure Inadequate irrigation facilities represent another barrier to the development of the agricultural sector, especially in poorer highland communities with limited financial resources and education. Almost all areas of the country face water shortages during the summer. Heavy rains and flooding caused by the El Niño climatic pattern in late 1997 and early 1998 exacerbated such problems: the floods not only devastated export crops—such as bananas, coffee, and cocoa— and domestic staples—such as rice, corn, soybean and sugarcane—but also destroyed much of the lowland transport infrastructure. Forging ahead with reconstruction work in 2000 is one of the government’s most pressing priorities once it achieves an IMF agreement.

Mining and semi-processing

Rich mineral deposits The mining sector contributes less than 1% of GDP. Mineral resources include gold, silver, copper, iron, lead, zinc, uranium, magnesium, phosphates, limestone, kaolin, marble and sulphur. Most activity is concentrated in the production of non-metal construction materials such as limestone, sand and clay, as well as pumice stone. The main areas for mining activity are in the southern provinces of Zamora Chinchipe, El Oro and Azuay, where there are precious metal deposits. The limestone deposits that supply Ecuador’s four major cement companies are found across 15 provinces, while sand is found mainly in the Oriente provinces of Morona Santiago and Napo. Pumice stone deposits, said to be among the ten largest in the world, are in the highland provinces of Cotopaxi, Pichincha and Tungurahua. Clay production occurs in Loja, but important deposits for future exploitation have been found in the Oriente.

The government welcomes The mining sector was opened to foreign investment in the 1980s in the search investment for alternatives to oil. The absence of a large state-owned mining industry means that private operators do not face the political opposition aroused in countries such as Chile and Peru, yet development of the sector was held back by frequent changes in government legislation and uncertainty over the enforcement of property and exploration rights. A mining law increasing protection to domestic and foreign mining companies was passed in 1991, and a state corporation, CODIGEM, was created to oversee the sector’s development. Although ownership of mineral resources remains with the state, mining contracts or permits to exploit mineral resources were formalised into deeds with a designated set of tradable rights. Special tax and tariff exemptions were set up to encourage foreign investors, and the Durán Ballén government streamlined procedures for registering titles.

Proposals to reform the mining law and make the tax regime internationally competitive include the elimination of royalties and value-added tax (VAT) on imports. The measures would be offset by higher concession fees and income tax receipts as the informal mining sector becomes incorporated into the tax system. There will be a single concession for the exploration and exploitation

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phases of mining projects rather than separate ones as at present. The reform will face tough opposition in Congress because it favours multinational mining companies while imposing the accounting, incorporation and tax costs of joining the formal sector on poor miners. Although environmental regulations for the sector are also being prepared, official commitment to this issue is in doubt. In 1996 the state forestry commission, INEFAN, ruled that mining activity is allowed in protected forests. In some areas, the local population has resisted the exploitation of concessions.

Manufacturing

A boom in the 1970s Industrial development in the 1960s built on the traditional, existing finances expansion manufacturing sectors of textiles, food and drink, tobacco, oil-refining and cement production. Rapid expansion took place in the 1970s as a result of the oil boom, sectoral development laws which encouraged import substitution and a protectionist trade policy.

Geographical Although the development laws also aimed to decentralise industrial activity, concentration 78% of production and 70% of businesses remain concentrated in the provinces of Guayas and Pichincha. Nonetheless, there are important industrial sectors in the provinces of Azuay (ceramics, furniture and tyres), Esmeraldas (oil-refining and wood), Manabí (sea and agricultural products), Cotopaxi (iron and steel), and the towns of Ambato, Milagro, Riobamba and Latacunga.

The state rolls back The 1990s have seen a dramatic shift in state policy towards industry, with the protection for producers stripping away of special benefits and protection. The development laws remain, but tax deductions and import duty exemptions have been eliminated. Membership of both the World Trade Organisation (WTO) and the Andean Community has led to the removal of non-tariff barriers and the reduction of tariffs. While this has exposed domestic industry to tough competition in terms of quality and prices, it has also widened its traditionally narrow focus on the national market, providing an incentive to export. In 1990 a maquiladora (in-bond) programme was established, allowing export companies to import tariff-free the raw materials and equipment needed for assembly. More recently, the Durán Ballén government adopted a largely hands-off approach, leaving industry to sink or swim in the face of tougher international competition, while reducing the bureaucratic burden on businesses. Difficult credit conditions caused the sector to stagnate in 1998 and contract sharply in 1999.

Exports are stimulated Stimulated by the prospect of new export markets, especially in the Andean Community, chemicals, machinery, minerals, paper, printing and wood products industries have been the growth areas of the 1990s. Between 1990 and 1994 the number of firms exporting industrial goods increased by 213%, according to a consultancy firm, Multiplica. However, food, drink and the tobacco industry remain the most important sectors (see Reference table 13). Canned fish has been the biggest growth area in recent years and is now the single largest manufacturing export, earning $182m in 1997 and $254m in 1998 (see Reference table 16).

A shortage of finance The sector has also been held back by a lack of financing. Apart from private financial institutions, the Corporación Financiera Nacional (CFN, National Finance Corporation) is the principal source of external funding for industry. The CFN acts as a second-tier bank, obtaining multilateral funding from institutions such as the Inter-American Development Bank (IDB) and the Corporación Andina de Fomento (CAF, Andean Development Corporation) which is then channelled through the private banks. Interest is only slightly below market rates, however, and chambers of industry and commerce have been among the most vociferous critics of the government’s failure to reduce the high interest rates of recent years (see Reference table 6 for data on domestic interest rates). There is also a shortage of medium- and long-term financing. The Ecuadorean stockmarket is as yet too underdeveloped and illiquid to represent a financing option for most businesses.

Construction

Construction hit by The construction sector, which is a major employer of lower-income, unskilled recession workers, has been hit hard in recent years by cuts in public spending, a shortage of credit and high interest rates. The public sector accounts for 55-60% of investment in construction, especially in infrastructure projects such as road-building. Between 1989 and 1993 it contracted by 20%. There was some respite in 1994, when real GDP growth recovered and a boom in commercial and upper-income residential construction led to an expansion of 5.3% (see Reference table 14). However, the credit squeeze and higher interest rates of 1995-96, which were followed by a downturn in private and public demand, left construction firms with unsold properties and high levels of debt, making trading conditions difficult once again. The sector’s problems have been exacerbated by the economic slowdown of 1997-98 and contraction in 1999. However, it will be one of the major beneficiaries once reconstruction of flood damage in the coast gathers pace and a second oil pipeline begins to be built, although the lack of experience and resources among domestic firms means that foreign expertise will have to be imported for major projects.

A housing shortage Ecuador has a severe housing deficit. It is estimated that around 50,000 houses a year need to be built merely to cater for population growth. In the absence of state housing provision or sufficient cheap financing for construction, building tends to be “informal”. It is not covered by official statistics, lacks planning permission and is beyond the reach of building regulations.

Financial services

Deregulation leads to a The financial sector was deregulated by the 1994 Ley General de Instituciones del credit boom— Sistema Financiero Nacional (the Financial Institutions Law), which led to a large increase in the number of institutions and the expansion of banks into new activities such as leasing, credit cards and investment banking. In accordance with the 1994 law, the financial system operates under free-market principles, with financial intermediaries free to set their own interest rates. In the context of strong short-term capital flows after 1992, institutions

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aggressively marketed credit. Competition for deposits between the many institutions pushed up savings rates, while strong demand for loans enabled them to maintain high margins.

—which gives way to But since the enactment of this law institutional reform at the banking super- collapse— intendency has proceeded sluggishly, permitting the spread of deficiencies in banking sector regulation and supervision. This has been one of the main causes of the successive banking crises since 1995. Rapid expansion of loan portfolios brought a sharp deterioration in the ratio of loan assets to reserves during the 1990s. While loans exceeded reserves fourfold in 1992, this rose to tenfold by 1994. Increased political uncertainty from 1997 and the decline in world commodity prices (including oil) and damage caused by El Niño contributed to a marked slowdown in the rate of deposit growth, which fell from an annual average of 26% in real terms in 1992-96 to just 3.3% in 1997 and 1.5% in 1998. (see Reference table 15). Exacerbating factors have been economic stagnation, an international credit squeeze in 1997-99 which restricted banks’ access to external funding, macroeconomic destabilisation, and El Niño, which damaged production in coastal areas, causing a deterioration in related loan portfolios.

—and the launch of Liquidity in the system fell throughout 1998, placing several banks under strain. a system-wide In September 1998 Banco de Préstamos (a medium-sized institution) had to close restructuring— after failing to provide sufficient guarantees to secure liquidity loans from the Banco Central del Ecuador (BCE, the Central Bank). This was the first in a series of banks to fail. In December liquidity loans from the government, totalling $350m, were not able to save Filanbanco, the largest bank in the country, which was transferred to state control. A Deposit Guarantee Agency (AGD) was created in December as part of a new banking sector support scheme and charged with restructuring and “cleansing” the banking system. An international audit was carried out in early 1999 and the results published in July. Banks were categorised under three broad headings: viable institutions, which met the minimum capital adequacy requirement of 9% capital to risk-weighted assets; banks whose capital- adequacy ratio was between 0% and 9%, which were given a year to increase their capitalisation; and banks with negative capital, which were deemed not viable and passed into the hands of the AGD. Under the terms of the deposit insurance scheme the AGD must guarantee deposits which attracted interest of up to 3 percentage points above the market rate. Such liabilities were estimated at $2bn in October 1999, by which time over 70% of the banking system was under state control.

—but the financial sector The international audits and the launch of legal proceedings against bank remains fragile and illiquid employees who acted improperly has sent a positive signal to the market, but the banking system remains fragile and illiquid. Apart from the burden of bad debts, the sector is heavily exposed to government paper. The slowdown in growth since 1995 has been accompanied by a fall in the demand for credit. This has meant that deposit growth in the banking sector has been largely channelled into the state’s monetary stabilisation bonds. The announcement by the government in October that privately held domestic debt is to be included in public-sector debt restructuring negotiations (see Capital flows and foreign debt) will further inpair bank’s solvency.

Savings rates are low and The stockmarket remains small and illiquid. Little progress has been made with the stockmarket is the privatisation programme and the creation of private pension funds was underdeveloped rejected in a national referendum in November 1995 and any effort at social security reform continues to be firmly resisted. The bankrupt, inefficient and corrupt public social security system is regarded as one of the main obstacles to increasing internal savings rates and providing adequate social services. The 1998 National Assembly on constitutional reform (see Political background) bowed to union pressure and rejected proposals to allow private insurers an important role in the IESS, the state social security institute. Instead, the Assembly ruled that pensions, unemployment insurance and public healthcare should remain entirely under government control.

Government and Central Bank debt issues have traditionally accounted for around one-third of transactions in the stockmarket. An increase in private- sector activity, including share transactions in the mid 1990s was reversed as the economy deteriorated in the second half of the decade. Depressed prices led to a shift in trading away from shares towards short-term interest-bearing investments.

Other services

Galapagos dominates— Tourism is the fourth largest earner of foreign-exchange. Ecuador has the benefit of a range of natural attractions in a relatively small area—mountains, beaches, tropical rainforest and a vast range of flora and fauna. The Galapagos Islands are the principal attraction for foreign visitors, followed by Quito and the highlands, and the Oriente. Although coastal resorts such as Manta, Salinas and Esmeraldas are important tourist destinations for Ecuadorean tourists, the area lacks sufficient infrastructure to attract many tourists from abroad. Improved training and tighter control over quality, operating permits and tariffs are also required.

—but investment in the Most visitors are from the US and Colombia. International hotel chains mainland is rising are belatedly discovering Ecuador, and the Hilton, Sheraton, Marriott and Radisson groups are among those involved in own-building or in management agreements in Quito and Guayaquil. This will significantly increase luxury and business hotel capacity, and is likely to attract more international conference activity to Ecuador. Greater competition at the top end of the market should raise standards. Ecotourism, particularly on the Galapagos Islands and in the Amazon region in the Oriente, is another fast-growing area.

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The external sector

Trade in goods

Liberalisation leads to Since 1990, and with greater force since 1992, Ecuador has undergone a process rapid trade growth— of trade liberalisation. The dismantling of protection for domestic manufacturers led to rapid import growth, averaging 25.4% per year in 1993-95. The removal of constraints on exports and rapid world trade growth also led to a rapid expansion in export earnings (see Reference tables 16-17).

—but earnings are The export sector has undergone significant restructuring in the last 15 years. vulnerable to terms of On the one hand, the relative importance of individual exports has changed as trade shocks some diversification away from oil has been achieved. On the other, Ecuador’s terms of trade have moved in line with world commodity prices, deteriorating sharply in 1997-98 because of the fall in global commodity prices. This, combined with widespread flood damage to the agricultural sector and lowland transport infrastructure as a result of El Niño, and continued transport bottlenecks in the oil sector, prompted export volumes to contract and earnings to fall sharply in 1998, swinging Ecuador’s merchandise trade balance deeply into deficit, after ten years of comfortable surpluses.

Non-oil exports have Earnings from oil and derivatives have fallen from 52% of the total in 1990 to increased their share a mere 22% in 1998. The fall in international oil prices between 1997 and early 1999 combined with continued transport bottlenecks severely curbed earnings. Higher oil prices are expected to return oil earnings to around 30-33% of the total in 1999, the level at which it stabilised in 1994-96. Over the same period, the importance of bananas has soared from 17% of earnings in 1990 to 25% in 1997-98. Prawn exports expanded rapidly in the late 1980s. After booming in 1994, coffee production has been struck by a sharp fall in world prices. Cocoa producers are struggling to improve quality in order to recover the aroma classification withdrawn by the International Cocoa Organisation (ICCO) in 1994. Exports of cut flowers and canned fish have been important growth areas in recent years. Earnings from flowers rose from $14m in 1990 to $162m in 1998 while those of canned fish have risen from $31m to $254m over the same period (see Reference table 16).

Strong import growth— The pace of import growth has fluctuated with domestic demand as rapid GDP growth has alternated with the imposition of austerity measures. Thus, imports surged in 1991, fell back in 1992 and recovered in 1993-94. Despite the economic downturn, imports grew in 1995 owing to one-off purchases of arms for the conflict with Peru. Political uncertainty caused imports to fall in 1996, but there was a marked recovery in 1997-98 as firms were unable to postpone the replacement of equipment any further. In 1999 the deep economic contraction has caused imports to fall by up to 50% across all the main categories.

—particularly of consumer The rapid expansion of credit from 1992 (see Financial services) and the dis- goods mantling of tariffs within the Andean Community in 1994 (see below) contributed to a boom in consumer goods imports, the bill for which more

than doubled from $385m in 1992 to $809m in 1994 (cif basis). Consumer goods imports have continued to grow, reaching $1.2bn in 1998. Apart from in 1994, when a credit boom and relatively strong growth encouraged a sharp increase in imports of durables, most consumer goods imports are non- durables. This reflects a local preference for foreign, particularly US, food imports, as well as shocks to the domestic production chain, most recently from El Niño. Progressive (albeit sluggish) tariff liberalisation since 1996 also makes imports more competitive. In 1995-98 consumer goods accounted for on average 20% of total imports. Capital and intermediate goods for industry and transport generally account for another 65% of imports (see Reference table 17).

Trade liberalisation is In the past a generally high degree of protectionism for domestic industries has proceeding, with some been the norm in Ecuador. Some advances on trade liberalisation have been setbacks made since Ecuador joined the World Trade Organisation (WTO) in January 1996. It has complied with most of its WTO commitments to keep its tariff ceilings within the permitted limits, but has deferred full compliance with some of its obligations in accordance with the grace period which the WTO offers to developing countries. Regressive measures have, on occasion, been applied to raise revenue to compensate for fiscal laxity, most recently in 1997.

Import duties range from In line with the common external tariff (CET), which applies to members of 0% to 20% the Andean Community, import duties range from 0% to 20%, with the average around 10%. The exception is car imports from outside the Andean Community, which attract a 35% tariff designed to protect the local assembly industry. More than 100 agricultural products are subject to a price band system to protect local producers. This system, whereby import tariffs vary in inverse relation to international prices of the relevant commodities, is due to be phased out by 2001 under WTO rules.

Trade liberalisation

1990: Reform of the Tariff Law; elimination of import quotas, permits and subsidies; adoption of Andean tariff classifications.

1992: Reduction in the tariff ceiling from 290% to 27%, excluding vehicles; unification of exchange markets.

1994: Andean Pact common external tariff is introduced, with a 0% tariff for imports from Andean Pact countries and 5-20% for external imports, excluding vehicles; the Organic Customs Law is reformed, and independent international inspection agencies employed.

1995: Import and export registration procedures are transferred from Central Bank to private banks, and simplified through the creation of the documento único de importación (DUI, unique import document).

1996: Ecuador joins the World Trade Organisation (WTO).

Imports,1998 ($ m, cif) Consumer goods 1,171 Non-durable 714 Durable 457 Fuels & lubricants 326 Raw materials 2,205 For agriculture 273 For industry 1,736 For construction 196 Capital goods 1,874 For agriculture 56 For industry 1,163 Transport equipment 654 Other 1 Total 5,576 Source: Banco Central del Ecuador, Información Estadística Mensua.l

Trade with the US still The US remains by far Ecuador’s most important trading partner, although its dominates share of exports has declined from around 45% in the early 1990s to around 38% since 1994, primarily as a result of the process of regional integration in Latin America. Trade with the Andean Community has increased rapidly in recent years, but Ecuador’s deficit with the rest of the region is widening. When internal tariffs were removed in 1994 the share of imports from the region almost doubled, from 7.1% of Ecuador’s total in 1993 to 14.1%. (See Reference table 18 for historical data on main trading partners.)

Main trading partners, 1998 Exports fob to: % of total Imports cif from: % of total US 38.3 US 29.4 Colombia 6.5 Colombia 10.7 Chile 3.3 Japan 9.0 Italy 6.1 Brazil 3.6 Source: Banco Central del Ecuador, Información Estadística Mensual.

Invisibles and the current account

Foreign debt payments Ecuador has traditionally recorded invisibles deficits. From the late 1970s cause deficits onwards this was exacerbated by the accumulation of foreign debt and an increase in interest payments (see Capital flows and foreign debt). Since 1975 the deficit on invisibles has outweighed the merchandise trade surplus, producing a current-account deficit in every year except 1985 and 1996. The recession-induced surplus of 1999 primarily reflects the collapse of imports. Tourism is Ecuador’s fourth largest export and within the invisibles deficit there has generally been a small surplus on the travel balance in the last ten years. Unrequited transfers have risen since 1990, reaching $438m in 1997 (see Reference tables 19 and 20).

Capital flows and foreign debt

The foreign debt burden The boom in oil exploration in the early 1970s was accompanied by a rapid grows and arrears rise of foreign indebtedness as governments contracted foreign loans to finance accumulate— a state-led industrialisation programme. Total external debt rose from 51% of GDP in 1980 to an annual average of 104% of GDP in 1987-94. High international interest rates increased the debt-service burden from an average of 4% of GDP in 1980-81 to just over 6% in 1982-86. The fall in oil prices in 1982-86, combined with a drop in the level of medium- and long-term commercial capital flows, forced a narrowing in the current-account deficit and contributed to a marked slow down in growth, from 4.4% per year in 1980-81 to an annual average of 2% in 1982-86. Ecuador began accumulating modest payments arrears, which surged in 1987 as exports collapsed because of earthquake damage inflicted on the oil transport infrastructure. Flows of commercial bank loans fell sharply, forcing an increased reliance on official loans. But with arrears on interest and principal—on both commercial bank and Paris Club debt—continuing to accumulate every year between 1987 and 1994 and debt as a percentage of GDP rising rapidly, it was clear that Ecuador would be unable to sustain its debt-service commitments.

External debt, 1998 $ m % of total Public medium- & long-term debt 12,516 81.9 Private medium- & long-term debt 355 2.3 IMF 72 0.5 Short-term debt 2,339 15.3 Total debt stock 15,282 100 Source: EIU.

—leading to a major debt In May 1994 agreement was reached with commercial bank creditors on a restructuring in 1995— Brady plan, which was transacted in February 1995. A total of $7.6bn was restructured: principal of $4.47bn and interest arrears of $3.11bn. Principal was swapped for Brady discount and par bonds. Most of the unpaid interest was converted into past-due interest (PDI) bonds. The restructuring convinced the markets that Ecuador was creditworthy again, and in 1997-98 $1.4bn in commercial debt alone flowed into the country, including a $500m Eurobond issue in 1997.

Brady restructuring, 1995 Maturity Interest rate Discount (past-due principal at 45% discounta) 30 Libor+0.8125 Par (past-due principala)303% fixed PDI (past-due interest) 20 See noteb IE (Interest equalisation) 10 Libor+0.8125

a Collateralised by US Treasuries. b 3-3.75% in first six years; thereafter Libor +0.8125. Source: Banco Central del Ecuador.

—and a new debt crisis in As early as 1996, however, interest and principal arrears began to accumulate on 1999 involving Brady and existing obligations once more, mainly on Paris Club debt. Buoyant exports kept Eurobond defaults— the country’s debt-service ratio manageable at around 27% in 1996-97 but in 1998-99 a sluggish economy and a fall in export earnings saw the country’s external debt indicators deteriorate. After falling to 84% of GDP in 1995 thanks to the restructuring, debt service due rose to 36% of exports in 1998, while the stock soared to an estimated 113% of GDP in 1999. During this period the deterioration in public finances owing to economic stagnation and low oil revenue made it increasingly difficult for the country to service its foreign bonds. Coupon payments on Brady and Eurobonds were largely met at the expense of arrears to public-sector workers and suppliers in the first half of 1999. In September Ecuador became the first country to fall into official default on its Brady bonds by paying only $54m of the $94m in coupon payments that had fallen due in late August. A month later, it defaulted on a Eurobond coupon.

—triggering messy The defaults have triggered a protracted wrangle with bondholders, with some wrangles with foreign demanding immediate payment of the entire debt. As of early November 1999, creditors the government was still involved in parallel negotiations with bondholder representatives and the IMF in order to attempt to secure a stand-by agreement, which would set a policy framework and reassure creditors that the country is embarking on long-overdue structural reforms. The government’s challenge is to convince bondholders that this restructuring will be the last, and for that it needs to demonstrate that it is proceeding with reform. Furthermore, with most remaining private foreign credit lines to the country having closed after the default on Brady bond obligations, the country desperately needs both the funds that would be forthcoming from an IMF deal—expected to consist of $400m in balance-of-payments support and $1.2bn in multilateral development funding over 18 months—and the boost to confidence that could re-open some private credit lines. Only once an IMF deal is reached and progress is made on restructuring the debt with external creditors will Ecuador be in a position to renegotiate its debt to the Paris Club (for historical data on external public and private-sector debt, see Reference tables 21 and 22).

Relations with the IMF

Relations with the Fund have been erratic. A number of IMF stand-by facilities have been agreed since the early 1980s, most of which have been suspended owing to non- fulfilment of targets. Another stand-by facility was agreed in 1994 and this time targets were fulfilled. Negotiations on a new stand-by agreement took place in 1997, but failed soon after the president made it clear that he was unwilling to take the steps required to meet IMF targets. President Jamil Mahuad has sought to reach a deal with the IMF since he took office in August 1998. The main obstacle has been Congress’s refusal to approve sufficient fiscal reforms to produce adequately financed budgets. The banking crisis also slowed negotiations as the IMF imposed conditions about how the crisis should be tackled, in particular the conduct and implementation of international audits (see Financial services). The IMF also made it clear that an agreement is dependent in part on Ecuador demonstrating tangible progress on restructuring its debt with commercial creditors, reflecting the Fund’s increased emphasis since the 1998 Russian crisis on the importance of burden-sharing between private and official creditors.

Foreign investment Net foreign direct investment (FDI) averaged $90m per year in 1988 -1993. In liberalised January 1993 sweeping changes to the foreign investment code were announced. The lifting of virtually all restrictions, together with greater macroeconomic stability and the later success of the Brady Plan increased net FDI flows to an average of $554m per year in 1993-98. Nearly 80% of investment is in the oil sector. A new law requiring all new foreign investment to be registered with the Central Bank became effective from June 1998.

Key changes to investment legislation

June 1991: The foreign investment regime brought in to line with the rest of the Andean Community. Equal treatment for domestic and Andean Community investment; removal of “fade away” clauses which had required foreign-owned companies to accept majority national ownership; reduction of number of areas in which foreign investment restricted.

January 1993: New foreign investment code. The Ceiling of 49% foreign equity on financial sector and insurance holdings was removed, along with requirement of prior authorisation. Limits on profit and dividend remittances were removed. Investment need only be registered with the Central Bank for statistical purposes. Restrictions remained on investments in fishing, domestic air transport, media, defence and border areas.

September 1997: Congress repealed a law which imposed discriminatory restrictions on foreign companies in their dealings with their Ecuadorean agents.

April 1998: The National Assembly on constitutional reform scrapped remaining constitutional restrictions on foreign investment in strategic sectors and declared that foreign investment enjoys the same rights and treatment as national investment. Only requirement for foreign investors is that they register with the Central Bank.

Foreign reserves and the exchange rate

Foreign-currency reserves increased significantly under the Durán Ballén government, rising from $781m at the end of 1992 to a record level of $1.8bn at the end of 1994. This reflected the repatriation of capital by Ecuadorean citizens, increased FDI and buoyant exports. Reserves fell slightly in 1995, but remained around the $2bn mark throughout most of 1996-97 as a result of reasonable export performance and weak imports. The collapse of international oil prices in late 1997 and 1998, and the growing financial uncertainty affecting emerging markets following the Russian devaluation which fuelled increased pressure on the exchange rate, caused reserves to fall to $1.6bn in 1998. Reserves fell again in the first three months of 1999 as export earnings slumped and an acute exchange-rate crisis (see below) prompted heavy intervention in the currency markets. Reserves stabilised following the abandonment of the crawling peg system in March, although at just under $1.3bn at the end of September 1999 they remain at their lowest level since 1992. (For historical data on foreign reserves, see reference table 23).

Real exchange rate against major trading partners, 1998 (annual av, Aug 1992=100; increase indicates depreciation of sucre) US ($) 87.59 Japan (¥) 76.73 Germany (DM) 69.47 Colombia (Ps) 127.90 Chile (Ps) 97.89 Trade-weighted index of 18 countries 83.14 Source: Banco Central del Ecuador, Información Estadística Mensual.

Relative economic stability The exchange-rate system has undergone a series of changes in recent years. underpins a crawling-peg Until November 1992 there was a three-tier system of official, intervention and system free-market rates, and the Central Bank dealt with all trade-related foreign exchange. In September 1993 the weekly intervention rate was set at the previous week’s average free-market rate, and in January 1994 the official rate of Su390:$1 was abolished. Finally, at the end of 1994 a crawling-peg system was introduced, with a Su50 band either side of a central parity rate based on the average free-market rate of the previous week. For four years the crawling- peg mechanism proved effective in maintaining relative exchange-rate stability and minimising interest-rate volatility. The monetary authorities intervened to adjust the band when necessary to protect international reserves and contain inflationary expectations. Thus the bands were adjusted several times, including in October 1995, August 1996 and March 1997. In 1998 the sucre was devalued twice, first in March (by 7.4%) amid plunging oil prices, and again in September (by 14%) owing to increasing pressure in the foreign- exchange market following the devaluation of the Russian rouble. Confidence in the currency dwindled markedly in 1998 owing to political uncertainty, the collapse of export earnings and capital flight from many emerging markets in the wake of the Asian and Russian crises.

—until two years of intense Over 18 months of pressure on the currency climaxed in January-February currency pressure 1999 after the introduction of the 1% tax on financial transactions (see culminate in a free float Economic policy) and the devaluation of the Brazilian Real. Efforts to avoid the new 1% tax prompted a surge in demand for dollars as economic agents withdrew their funds from domestic banks. The devaluation of the Brazilian Real in January further increased the demand for dollars. By mid-February, amid a haemorrhage of foreign reserves and interbank interest rates of 50-125%, the authorities floated the sucre, abandoning the crawling-peg exchange-rate system which had been in operation for almost two decades. Since then the exchange-rate system has been based on the free flotation of the currency. However, the loss of confidence in the sucre has compounded pressure from diverse sectors within the country for the introduction of a currency board (as in Argentina) or full dollarisation (as in Panama). The Central Bank has carried out a technical evaluation of the options and concluded that such systems would only be viable once fundamental macroeconomic imbalances are corrected and the banking sector attains greater stability and efficiency, a process that is likely to take several years. (For historical data on exchange rates, see Reference table 24).

Appendices

Sources of information

National statistical sources Banco Central del Ecuador, Boletín Anuario (annual)

Banco Central del Ecuador, Boletín de Precios, Salarios y Empleo (monthly)

Banco Central del Ecuador, Información Estadística Mensual (monthly),

Corporación Ecuatoriana de Turismo, Boletín Estadística, (annual)

Instituto Nacional de Estadística y Censos (INEC), Encuesta Urbana de Empleo, Subempleo y Desempleo (biannual)

Instituto Nacional de Estadística y Censos (INEC), Encuesta de Superficie y Producción Agropecuaria (annual)

Ministerio de Obras Públicas, Estadísticas de Transporte en el Ecuador (annual)

International sources Energy Data Associates, 1 Regent Street, London SW1Y 4NR.

IMF, International Financial Statistics

World Bank, Global Development Finance

Select bibliography Alberto Acosta, Breve Historia Económica del Ecuador, Quito, 1995

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

Corporación de Estudios para el Desarrollo (Cordes), Carta Económica

Agustín Grijalva Jiménez (ed.), Datos Básicos de la Realidad Nacional, Quito, 1995

Oswaldo Hurtado, El Poder Político en el Ecuador, Quito, 1993

Multiplica, Gestión (monthly)

Multiplica, Informe Macroeconómico, Quito (monthly)

PMC, Ekos Economia, Quito (monthly)

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

Reference tables

Reference table 1 Population 1994 1995 1996 1997 1998 Total (m) 10.56 10.79 11.04 11.29 11.55 Growth rate (%) 2.3 2.3 2.3 2.3 2.3 Source: Derived from Instituto Nacional de Estadística y Censos (INEC); BCE, Boletín Anuario.

Reference table 2 Labour force (urban, % unless otherwise indicated) 1993 1994 1995 1996 1997 Male 60.3 60.8 60.5 60.5 60.9 Female 39.7 39.2 39.5 39.5 39.1 Unemployed 8.3 7.1 6.9 n/a 9.2 Underemployed 47.2 45.2 45.9 n/a 40.4 Economically active population (‘000) 2,892.0 2,904.0 3,104.0 3,223.0 3,373.8 Source: INEC, Encuesta Urbana de Empleo, Subempleo y Desempleo.

Reference table 3 Transport statistics

1996 1997 Total registered vehicles 541,361 561,864 By use Private 512,377 531,189 Hire 20,471 22,842 State 6,954 6,184 Municipal 1,559 1,649 By province Pichincha 182,090 186,530 Guayas 170,487 169,823 Other 188,784 205,511 Source: Instituto Nacional de Estadística.

Reference table 4 Non-financial public-sector finances (Su bn unless otherwise indicated) 1994 1995 1996 1997 1998 Petroleum receipts 2,619 3,392 5,002 5,058 4,932 Non-petroleum receipts 5,105 6,934 8,280 12,482 16,825 of which: VAT 1,233 1,584 2,010 3,104 4,491 income tax 552 878 1,086 1,596 1,912 import duties 622 761 776 1,672 3,200 Total revenue 8,884 11,737 14,789 18,774 21,856 Salaries 2,693 3,639 4,707 6,143 9,134 Goods & services 812 778 1,693 2,390 3,168 Interest payments 1,460 2,005 2,641 3,962 5,332 On external debt 1,292 1,707 2,092 2,992 4,048 On domestic debt 168 298 548 970 1,284 Capital expenditure 2,362 3,032 4,602 4,978 6,302 Total expenditure incl others 8,666 12,259 16,586 20,790 28,013 Budget balance 219 –522 –1,797 –2,016 –6,157 Ratios (% of GDP) Revenue 24.4 25.5 24.4 23.8 20.3 of which: petroleum revenue 7.2 7.4 8.2 6.4 4.6 Expenditure 23.8 26.6 27.3 26.3 26.1 of which: interest payments 4.0 4.4 4.3 5.0 5.0 Balance 0.6 –1.1 –3.0 –2.6 –5.7 Source: Banco Central del Ecuador, Información Estadística Mensual.

Reference table 5 Money supply (Su m unless otherwise indicated; end-period) 1994 1995 1996 1997 1998 Money (M1) incl others 4041.5 4151.2 5349.5 6955.9 9239.9 % change, year on year 32 3 29 30 33 Quasi-money 6,306 9,995 14,981 20,032 29,441 Money (M2) 10,348 14,147 20,331 26,988 38,681 % change, year on year 51.6 36.7 43.7 32.7 43.3 Source: IMF, International Financial Statistics.

Reference table 6 Interest rates (%; end period) 1994 1995 1996 1997 1998 Discount rate 44.88 59.41 46.38 37.46 61.84 Deposit rate 33.7 43.3 41.5 28.09 39.39 Lending rate 44 55.7 54.5 43.02 49.55

Note. Deposit rate: Average of free market rates for 30–89-day time deposits, and from 1992 weighted average of free market rates for 30–83-day time deposits. Lending rate. Source: IMF, International Financial Statistics.

Reference table 7 Gross domestic product (market prices) 1994 1995 1996 1997 1998 Total ($ bn) At current prices 16.6 17.9 19.0 19.8 19.7 Total (Su m) At current prices 36,478 46,005 60,727 79,040 107,421 At constant (1975) prices 210.1 215.1 219.3 226.7 227.6 % change, year on year 4.3 2.3 2.0 3.4 0.4 Per head (Su) At current prices 1,573 1,662 1,725 1,751 1,708 At constant (1975) prices 20 20 20 20 20 % change, year on year 2.0 0.1 –0.3 1.1 –1.8 Sources: Banco Central del Ecuador, Información Estadística Mensual; IMF, International Financial Statistics.

Reference table 8 Gross domestic product by expenditure (Su bn unless otherwise indicated; constant 1975 prices) 1994 1995 1996 1997 1998 Private consumption 135 138 141 144 147 % change 2.9 2.2 1.9 2.4 2.0 % of total 64.3 64.2 64.2 63.6 64.6 Government consumption 20 20 20 20 20 % change 0.0 1.9 –1.0 –0.3 0.2 % of total 9.5 9.5 9.2 8.9 8.9 Gross fixed investment 30 32 32 33 36 % change 4.5 5.3 1.8 4.0 6.3 % of total 14.3 14.7 14.7 14.8 15.6 Stockbuilding 1 2 –3 1 2 % change 655.3 143.0 –255.6 –139.7 116.0 % of total 2.0 2.0 2.0 2.0 2.0 Exports of goods & services 70 74 76 80 77 % change 8.7 5.0 3.6 4.3 –3.2 % of total 33.4 34.2 34.8 35.1 33.8 Imports of goods & services 46 50 47 52 54 % change 6.0 9.8 –5.9 8.8 5.5 % of total 21.8 23.4 21.6 22.8 23.9 Total 210 215 219 227 228 % change 4.3 2.3 2.0 3.4 0.4 % of total 100.0 100.0 100.0 100.0 100.0 Source: BCE, Información Estadística Mensual.

Reference table 9 Gross domestic product by sector (Su bn unless otherwise indicated; constant 1975 prices) 1994 1995 1996 1997 1998 Agriculture, forestry & fishing 35.9 37.0 38.3 39.9 39.3 % change 3.9 3.2 3.5 4.1 –1.4 % of total 17.9 18.1 18.3 18.5 18.2 Oil & mining 30.2 31.3 30.8 31.8 30.8 % change 10.6 3.8 –1.9 3.5 –3.3 % of total 15.1 15.3 14.7 14.8 14.2 Manufacturing 32.1 32.8 33.9 35.1 35.2 % change 4.4 2.2 3.3 3.5 0.4 % of total 16.0 16.0 16.2 16.3 16.3 Electricity, gas & water supply 3.1 3.0 3.0 3.1 3.2 % change 3.1 –3.7 2.8 2.4 2.1 % of total 1.5 1.4 1.5 1.4 1.5 Construction 5.3 5.2 5.4 5.5 5.8 % change 5.3 –1.4 2.5 2.8 6.0 % of total 2.6 2.5 2.6 2.6 2.7 Trade & tourism 31.0 31.7 33.1 34.1 34.5 % change 3.6 2.2 4.4 3.3 0.9 % of total 15.5 15.5 15.8 15.8 15.9 Transport & communications 18.7 19.3 19.9 20.7 21.0 % change 4.2 3.0 3.1 3.9 1.6 % of total 9.4 9.4 9.5 9.6 9.7 Financial & business services 16.1 16.3 16.7 17.0 17.6 % change 2.8 1.6 1.9 1.9 3.5 % of total 8.0 8.0 8.0 7.9 8.1 Government & personal services 28.0 28.3 28.4 28.8 29.1 % change 0.3 1.0 0.5 1.3 1.2 % of total 14.0 13.8 13.6 13.4 13.4 Source: BCE, Información Estadística Mensual.

Reference table 10 Prices and earnings (av) 1994 1995 1996 1997 1998 Consumer price index (1979=100) 10,986 13,522 16,790 21,937 29,845 % change 27.3 23.1 24.2 30.7 36.0 Producer price index (1979=100) n/a n/a n/a n/a 225.7 Minimum wage plus statutory benefits Nominal (Su per month) 243,972 354,729 483,681 609,257 769,424 Real (Sep 1994-Aug 1995=100) 87.3 103.6 113.6 109.6 101.7 Source: BCE, Información Estadística Mensual.

Reference table 11 Agricultural gross domestic product (Su bn; constant 1975 prices) 1993 1994 1995 1996 1997 Bananas, coffee & cocoa 4.8 5.1 5.4 5.6 6.2 Other crops 11.3 11.8 12.2 12.6 12.9 Livestock 10.6 10.9 11.1 11.4 11.6 Forestry 2.2 2.2 2.3 2.3 2.4 Fisheries 5.7 6.0 6.1 6.4 6.8 Total 34.6 35.9 37.0 38.3 39.9 Source: BCE directly & Boletín Anuario.

Reference table 12 Agricultural production (‘000 tonnes) 1993 1994 1995 1996 1997 Sugarcane 4,073 3,635 3,960 n/a n/a Bananas 4,422 5,086 5,403 5,423 5,750 African palm 947 1,082 1,000 n/a n/a Rice 1,240 1,420 1,291 1,398 1,472 Maize 487 498 614 n/a n/a Potatoes 428 531 473 n/a n/a Coffee 137 187 148 n/a n/a Soya 143 194 91 n/a n/a Cocoa 8381869091 Cotton n/a n/a n/a 16 14 Source: BCE, Boletín Anuario; INEC, Encuesta de Superficie y Producción Agropecuaria.

Reference table 13 Manufacturing gross domestic product (Su bn; constant 1975 prices) 1993 1994 1995 1996 1997 Food, drink & tobacco products 10.2 10.5 10.7 11.0 11.2 Fish and meat 1.9 2.0 2.1 2.1 2.2 Cereals & bread 1.7 1.7 1.7 1.8 1.9 Sugar 0.7 0.7 0.8 0.8 0.7 Other food 2.8 2.8 2.9 3.0 3.1 Drinks 2.7 2.8 2.8 2.9 3.0 Tobacco 0.4 0.4 0.4 0.4 0.4 Textiles, clothing & leather 6.4 6.6 6.7 6.9 7.3 Wood & products 1.6 1.7 1.7 1.7 1.8 Paper & printing 2.7 2.8 2.9 3.0 3.1 Chemicals & rubber 2.1 2.3 2.4 2.4 2.5 Basic minerals, metallic & non-metallic 3.8 4.1 4.2 4.4 4.6 Machinery, equipment & transport 2.0 2.1 2.2 2.3 2.4 Total incl others 30.7 32.1 32.8 33.9 35.1 Source: BCE, Boletín Anuario.

Reference table 14 Construction statistics (index of licences granted; 1972=100) 1993 1994 1995 1996 1997 Overall 236.4 269.1 217.8 184.7 157.0 By city Quito 242.3 215.1 118.4 141.1 76.2 Guayaquil 178.0 357.2 382.5 211.1 216.5 Cuenca 404.6 420.9 453.4 501.4 514.6 Ambato 482.8 396.4 301.2 313.5 365.2 Riobamba 24.5 18.4 13.8 25.2 16.3 Machala 299.0 266.1 149.4 105.0 371.8 Source: Instituto Nacional de Estadística, Encuesta Nacional de Edificaciones.

Reference table 15 Deposit money banks (Su bn; end-period) 1994 1995 1996 1997 1998 Assets Reserves 900 1,243 1,862 2,378 3,613 Foreign assets 691 1,092 1,978 3,838 6,048 Claims on central government 118 370 766 1,694 4,011 Claims on non-financial public enterprises 0 0 0 0 0 Claims on private sector 8,470 12,067 16,472 24,535 37,019 Claims on other banking institutions 16 552 1,243 105 141 Liabilities Demand deposits 2,218 2,239 2,977 3,911 4,975 Time, savings & foreign-currency deposits 5,902 9,610 14,536 19,530 29,031 Bonds 92 439 1,496 2,251 1,768 Foreign liabilities 972 1,936 2,524 4,950 9,286 Long-term foreign liabilities 332 382 563 878 845 Central government deposits 0 8 15 29 58 Credit from monetary authorities 58 396 483 24 2,795 Liabilities to other banking institutions 292 611 85 80 56 Capital accounts 2,182 3,726 5,262 7,794 11,228 Other (net) –1,853 –3,482 –5,621 –6,897 –9,212 Ratios Loan assets/reserves 9.6 10.5 9.9 11.1 11.4 Real growth rates (%) Total deposits 31.9 23.1 22.3 3.3 1.5 Sight deposits 9.5 –21.8 7.4 0.8 –16.4 Time, savings & foreign-currency deposits 42.4 40.0 25.7 3.8 5.1 Source: IMF, International Financial Statistics.

Reference table 16 Exports ($m; fob) 1994 1995 1996 1997 1998 Oil & derivatives 1,305 1,530 1,776 1,557 925 Banana & plantain 708 857 973 1,327 1,070 Shrimp 551 673 631 886 872 Coffee & derivatives 414 244 160 121 105 Cocoa & derivatives 102 133 164 132 47 Tuna & other fish 73 89 85 99 83 Non-traditionals 690 855 1,112 1,142 1,103 Canned fish 103 118 151 182 254 Flowers 59 84 105 131 162 Others 528 652 856 829 687 Total 3,843 4,381 4,900 5,264 4,205 Source: Banco Central del Ecuador, Información Estadística Mensua.

Reference table 17 Imports ($ m; cif) 1994 1995 1996 1997 1998 Consumer goods 810 823 857 1,040 1,171 Non-durable 345 442 502 612 714 Durable 465 382 355 428 457 Fuels & lubricants 104 241 162 437 326 Raw materials 1,318 1,709 1,759 1,996 2,205 For agriculture 131 196 244 280 273 For industry 1,086 1,388 1,351 1,536 1,736 For construction 101 125 164 181 196 Capital goods 1,390 1,378 1,153 1,481 1,874 For agriculture 35 46 37 48 56 For industry 651 752 738 969 1,163 Transport equipment 704 580 378 464 654 Total incl others 3,622 4,153 3,932 4,955 5,576 Source: Banco Central del Ecuador, Información Estadística Mensual.

Reference table 18 Main trading partners (% of total) 1994 1995 1996 1997 1998 Exports fob to: US 41.7 41.1 37.9 38.6 38.3 Colombia 5.9 5.9 6.2 6.8 6.5 Chile 4.4 4.6 4.5 4.5 3.3 Italy 4.1 4.0 4.0 5.2 6.1 Imports cif from: US 26.6 31.3 31.1 30.6 29.4 Colombia 8.1 9.5 10.6 10.3 10.7 Japan 14.1 7.9 5.2 5.9 9.0 Brazil 6.2 4.5 4.0 2.9 3.6 Sources: Banco Central del Ecuador, Información Estadística Mensua.

Reference table 19 Balance of payments, IMF series ($ m) 1993 1994 1995 1996 1997 Goods: exports fob 3,066 3,843 4,411 4,900 5,264 Goods: imports fob –2,474 –3,282 –4,057 –3,680 –4,666 Trade balance 592 561 354 1,220 598 Services: credit 646 738 846 850 736 Services: debit –789 –901 –964 –941 –1,121 Income: credit 34 59 90 81 106 Income: debit –1,291 –1,283 –1,292 –1,389 –1,453 Current transfers: credit 145 164 250 358 438 Current transfers: debit –15 –19 –19 –68 –47 Current-account balance –678 –681 –735 111 –743 Inward direct investment 469 531 470 447 577 Direct investment abroad 0 0 0 0 0 Inward portfolio investment 0 0 0 0 0 Outward portfolio investment 0 0 0 0 0 Other investment assets –29 –9 –16 –5 –21 Other investment liabilities –317 –630 1,098 671 634 Financial-account balance –346 –639 1,082 666 613 Capital account nie credit 0 43 0 7 138 Capital account nie debit 0 0 0 0 0 Capital account nie balance 0 43 0 7 138 Net errors & omissions –69 –20 –1,336 –1,315 –542 Overall balance –624 –766 –519 –84 43 Financing (– indicates inflow) Movement of reserves –512 –464 216 –231 –234 Use of IMF credit & loans 0 142 0 0 0 Source: IMF, International Financial Statistics.

Reference table 20 Balance of payments, national estimates ($ m) 1994 1995 1996 1997 1998 Exports fob 3,843 4,411 4,900 5,264 4,203 Imports fob –3,282 –4,057 –3,680 –4,666 –5,198 Trade balance 561 354 1,220 598 –995 Services credit 797 936 931 928 890 Services debit –2,184 –2,256 –2,330 –2,631 –2,840 Unilateral transfers 145 231 290 391 776 Current-account balance –681 –735 111 –714 –2,169 Direct investment 531 470 491 695 831 External debt 471 1,565 971 858 1,275 Arrears 114 –110 66 –13 40 Other capital 23 –1,345 –1,366 –565 –373 Financing 0 0 0 0 0 Reserves (– indicates increase) –458 155 –274 –262 395 Source: BCE, Información Estadística Mensual.

Reference table 21 External debt, World Bank series ($ m unless otherwise indicated; debt stocks as at year-end) 1993 1994 1995 1996 1997 Public medium- & long-term 9,975 10,552 12,068 12,444 12,376 Private medium- & long-term 241 224 440 320 340 Total medium- & long-term debt 10,216 10,777 12,508 12,764 12,716 Official creditors 4,570 4,934 5,281 5,149 4,905 Bilateral 2,199 2,354 2,261 2,206 2,033 Multilateral 2,371 2,580 3,019 2,944 2,872 Private creditors 5,646 5,843 7,227 7,614 7,811 Short-term debt 3,864 4,100 1,312 1,586 2,069 of which: interest arrears 2,330 2,349 13 77 84 Use of IMF credit 71 198 174 145 133 Total external debt 14,150 15,075 13,994 14,495 14,918 Principal repayments 517 509 750 646 1,069 Interest payments 404 492 667 675 823 of which: short-term debt 95 88 81 92 101 Total debt service 921 1,000 1,417 1,321 1,891 Ratios (%) Total external debt/GDP 103.0 98.4 83.9 82.1 86.5 Debt-service ratio, paida 24.6 21.6 26.5 22.7 31.0

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.

Reference table 22 External debt, national estimates ($ m; end-period) 1994 1995 1996 1997 1998 Initial public debt stock 9,830 10,440 12,351 12,531 12,495 Total disbursements 902 7,268 1,097 1,351 1,180 Effective disbursements 688 1,064 1,013 1,263 981 Refinanced disbursements 6 3,615 0 0 109 Capitalisation of interest payments 207 2,590 84 88 90 Total debt-service paid 1,202 9,527 1,227 1,874 1,452 Total repayments 554 5,483 574 1,113 740 Effective repayments 505 687 566 975 616 Refinanced & forgiven repayments 49 4,797 7 138 124 Total interest payments 648 4,043 653 761 712 Effective interest payments 429 576 561 670 617 Refinanced & forgiven interest payments 219 3,468 92 90 94 Exchange-rate adjustments 262 126 –343 –273 127 Final public debt stocks 10,440 12,351 12,531 12,495 13,062 Interest arrears 3,317 28 97 84 179 Final public debt stocks incl interest arrears 13,758 12,379 12,628 12,579 13,241 Ratio Total public debt /GDP 81.5 68.8 65.9 63.7 67.2 continued

1994 1995 1996 1997 1998 Initial private debt stocks 603 828 1,555 1,958 2,520 Total disbursements 1,240 3,190 3,869 4,430 6,483 Effective disbursements 1,091 2,469 3,363 4,203 6,118 Refinanced disbursements 149 721 506 226 365 Total debt service paid 1,144 2,649 3,661 4,069 6,125 Total repayments 1,015 2,465 3,466 3,868 5,843 Effective repayments 866 1,743 2,960 3,641 5,478 Refinanced & forgiven repayments 149 721 506 226 365 Total interest paymentsa 129 184 196 202 282 Exchange-rate adjustments 1 1 –1 0 –1 Final private debt stock 828 1,555 1,958 2,520 3,159 Interest arrears 3 – – – – Final private debt stocks incl interest arrears 832 1,555 1,958 2,520 3,159 Total final debt incl interest arrears 14,589 13,934 14,586 15,099 16,400 a Made up of effective interest payments only. Source: BCE, Información Estadística Mensual.

Reference table 23 Foreign reserves ($ m unless otherwise indicated; end-period) 1994 1995 1996 1997 1998 Total international reserves excl gold 1,844.2 1,627.6 1,858.5 2,092.8 1,619.7 Golda 119.46 119.67 116.81 116.81 116.81 Total reserves incl gold 1,964 1,747 1,975 2,210 1,737 Memorandum items Goldb 166 167 167 167 167 Gold (m fine troy oz) 0 0 0 0 0

a Valued at 75% of the fourth-quarter London price. b National valuation. Source: IMF, International Financial Statistics.

Reference table 24 Exchange rates (Su per unit of currency unless otherwise indicated; annual averages) 1994 1995 1996 1997 1998 $ 2,196.73 2,564.49 3,189.47 3,998.27 5,446.57 DM 1,353.67 1,789.43 2,119.57 2,305.74 3,095.24 Colombian peso 2.66 2.81 3.08 3.50 3.82 Chilean peso 5.23 6.46 7.74 9.54 11.83 Peruvian nuevo sol 1,000.98 1,138.51 1,297.10 1,498.41 1,849.43 ¥ 21.49 27.26 29.32 33.05 41.61 Sources: BCE, Información Estadística Mensual; IMF, International Financial Statistics.

Editor: Justine Thody All queries: Tel: (44.20) 730 1007 Fax: (44.20) 730 102