Recovery opens door to investors
HAVING STABILIZED THE ECONOMY THROUGH DOLLARIZATION AND OVERCOME THE DEVASTATING EFFECTS OF EL NIÑO, ECUADOR'S MAIN OBJECTIVES ARE NOW MODERNIZATION AND PRIVATIZATION. TELECOMMUNICATIONS, ELECTRICITY, WATER, AND TRANSPORT INFRASTRUCTURE, AS WELL AS MINING, ARE POTENTIALLY PROFITABLE SECTORS RIPE FOR DEVELOPMENT

ECUADOR is hoping its high-earning industries (agriculture, textiles and oil) and a new IMF agreement consolidate the country’s recovery.

Ecuador, with over 13 million inhabitants, is situated on the equator in the northwest corner of South America, and its 109,500 square miles cover Pacific coast lowlands, Andean valleys and mountains, and Amazonian rain forests. Its main exports–cacao, shrimps, natural flowers and bananas (of which Ecuador is the world’s number one exporter)–were consolidated and superceded economically in 1972 by the discovery of oil, which helped finance expanded public services, state enterprises, infrastructure and import-substitution manufacturing. However, the country’s reliance on the export of primary products such as oil, bananas, and shrimp, left it highly vulnerable to fluctuations in world market prices.

Indeed, by the 1980s, the promising economy had stagnated due to falling oil prices and the effect of ‘El Niño’ on agricultural production. By the late 1990s, oil had dropped to its lowest price in a decade, banana exports had fallen from $1.3 billion to $900 million and shrimp from $800 to $250 million a year. In 1999 the economy virtually collapsed as hyperinflation and non-fulfillment of long delayed tax, judicial, public pension and educational reforms all took their toll. The country defaulted on its Brady and Eurobond payments and deposits were frozen at a cost of $2 billion dollars. This prompted the removal of President Jamil Mahuad in an indigenous military coup in January 2000, succeeded by the then Vice-president Gustavo Noboa.

President Noboa’s most important reform was the dollarization of the economy, with a fixed exchange rate of 25,000 Ecuadorian sucres to the dollar. In April 2000, the Noboa government signed an agreement with the International Monetary Fund for a one year stand-by agreement and in September 2000, it concluded negotiations with the Paris Club of official creditors for a one-year rescheduling of $880 million in debt and arrears. As a result, the country’s economy was stabilized and the GDP rose to 5.4% in 2001, compared with 2.3% the previous year and a drop of 7.3% in 1999.

The Noboa administration now aims at reforming public finances and sustaining long-term dollarization, ideally by acquiring foreign investment to generate fiscal surpluses, build up a macroeconomic stabilization fund and make progressive reductions to the public external debt problem. With confidence partially restored in the economy, there have been positive signs of international assistance. The IMF handed out $95 million to Ecuador in December 2001 and a new agreement is anticipated for 2002. It is also hoped that the U.S. Congress will re-extend the recently-expired Andean Trade Preferences Act (ATPA), which granted preferential duty-free access to the U.S. market for certain products and helped to increase output, generate jobs and create a more diverse export base.
Ecuador’s largest foreign currency earners after oil (which represents 20% of the GDP) are remittances from emigrants mainly based in the U.S. and from tourism. Agriculture and textiles were also high earners, while inflation stood at 22.4% in 2001 compared with 91% the previous year. The consumer price index in turn rose 0.67% in December 2001 as opposed to 2.5% in 2000 and the situation is now considered “normal inflationary process.” Though unemployment officially decreased to 10.5%, poverty is an increasing problem. Only 40% of homes have running water and sewage systems.