PLAN FOR PRUDENCE AND GROWTH PRODUCES RESULTS
Priority goes to fiscal objectives and management of foreign debt

Improved economic management has brought Ecuador low inflation and a rising growth rate

Ecuador remains committed to dollarization and to the fiscal prudence required for the country to remain economically stable and achieve sustained growth.

Mauricio Yépez Najas, President of the Board of the Central Bank says, “The principal objective of our economic program since 2000 has been to stabilize the economy and achieve new macroeconomic balances.
“We have had considerable success in accomplishing this in the short term. In two years, we have reached pre-crisis levels. Now we are maintaining stability and seeking growth.”

It is remarkable progress since 1999, when the aftermath of El Nino and a depressed oil market precipitated an economic crisis in the country. The banking sector collapsed, Ecuador defaulted on its external loans, and the 70% depreciation of the local currency, the sucre, forced the government of the day to replace it with the US dollar.

As a result, the inflation rate was dramatically reduced and there was increased GDP growth. Poor economic management threatened to undermine the benefits, however, and the present government inherited a budget gap and massive foreign debt.

Recently, the Central Bank raised its forecast for economic growth in 2004 from 4% to 5.7%, on the basis of rising oil production. The annual inflation rate—which before the switch to the dollar in 2000 exceeded 96%—is forecast at 3%-4% for this year.

Guillermo Lasso Mendoza, Executive President of Banco de Guayaquil, who helped draw up the government’s economic plan, stresses the importance of the commitment to “a solid, disciplined, ordered and austere” fiscal policy. He, too, predicts stability and strong growth for 2004.

Mauricio Pozo Crespo, Minister of Economy and Finance, confirms that the combination of dollarization and government action are paying off. “The results are clear. The low inflation rate is not only the result of dollarization, but also of better economic management that allows a higher level of stability. In my opinion, dollarization has guaranteed its permanence.”

“The government’s commitment to fiscal discipline and structural reform under President Gutiérrez has won the country the respect of the international community,” observes the Minister. “The big reforms are in progress. Ecuador is an open economy and before too long we will have a more active international presence that will generate greater confidence in the country.”

The impressive fiscal primary surplus that Ecuador has achieved needs to be maintained at a high level in 2004 and beyond, while a substantial amount of the revenues from extra oil exports are being used to reduce public debt. Over the last decade, servicing foreign debt has swallowed up between 45% and 55% of the national budget. According to Mr. Yépez at the Central Bank, the ratio of foreign debt to gross domestic product (GDP) has more than halved from its 2000 crisis level of 120%.

A key element of Ecuador’s US$205 million IMF standby loan was a pledge to concession government-owned oil fields and the management of the state-run telecommunication and electricity companies to private operators.The government will hold on to a 30% stake in the oil fields, as well as receiving royalties.

Mauricio Pozo emphasizes the need for foreign investment, particularly in the oil sector. “The government’s policy is to open the oil sector to private investment with the aim of doubling oil production. Around 380,000 barrels are being produced daily, and there is the potential to raise this to 780,000. This implies an investment level of US$6.5 billion over eight years.”

Foreign investment in Ecuador surged by 189% in the first eight months of 2003 as compared to 2002, according to government figures; most of it flowing into the oil sector.