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Text File | 1994-05-02 | 15KB | 304 lines

<text> <title> Ecuador: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Ecuador </hdr> <body> 1. General Policy Framework The Ecuadorian economy grew 2.3 percent in 1990, below the population growth rate but an improvement over 1989 when growth was 0.6 percent. Growth in 1991 is expected to be around 2.5 percent. The balance of payments performance in 1990 was strong as net international reserves increased three-fold to $603 million. In 1991, reserves have fluctuated around $550 million (three months of imports). In 1990 both growth and reserves were boosted by higher oil revenues because of the Gulf crisis. On the down side, inflation has remained at around 50 percent as the effort to bring it down lost momentum. In addition, Ecuador has accumulated over $1.6 billion of arrears to commercial banks since early 1987. Government spending patterns have been uneven in the past three years, with periods of fiscal austerity alternating with increased spending. In recent years the government has run small public sector deficits or surpluses, but the uneven spending cycles have contributed to inflation. Deficits are usually financed by foreign borrowing, limited sales of government securities, and accumulation of arrears. The Central Bank has not financed the government deficit in recent years, although it has indirectly financed some parastatals through loans from national development banks. Monetary creation on the part of the Central Bank has been a major source of inflation. The Central Bank has incurred significant losses in recent years because of a wide variety of subsidies that it offers, and has printed money to cover the losses. For 1991, the money supply increased at the rate of 50 to 60 percent, higher than inflation. Since the Central Bank cannot control its own sources of monetary growth, it has pressured private sector banks, with limited success, to limit private sector credit expansion. 2. Exchange Rate Policies Ecuador has two functioning exchange rates, the intervention and free-market rates. Public sector transactions, as well as private sector imports and exports, are conducted at the intervention rate, which is set by the Government. Exporters are required to surrender their foreign exchange earnings to the Central Bank for sucres. Foreign exchange is allocated to importers on a weekly basis; usually there is sufficient foreign exchange available so importers do not need to resort to the free market. Residual transactions are conducted in the free market. Foreign currency is readily available in the free market, and there are no restrictions on the movement of foreign currencies into or out of Ecuador. There is a weekly mini-devaluation of the intervention rate against the U.S. dollar, with an occasional larger devaluation (usually three to six percent) to make up for any slippage. This policy has, for the most part, kept the sucre competitive, although there has been some real appreciation against the dollar in the last two years. The spread between the intervention and free rates in late 1991 has been less than five percent. At times in the past year the spread has widened to 10-15 percent. This policy has kept the sucre relatively competitive. 3. Structural Policies Since taking office the Borja government has made a number of structural reforms, introducing several changes each year. The most current reforms are particularly notable because many observers did not expect the Borja government to undertake many initiatives in the second half of its term. Even with these reforms, domestic and foreign investment probably will be limited in the upcoming year, since more needs to be done to liberalize the economy and encourage investment. In addition, political uncertainties created by the upcoming 1992 presidential elections most likely will inhibit investment. The most notable reforms have been in the area of trade. Maximum tariffs and trade dispersion have been reduced and most non-tariff surcharges have been eliminated. Ecuador agreed to enter Andean free trade in July 1992, six months behind the other members of the Andean Pact. Other major reforms include a new tax law, an in-bond industry law, liberalized foreign investment regulations, and a revised mining law. A bill that will make Ecuador's highly restrictive labor code somewhat more flexible is now before Congress. The administration has drafted a number of other important reforms and plans to submit them to Congress before the end of 1991. The draft laws would simplify procedures for exporters, reduce loss-making demands on the Central Bank, unify the public sector budget and provide the basis for a more modern capital market. 4. Debt Management Policies Ecuador and the International Monetary Fund negotiated a stand-by agreement in December 1991 to cover the following year. The previous stand-by expired in February 1991. Ecuador rescheduled 1991 and 1992 interest and amortization payments to the Paris Club in early 1992. Ecuador's previous rescheduling agreement with the Paris Club expired in 1990. Ecuador stopped servicing its debt to the commercial banks in 1987, and began paying about 30 percent of interest due in June 1989. It began discussions with commerical bank creditors in August 1989, but they have been unable to reach agreement. At the end of 1990, total outstanding external debt was 11.8 billion dollars, with accumulated interest arrears accounting for 1.6 billion dollars. Over half the debt, 6.8 billion dollars, and almost all the arrears, are owed to commercial banks. 5. Significant Barriers to U.S. Exports For 1991, tariffs for most products ranged from two to 35 percent. Some agricultural inputs enter duty free, while automobiles carry a 50 percent tariff, although the importation of cars and light trucks is prohibited. Tariffs should be reduced in 1992, as part of either Ecuador's three year program to reduce tariffs or the Andean Pact's efforts to establish a common external tariff for the Pact members. Ecuador's tariff schedule is based on the GATT's Harmonized System of Nomenclature, although Ecuador is not a member of the GATT. Most non-tariff fees on imports have been eliminated; there are plans to eliminate the remaining fees, which total three percent. All imports must have a prior import license, which is issued by the Central Bank. Licenses are usually made available for all goods, although obtaining them can be a bureaucratic hassle. All foreign exchange transactions for imports and exports must take place through the Central Bank at the intervention rate. Foreign ownership of banking is limited to 49 percent, although three banks with 100 percent foreign ownership (including one U.S.-owned bank) are allowed to operate. The operations of these banks are somewhat more restricted than those of local banks. Foreign airlines (including one U.S. cargo and two U.S. passenger carriers) operate in Ecuador, but the government limits their operations to protect the state-owned airline. In 1991 Ecuador's foreign investment regime was liberalized. Foreigners may invest in most sectors without prior governmental approval. Foreign investment is prohibited in the media and limited to 49 percent of bank shares. Foreign investment in public services must obtain prior governmental approval. Cargo preference laws require use of Ecuadorian flag vessels where available. Ecuador has lagged in implementing Andean Pact decisions favoring freer competition in air and maritime services. The government has been slow, and sometimes reluctant to resolve investment disputes. Government procurement practices do not usually discriminate against U.S. or other foreign suppliers. However, bidding for government contracts can be cumbersome and time-consuming. Many bidders ob