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CIAO DATE: 04/03
Ecuador Alert: Thunder in the Andes: Ecuador's Political and Economic Crises
Scott MacDonald *
Hemisphere Focus: 1998-2000
Series VIII, Issue 9
May 10, 2000
Overview
Ecuador remains one of Latin America's hot spots, with an economy still in crisis and a weak civilian government seeking to implement critically needed austerity measures. Public support for the government's push to dollarize and reform the economy is lacking, especially as austerity measures are hitting the lower sectors of the population hard. Unfortunately, the Andean country is likely to have more political turmoil ahead. A weaker central government in Ecuador also means a reduced police effort against drug trafficking, gun running and money laundering, all of which affect the neighboring governments of Colombia and Peru, both of which have their own political dramas to contend with.
Glimmers of Hope...
Despite the grim nature of the economic situation in Ecuador, not all is lost. On April 1, the country began the process of adopting the U.S. dollar as its currency. Later that month, the administration of President Gustavo Noboa signed a 12-month stand-by with the International Monetary Fund [IMF], which provides about U.S.$304 million, and clears the way for U.S.$2 billion in further loans from the World Bank, the Inter-American Development Bank, and the Andean Development Corp. In return, the Ecuadorian government will implement economic policies that seek to stabilize the economy, "address priority social needs, restore the banking system to good health, lay the basis for a sustained recovery in output and employment, and put inflation on a downward trend." 1
The legal foundation for the Noboa administration's economic reforms is the Ley Fundamental para la Transformación Economica del Ecuador (the economic transformation law). Approved by Congress on March 1, 2000, the new law provides a framework for the official dollarization of the economy. It also paves the way for a more flexible labor market, financial sector reform, and measures to attract new private foreign and domestic investment. The bottom line for the government is to send a message to Ecuadorians that measures are finally being taken (hopefully on a sustained basis) to rectify some of the past mismanagement, and to relay to the international community that the new government is acting in good faith to restore relations. Higher oil prices are also likely to help Ecuador's economy.
...Yet Daunting Challenges
The challenges ahead, however, are daunting. Two years of economic contraction have left the economy at a low point. In 1999 alone, real GDP fell by close to eight percent, hit by the cumulative effect of the El Nino phenomenon (1997-99), a sharp drop in oil prices, and a turbulent international financial situation. These external financial shocks were compounded by policy weaknesses and ongoing tensions between the president and the Congress. Unemployment stands at around 16 percent, inflation remains above 80 percent, and the national currency, the sucre, depreciated by almost 200 percent in 1999.
Public sector finances have not recovered from earlier mismanagement. In 1998, the combined public sector deficit as a percent of GDP was 5.9 percent, followed by another massive deficit of 7.2 percent in 1999. Equally daunting, the total public sector debt rose sharply from 64 percent of GDP in 1997 to 118 percent of GDP in 1999. This rise was caused by weaknesses in revenue collection that led to substantial borrowing, the issue of public sector bonds in support of the failing banking system, and the negative effects of recession and the massive depreciation of the sucre.
Forced to contend with a ballooning of public expenditures, the government opted to "temporarily" interrupt debt service payments on Brady bonds and Eurobonds in August 1999. It was hoped that there could be an "orderly resolution" of negotiations with external private creditors, which would allow for a more sustainable repayment structure. This did not happen. By September and October 1999, Ecuador had defaulted on U.S.$1.9 billion in Brady and Eurobonds. Indeed, Ecuador became the first county ever to default on its Brady bonds. The defaults will keep Ecuador out of international capital markets for a long time, and complicate its ability to lighten its U.S.$13 billion foreign debt load, probably the heaviest per-capita in Latin America.
By May 2000, Ecuador's economy still remains transfixed by still severe problems. No growth is expected for 2000, the banking system is still being restructured, and relations with external private creditors needed to restructure U.S.$6.5 billion in bonds, have not yet been established. Negotiations might be resumed in may, but could be overturned if the Noboa administration encounters substantial resistance to its reform efforts. The situation is further complicated by a lack of consensus on necessary measures to improve fiscal performance and to resolve serious problems in the banking sector.
A Fractious Political Life
All of this points to one of the most serious problems facing Ecuador: its fractious political life and the related inability of the national elite to maintain any lasting unity of purpose. Noboa came to power as a result of a coup, sparked by considerable discontent with the economic programs of his predecessor, President Jamil Mahuad. While blame can be directed toward President Mahuad for his slowness in acting in a forceful way to deal with the nation's economic crisis, Congress, with its many political parties, also deserves part of the blame. Under the Ecuadorian Constitution, Congress has the right to impeach Cabinet members. This has been done repeatedly, especially in going after economic ministers seeking to implement unpopular, but usually badly needed, policies. The actual coup itself was due to the anti-austerity demonstrations and near-armed rebellion by the Ecuadorian Confederation of Indigenous Nationalities (CONAIE), acting together with a military completely disenchanted with inept civilian politicians. For Ecuador to move from its current economic crisis into a sustainable recovery, its political elites will have to develop a greater sense of responsibility, as well as consensus as to where they wish to lead their country.
The lack of consensus in Ecuadorian politics was most recently evident in the government's negotiations with CONAIE. Although the Noboa government is keenly aware of the movement's power, talks concerning economic policies fell apart in late April. The talks ended because the Indian movement accused the government of reneging on an earlier agreement on social services. CONAIE's leadership also claimed that the government has done nothing to improve their lot in the three months it has been in office. Considering the tight fiscal situation the Noboa administration faces, demands for greater social spending put the government between a rock (CONAIE) and a hard place (the IMF).
The IMF, recognizing the problems of consensus-building in Ecuador, was clear about what it expects from the country. As acting managing director Stanley Fischer commented: "The loan program is very demanding and successful implementation will require firm resolve on the part of the authorities and the support of the Congress and the public at large." The IMF position must be juxtaposed with the following numbers. At March's end, the price of a minimum basket of goods for a family of five was calculated by the government to be U.S.$92. The minimum monthly income for a family the same size was U.S.$79. Additionally, an estimated 47 percent of Ecuadorians live below world poverty levels. Dollarization and austerity measures (as agreed to with the IMF) clearly are hitting the poor hard. Consequently, it should come as no surprise that the Indians and other social groups have been, and plan more demonstrating against the IMF program. The sad fact is that while the IMF program spells short-term pain, it will bring benefits in the long term—if it is successfully implemented and not derailed by political and social discontent.
No one benefits from an Ecuador in crisis. Considering that a large part of U.S. policy in Latin America is the support of democratic governments, Ecuador remains a hotspot on the map. The January 2000 coup launched by General Carlos Mendoza with the support of CONAIE was the first in the region since Lino Oviedo's failed attempt in Paraguay in 1996. Although the U.S. response was rapid and the Junta of National Salvation was quickly dismantled and Noboa installed, it is clear that the foundation of democratic institutions in Ecuador remains unstable.
Scott B. MacDonald is the director of research at Aladdin Capital Holdings, a hedge fund based in Stamford, Connecticut. Prior to that position, he worked at as the senior economist at KWR international, director of sovereign research at Donaldson, Lukfin & Jenrette and Credit Suisse First Boston. He has considerable experience in working on Latin American issues and his last book (co-authored with CSIS's Georges Fauriol) was Fast Forward: Latin America on the Brink of the 21st Century [Transaction Publishers, 1999.] Back.
Note 1: IMF, "Memorandum of Economic Policies of the Government of Ecuador for 2000." April 2000, p.1. Back
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