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U.S. DEPARTMENT OF STATE
ECUADOR: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                             ECUADOR

                     Key Economic Indicators
    (Millions of current U.S. dollars unless otherwise noted)


                                    1992      1993      1994 1/

Income, Production and Employment:

Real GDP (1985 factor cost)       10,694    10,908    11,279  
Real GDP Growth (pct.)               3.6       2.0       3.4
GDP (at current prices)           12,233    14,311    16,590  
By Sector:
  Agriculture/Fishing              1,554     1,733     2,010
  Petroleum/Mining                 1,537     1,534     1,780  
  Manufacturing                    2,697     3,112     3,610  
  Electricity/Gas/Water               14        40        40  
  Construction                       556       699       810  
  Transport/Communications           949     1,277     1,480  
  Commerce/Hotels                  2,627     2,894     3,350  
  Finance/Business Services          568       718       830  
  Government/Other Services        1,132     1,531     1,780  
  Sales Tax/Other                    599       775       900  
Net Exports of Goods & Services    (110)     (490)     (890)
Real Per Capita GDP (1985 USD)       996       993     1,005
Labor Force (000s/estimated)       3,455     3,503     3,590
Open Urban Unemployment (pct.)       8.9       9.4       N/A

Money and Prices:  (percentage)

Money Supply (M2 growth)            55.5      54.0      67.0
Base Interest Rate 2/               47.4      33.8      34.0
Consumer Price Inflation            60.2      31.0      25.0
Exchange Rate (Sucres/USD) 3/      1,587     1,918     2,200  

Balance of Payments:

Merchandise Exports (FOB)          3,008     2,904     2,850
  Exports to U.S.                  1,408     1,327     1,311
Merchandise Imports (CIF)          2,430     2,562     2,820
  Imports from U.S.                  813       824       902
Aid from U.S. (fiscal year)         32.1      23.7      16.9
Aid from Other Countries              88       106       113
External Public Debt              12,122    12,806    13,248 4/
Debt Service Payments 4/           1,532     1,299        - 
Foreign Exchange Reserves            782     1,254     1,583 5/
Merchandise Trade Balance            960       578       310


N/A--Not available.

1/ 1994 estimates are based on data available in October 1994.
GDP sector figures are based on sector shares of 1993 GDP.
2/ Average annual interest rate for 90-day bank deposits.
3/ Average annual free market exchange rate.
4/ 1994 debt stock, excluding interest on interest, as of June
30.  Debt service includes public and private scheduled 
payments, including arrears, but not refinanced payments.
5/ Reserves as of September 30, 1994.



1.  General Policy Framework

    The Ecuadorian economy is based on petroleum production,
along with exports of agricultural commodities (chiefly
bananas) and seafood (particularly shrimp).  Industry is
largely oriented to servicing the domestic market, but is
becoming more export-oriented.  During the oil boom of the
1970's, the Ecuadorian government borrowed heavily from abroad,
increased subsidies to consumers and producers, and expanded
the state's role in economic production.  In the 1980's, such
policies became less financially sustainable, leading to
chronic macroeconomic instability.  The resulting fiscal
deficits were financed by accumulation of arrears to suppliers
and foreign banks, along with monetary emissions by the Central
Bank.  Nevertheless, a functioning democracy and partial reform
measures kept Ecuador's economic problems within manageable
limits.  In 1992 the electorate turned away social democratic
and populist presidential candidates to choose a conservative
advocate of economic liberalization.  President Sixto Duran
Ballen took office in August 1992 promising to stabilize the
economy, modernize the state, and expand the role of the free
market.  While the macroeconomic program has been successful,
the fundamental structural reforms required to improve the
investment climate and prospects for long-term growth has
proven more difficult to achieve.  

    Two rounds of economic stabilization measures in 1992 and
1994, including large fuel and public utility price hikes, all
but eliminated the public sector budget deficit, reduced
chronic inflation, slowed the depreciation of the currency, and
built up Ecuador's foreign currency reserves.  The 1992 budget
reform law should help unify the central government budget,
curtail the earmarking of revenues for unrelated expenditures,
and give the Ministry of Finance greater control over spending
by public agencies.  The elimination of the Central Bank's role
in subsidizing credit earlier in 1992 has also helped curb the
deficit.  Since February 1994, the government has set domestic
gasoline prices according to world market factors, thereby
stabilizing an important source of government revenue. 
Finally, the tax reform of December 1993 and the March 1994
customs law, if fully implemented, should increase the
government's non-oil revenues.

    After failing to close an agreement with the IMF in
mid-1993, the government concluded a two-year stand-by
arrangement in March 1994 and has applied strict fiscal
discipline to date.  Deferral of capital projects has helped
keep the 1994 consolidated public sector deficit to below 0.5
percent of GDP.  Government revenue from oil exports and
domestic sales of fuel will account for about 7.5 percent of
GDP in 1994, while sales and income taxes will only contribute
6.2 percent of GDP.  Public sector expenditures (including the
state enterprises, but excluding the military's capital budget
funded by a direct allocation of oil revenues) will account for
about 26 percent of GDP in 1994.  Debt service is the largest
area of government spending, followed by education and 
defense.  For 1995, the government plans to increase real
spending on debt service, road building, public health, and the
military, and cut spending on housing, welfare, agriculture,
and general administration.

    As a result of the stabilization program and weaker demand
for Ecuadorian exports, economic growth slowed to 2 percent in
1993, down from 3.6 percent in 1992.  Greater oil and banana
production volumes in 1994 may result in GDP growth of over 3
percent in 1994.  The government hopes that reform measures
will finally produce a general economic recovery and 4 percent
growth in 1995.  Gross domestic product for 1994 should reach
about $16.6 billion, producing a GDP per capita of
$1,479.  In 1993, Ecuador ran a $578 million merchandise trade
surplus and a current account deficit of $360 million due to a
services deficit of $1,068 million.  Ecuador's trade surplus
will fall further to around $300 million in 1994, with oil and
banana prices remaining below the levels of previous years.

    After experiencing general price rises of 60 percent in
1992 and 31 percent in 1993, Ecuador's inflation rate is
slowing to about 25 percent for 1994.  The government hopes to
reduce inflation to 15 percent in 1995 and single digits in
1996.  Driven by capital inflows, the money supply (M2 or bank
liquidity) increased by 54 percent in 1993 and as of the end of
September 1994 was up 70 percent over the previous 12 months. 
M2 has risen to 21 percent of GDP.  Since late 1992 the Central
Bank has tried to smooth out fluctuations in liquidity through
weekly bond auctions and interventions in the secondary
market.  The government has attempted to compensate for the
inflationary effect of the foreign exchange influx by
increasing its sucre deposits at the Central Bank.  In July
1994, the Central Bank abandoned the use of reserve
requirements as a monetary policy tool when it unified the
requirement for checking and savings deposits, then lowered it
to 10 percent.  From late 1992 to early 1994, free market sucre
interest rates swung sharply in response to alternating periods
of declining inflationary expectations and renewed uncertainty
over the direction of government economic policy.  Declining
liquidity produced a slower climb in rates from April to July
1994 to peak at 41 percent for 90-day CD's.  During the second
half of 1994, 90-day CD rates eased to about 35 percent.  The
spread between savings and lending rates has narrowed from an
average of 11 points in 1993 to 8 points for 1994.


2.  Exchange Rate Policy

    In September 1992, the government devalued the currency by
35 percent, set an intervention rate of 2,000 sucres to the
dollar and embarked on a controlled float.  Since December 1992
exporters have no longer had to surrender their foreign
exchange earnings to the Central Bank.  The intervention rate
was abandoned in September 1993.  Foreign currency is readily
available on the free market, trading at about 2,275 sucres to
the dollar in October 1994, a 12 percent nominal depreciation
since the beginning of the year.  There are no restrictions on
the movement of foreign currencies into or out of Ecuador.  A
partially-controlled exchange rate structure remains in effect
for the public sector.  The state oil company and other public
entities currently receive about 11 percent less for dollars 
earned from exports than the free market rate for buying
dollars.  The spread, which the government plans to eliminate,
serves to finance the Central Bank and force savings by the
public sector enterprises.  

    A high interest rate differential between Ecuador and the
United States has attracted net capital inflows of around $700
million since late 1992, slowing the nominal depreciation of
the sucre.  Relative exchange rate stability contributed to a
real inflation-adjusted appreciation of the sucre of 16.7
percent in 1993, a pattern that has continued in 1994.  The
overvalued currency and earlier trade liberalization measures
have made imports more competitive and served as a partial
anchor against inflation, but Ecuadorian exporters are
increasingly caught between rising sucre costs and stagnant
sucre earnings.  The Central Bank has intervened in the
exchange market on occasion to keep the currency from
appreciating by selling sucres, leading to an increase in
foreign reserves, but creating upward pressure on the money
supply.  By the end of September 1994, foreign exchange
reserves had risen to $1.58 billion, enough to cover imports
for about 6 months.  During 1995, increased inflows of
multilateral development resources should be offset by renewed
debt service payments.


3.  Structural Policies

    The Duran Ballen administration has had only partial
success with its structural reform program designed to promote
investment and economic growth.  In the administration's first
year, progress was made on budget reform and promoting the
development of capital markets.  The government's staffing
level, particularly for contractors, was significantly
reduced.  Many unnecessary and market-distorting regulations
were eliminated.  With a few exceptions for pharmaceuticals and
some foodstuffs, all prices are now set by the free market. 
During the second year, the state development banks began
selling their equity shares in commercial enterprises to the
private sector, although there have been no sales of shares
owned by the military.  The government hopes to move forward
during its final two years with the partial privatization of
some of the major state enterprises, while continuing the
effort to implement earlier government modernization
legislation and combat corruption.

    The version of the state modernization law finally passed
by Congress in late 1993 allows private sector participation in
"strategic sectors" of the economy, including petroleum,
electricity, and telecommunications, but only on a concession
basis.  Legislation to promote private sector involvement in
telephone service and electricity generation may be enacted in
1995.  Meanwhile, the government is proceeding with the sale of
Ecuatoriana, the bankrupt state airline.  Since April 1994, new
leaders at the National Modernization Council (CONAM) have
given direction and purpose to the government's structural
reform program.  In addition to the plans for the major state
enterprises, CONAM is developing concession programs for public
works, the civil registry, airports, and ports and customs
administration.  Postal and railroad services will be left more
to the private sector.  Efforts will also be made to modernize
higher education and the social security system's troubled
pension and health systems.  The Ministry of Education is
introducing a modern curriculum in the public schools designed
to emphasize reasoning over memorization.  

    The May 1993 capital markets law provided a mechanism for
privatizing state enterprises by establishing the legal basis
for turning the Quito and Guayaquil stock exchanges into true
equity markets.  During the first year of operations under the
new law, monthly trading volume of equity shares grew from
practically nothing to $53 million in July 1994.  The markets
should expand further in the wake of social security pension
reform, privatizations of state firms, and greater private
sector interest in the markets' capital-raising potential. 
Meanwhile, Congress enacted a new financial institutions law in
May 1994 that substantially deregulates the financial sector,
while providing greater safeguards against bank failures.

    Investment liberalization measures in 1991 and 1993
provided foreign investors with full national treatment and
eliminating prior authorization requirements for investment in
most industries, including finance and the media.  Specific
restrictions, most applicable to Ecuadorian as well as foreign
investors, remain for petroleum, mining, electricity,
telecommunications, and fishing investments.  A bilateral
investment treaty that provides free transfers and a binding
arbitration dispute settlement procedure was signed with the
United States in August 1993 and ratified by Ecuador's Congress
in September 1994.  The capital markets law equalized income
tax rates on foreign and domestic companies at 25 percent.  A
value-added tax of 10 percent applies to sales of imports of
goods and services in the formal sector.  Utilizing the more
investor-friendly procedures of the November 1993 hydrocarbons
law, the goverment generated considerable foreign interest in
the 1994 seventh petroleum exploration licensing round and a
project to construct and manage a second oil pipeline across
the Andes.  In July 1994, Congress approved an agrarian
development law that will improve the security of agricultural
land tenure for both peasants and agrobusiness.  


4.  Debt Management Policies

    At the end of the first half of 1994, Ecuador's external
debt, including past-due interest, exceeded $13.3 billion. 
Over half of the debt, about $4.5 billion in principal and $2.8
billion in interest arrears, was owed to foreign commercial
banks and secondary market investors in bank paper.
Total debt service owed in 1993 amounted to 36 percent of goods
and services exports and 9 percent of GDP.  Ecuador stopped
paying debt service to the commercial banks in 1987, resumed
paying 30 percent of interest due in June 1989, then halted
partial interest payments in September 1992.  Settlement of the
debt issue has been a major priority for the Duran Ballen
administration.  Resolution of the debt problem should improve
Ecuador's creditworthiness and attractiveness to investors.

    In May 1994, Ecuador and its commercial creditors agreed on
a comprehensive restructuring of its external commercial bank
debt.  Under the agreement, creditors can exchange existing
instruments for new bonds carrying a 45 percent discount or for
par bonds with fixed interest rates varying from 3 to 5
percent.  Given the mix of instruments chosen by the creditors
under the agreement signed in October 1994, Ecuador received a
net reduction of 26 percent in principal owed, while 57 percent
of the remaining debt stock of $3.32 billion will carry a fixed
interest rate of no more than 5 percent.  The government will
have to spend about $540 million to purchase collateral for
debt principal and interest.  Multilateral bank financing, made
possible by the 1994 agreement with the IMF, will help Ecuador
meet the upfront costs of the debt settlement.  Service on the
commercial debt should average some $275 million over the next
6 years and rise thereafter unless the government takes steps
to retire some of its debt stock.  

    In June 1994 Ecuador reached an agreement with the Paris
Club to reschedule $304 million in official bilateral debt
service on pre-1983 obligations that fell due in 1993 and
1994.  Ecuador is currently negotiating a bilateral
rescheduling agreement with the United States.  The Ecuadorian
government is also negotiating a major structural adjustment
loan with the World Bank.


5.  Significant Barriers to U.S. Exports

    In the early 1990's, the Borja administration initiated a
major trade liberalization program, reducing tariffs and tariff
dispersion, eliminating most non-tariff surcharges, and
enacting an in-bond processing industry (maquila) law.  As part
of the Andean Pact integration effort, the Duran Ballen
administration concluded bilateral free trade agreements with
its Andean Pact partners Colombia, Bolivia, Peru, and
Venezuela.  Ecuador applied to join GATT in September 1992 and
is currently engaged in negotiations with GATT contracting
parties over the terms of its accession to both GATT and the
WTO.  As part of its accession, Ecuador will commit to ensure
its trade regime is GATT-consistent.

    Ecuador's tariff schedule is based on the GATT's Harmonized
System of Nomenclature.  In 1991, the Borja administration
overhauled a highly protectionist tariff system, reducing
duties and fees for most imports to the 5 to 20 percent range. 
Ecuador is in the process of establishing a common external
tariff system with other members of the Andean Pact.  In
September 1993, Ecuador reached an agreement with Colombia and
Venezuela to introduce a common tariff of 35 percent for cars
and light trucks.  

    Customs procedures can be difficult, and have occasionally
been used to discriminate against U.S. products.  The
government is implementing a new customs reform law to reduce
corruption and improve efficiency in the customs service,
thereby eliminating a major constraint on trade.  Sanitary
requirements for imported foods, as well as some other
consumption goods have had the effect of blocking the entry of
some imports from the United States.  The government is phasing
out its policy of setting minimum prices for assessing customs
duties on textiles and some other imports.  Import bans are in
effect for used clothing, cars, and tires.  Price bands have
resulted in high effective tariffs for a variety of
agricultural products.

    All importers must obtain a prior import license from the
Central Bank.  Licenses are usually made available for all
goods, although importers sometime encounter bureaucratic
delays.  A 1976 law prevents U.S. and other foreign suppliers
from terminating existing exclusive distributorship
arrangements without paying compensation.  Foreigners may
invest in most sectors, other than public services, without
prior government approval.  There are no controls or limits on
transfers of profits or capital and foreign exchange is readily
available.  

    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 object to the requirement for a
bank-issued guarantee to ensure execution of the contract.


6.  Export Subsidies Policies

    Ecuador does not have any export subsidy programs.


7.  Protection of U.S. Intellectual Property

    Ecuador's protection of patent and trademark rights is
based on Andean Pact Decisions 344 and 345, while copyrights
are covered by Decision 351.  The new decisions provide 20-year
patent terms (except for some pharmaceuticals), protection for
plant varieties.  Ecuador's implementing regulations provide
pipeline protection for patents, and control of parallel
imports.  

    In a major breakthrough, Ecuador and the U.S. signed a
bilateral Intellectual Property Rights Agreement in October
1993 that guarantees full protection for copyrights,
trademarks, patents, satellite signals, computer software,
integrated circuit layout designs, and trade secrets.  While
the government implemented some provisions by executive order
and legislation, the Ecuadorian Congress has not yet ratified
the agreement; nor has the government introduced legislation to
harmonize local law with the agreement's requirements.  Ecuador
is committed to adopting legislation implementing the
Trade-Related Intellectual Property (TRIPS) Agreement of the
Uruguay Round, as part of its GATT/WTO accession.

    Enforcement of intellectual property rights remains a
problem for Ecuador.  Copyright infringement occurs and there
is some local trade in pirated audio and video recordings, as
well as computer software.  Local registration of unauthorized
copies of well-known trademarks is a problem since the
government lacks the resources to monitor and control such
registrations.  Some local pharmaceutical companies produce or
import patented drugs without licenses.


8.  Worker Rights

    a.  Right of Association

    Under the Ecuadorian constitution and labor code, most 
workers in the private and parastatal sectors enjoy the right
to form trade unions.  The revised labor code of November 1991
raised the number of workers required for an establishment to
be unionized to 30.  Less than 10 percent of the labor force,
mostly skilled workers in parastatal or medium to large sized
industries, is organized.  Except for public servants and
workers in some parastatals, workers by law have the right to
strike.  Sitdown strikes are allowed, but restrictions on
solidarity strikes were imposed in 1991.  Ecuador does not have
a high level of labor unrest.  Most strike activity involves
public sector employees.

    b.  Right to Organize and Bargain Collectively

    Private employers with more than 30 workers belonging to a
union are required to engage in collective bargaining when
requested by the union.  The labor code prohibits
discrimination against unions and requires that employers
provide space for union activities.  The labor code provides
for resolution of conflicts through a tripartite arbitration
and conciliation board process.  Employers are not permitted to
dismiss permanent workers without the express permission of the
Ministry of Labor.  The in-bond (maquila) law permits the
hiring of temporary workers in maquila industries, effectively
limiting unionization in the sector.  Despite reforms in 1991,
employers consider the labor code to be highly unfavorable to
their interests and a disincentive to hiring union members and
to employment in general.

    c.  Prohibition of Forced or Compulsory Labor

    Compulsory labor is prohibited by both the constitution and
the labor code and is not practiced.

    d.  Minimum Age of Employment of Children

    Persons less than 14 years old are prohibited by law from
working except in special circumstances such as
apprenticeships.  Those between the ages of 14 and 18 are
required to have the permission of their parent or guardian to
work.  In practice, many rural children begin working as farm
laborers at about 10 years of age, while poor urban children
under age 14 often work for their families in the informal
sector.

    e.  Acceptable Conditions of Work

    The labor code provides for a 40 hour work week, a 15 day
annual vacation, a minimum wage, and other variable employer-
provided benefits such as uniforms and training opportunities. 
The minimum wage is set by the Ministry of Labor every six
months and can be adjusted by Congress.  Mandated bonuses bring
total monthly compensation to about $123.  The Ministry of
Labor also sets specific minimum wages by job and industry so
that the vast majority of organized workers in state industries
and large private enterprises earn substantially more than the
general minimum wage.  The Duran Ballen administration has
proposed a simplification of the complex wage and bonus
system.  The labor code also provides for general protection of
workers' health and safety on the job.  Occupational health and
safety is not a major problem in the formal sector.  There are 
no enforced safety rules in the agriculture sector and informal
mining.

    f.  Worker Rights in Sectors with U.S. Investment

    The economic sectors with U.S. investment include
petroleum, chemicals and related products, and food and related
products.  U.S. investors in these sectors are primarily large,
multinational companies which abide by the generous Ecuadorian
labor code.  In 1994 there were no strikes or serious labor
problems in any U.S. subsidiary.  U.S. companies are subject to
the same rules and regulations on labor and employment
practices governing basic worker rights as Ecuadorian companies.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                             355
Total Manufacturing                                    97
  Food & Kindred Products                    33
  Chemicals and Allied Products              -3
  Metals, Primary & Fabricated               18
  Machinery, except Electrical                0
  Electric & Electronic Equipment           (1)
  Transportation Equipment                  (1)
  Other Manufacturing                        31
Wholesale Trade                                        38
Banking                                               (1)
Finance/Insurance/Real Estate                           0
Services                                                0
Other Industries                                      (1)
TOTAL ALL INDUSTRIES                                  511      

(1) Suppressed to avoid disclosing data of individual companies

Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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