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Ecuador RECENT ECONOMIC PERFORMANCE
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Figure 12. Rise in Consumer Prices, 1980-89
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Figure 13. Real Gross Domestic Product (GDP) Growth Rate, 1980-89
In the early 1980s, the economy faltered as the international
price of petroleum began a gradual decline and the country lost
some foreign markets for its traditional agricultural products.
Dramatic climatic changes caused by El Niño during 1982-83 produced
coastal floods, torrential rains, and severe drought, which were
highly damaging to crops and to the transportation and marketing
infrastructures
(see Return to Democratic Rule, 1979-84
, ch. 1;
Climate
, ch. 2). The economy also began to feel the pinch of the
country's growing external debt, which amounted to US$8.4 billion
in 1984. Debt servicing in that year absorbed approximately 60
percent of the country's export earnings. Foreign sources of credit
began to dry up as early as 1982, leaving the national government
and hundreds of state-owned companies short of capital.
Inflationary pressures mounted during the early 1980s; consumer
prices, which rose 14 percent in 1980, increased by 25 percent in
1982 and by 53 percent in 1983
(see
fig. 12).
In March 1983, the government, with an eye toward rescheduling
the external debt, introduced several austerity measures, including
a second devaluation of the sucre in two years, this time a 21-
percent devaluation of the sucre (S/, for the value of the
sucre-- see Glossary),
a 16-percent rise in the commercial interest rate,
and a deceleration of government spending. The government's
stabilization program, which included new exchange controls and the
reduction of fuel and export subsidies, was unpopular domestically,
but it enabled Ecuador to successfully negotiate a new debt
repayment schedule with the International Monetary Fund
(IMF--see Glossary),
which also proved willing to grant Ecuador an additional
US$107 million in financial assistance. The government, after
several months of negotiation, also concluded multiyear
rescheduling agreements with foreign private banks in December 1984
and with the Paris Club (a financial consortium of Western banks
and governments) in April 1985. By successfully refinancing nearly
all of the public-sector debt, the government narrowly avoided
defaulting on payments, and, for the period 1985-89, the external
debt-service ratio was reduced from 60 percent of export earnings
to a manageable 30 percent. From 1985 until the beginning of 1987,
Ecuador paid only the interest on its external debt
(see External Debt
, this ch.).
The Ecuadorian economy recovered during 1984, partly as a
result of temporary stability in the international price of crude
oil and partly because of a rebound in the agricultural sector. By
late 1984, the balance-of-payments current account, which had
reflected a US$58 million deficit in 1983, had a US$19 million
credit, and the trade surplus reached US$1 billion. The real GDP
growth rate was 4 percent, nearly a 7-percent increase over 1983.
These improvements in the economy, combined with wage restraints
and a tight national government budget, made it possible to reduce
the inflation rate in 1984 to 25 percent; for the next two years,
the inflation rate was contained at about 24 percent.
In 1985 Ecuador withdrew for one year from the Organization of
Petroleum Exporting Countries (OPEC) in order to free itself from
that organization's export quotas and thus increase oil export
revenue. In 1984 petroleum had accounted for about 70 percent of
all commodity exports and about 50 percent of the central
government's revenues. In 1985 Ecuador earned over US$1.8 billion
in revenue from petroleum exports, two-thirds of Ecuador's export
revenue that year. But a sharp decline in international oil prices
in 1986 resulted in a US$1.1-billion drop in petroleum export
revenue. The balance-of-payments current account, which registered
a surplus of US$149 million in 1985, showed a US$613-million
deficit for 1986. Foreign-exchange reserves declined to US$145
million by mid-1986, and real GDP growth for 1986 came to only 1.7
percent, compared with 3.8 percent in 1985
(see
fig. 13). To meet
the economic crisis, in January 1987 the government suspended debt
repayments to all private lending institutions and imposed a 25-
percent surcharge on many imported items.
Febres Cordero had entered office promising prosperity and
neoliberal economic reforms featuring governmental efficiency, a
free-enterprise approach in managing the economy, and a free-market
exchange system that would promote economic deregulation. To
fulfill these promises, Febres Cordero removed government price
controls, devalued the currency, and eliminated most import quotas.
In addition, he reduced import tariffs on industrial raw materials
by one-half and invited new foreign investment into the country.
Although GDP growth had bounced back from a negative 2.8 percent in
1983 to a healthy 4.0 percent in 1984 and 3.8 percent in 1985, the
sharp drop in petroleum export revenue in 1986 and the resulting
increase in the fiscal deficit, 81 percent of which was financed
through foreign borrowing, brought the nation to the brink of an
economic crisis. In 1986 GDP growth fell to 1.7 percent,
unemployment went up, and per capita income fell to its lowest
level since 1978.
In March 1987, an earthquake destroyed about forty kilometers
of the Trans-Ecuadorian Pipeline and its pumping stations, causing
a nearly six-month suspension in crude petroleum production and the
loss of an additional US$700 million in export revenue. Meanwhile,
revenue from other exports--cocoa, coffee, and shrimp--did not
increase and failed to compensate for the decline in oil income.
The Ecuadorian government acquired a
World Bank (see Glossary) loan
of US$80 million to help finance the reconstruction of the damaged
pipeline, but repairs cost the government a total of US$150
million. GDP fell to -5.2 percent in 1987, inflation inched up to
32.5 percent, and the trade deficit stood at US$33 million. The
government responded to its financial emergency by raising domestic
gasoline prices by 80 percent and bus and taxi fares by 14 percent.
To help make up for the oil revenue shortfall, a consortium of
international banks loaned Ecuador an additional US$220 million,
bringing public-sector external debt at the end of 1987 to about
US$9.6 billion, one of the world's highest on a per-capita basis.
(Ecuador's GDP for 1987 was US$10.6 billion.)
During Febres Cordero's last two years in office, his economic
team concentrated on implementing monetary reforms, renegotiating
the external debt, and encouraging foreign investment. Its efforts
were only partially successful. The government failed to hold wages
down, and, despite efforts to curtail government spending, public-
sector expenditures increased dramatically in 1987 and in the first
half of 1988. Ecuador's halting experiment with neoliberal economic
measures unofficially came to a close on March 3, 1988, when Febres
Cordero announced the end of the free-market foreign-exchange
system
(see Monetary and Exchange Rate Policies
, this ch.). Two
months later, on May 8, 1988, Febres Cordero's longtime rival,
Rodrigo Borja of the Social Democratic party, the center-left
Democratic Left (Izquierda Democrática--ID), was elected president
with 46 percent of the vote
(see Political Parties
, ch. 4).
In contrast to Febres Cordero, Borja advocated an expanded
state role in the national economy. During the campaign, he
promised to promote industrialization and nontraditional exports
and stressed the importance of agrarian reform. Borja, however,
inherited a rapidly worsening economy as he assumed office on
August 10, 1988; within a month he announced a national economic
austerity program that included a sharp devaluation of the sucre,
tax increases, new import restrictions, a reduction in public-
sector spending, a 100-percent increase in fuel prices, and a 40-
percent boost in electricity rates for private households. Borja
also opened new negotiations with foreign creditors to whom Ecuador
was in arrears for almost US$1 billion. The president, however,
refused to lift the suspension of foreign debt payments, imposed by
Febres Cordero in 1988, until April 1989
(see External Sector
, this
ch.).
Borja's austerity policies and the resulting climb in the
unemployment rate to 13 percent by the end of 1988, the highest in
ten years, spawned strikes by labor unions, public employees, and
students. The government, however, continued its anti-inflationary
program. Despite government cost-cutting efforts, inflation reached
86 percent in 1988, the highest in the country's history. On the
positive side of the economic ledger, GDP expanded by 8 percent in
1988, as petroleum exports returned to pre-earthquake levels.
In an attempt to blunt criticism of his policies, Borja
introduced a new package of economic liberalization measures in
1989, including a relaxation of import restrictions, a further
devaluation of the official exchange rate to prod exports, and a
loosening of banking controls to stimulate the manufacturing
sector. About 62 percent of the import items that had been barred
since mid-1988 were to be allowed into the country beginning in
1990.
Data as of 1989
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