Ecuador; imports are liberalized, but foreign exchange shortage still limits import growth

Business America, Oct 28, 1985

Ecuador's 1984 economic performance was impressive. Real gross domestic product grew 4.1 percent, and real per capita GDP grew 1.1 percent. Oil production increased almost 10 percent to reach an average of 260,040 barrels per day (bpd), of which an average of 162,553 bpd were exported. The government achieved overall public sector equilibrium, which reduced inflationary pressures. The inflation rate fell to 25.1 percent from over 52 percent in 1983.

President Leon Febres Cordero, who took office on Aug. 10, 1984, has taken many steps designed to reorient the economy towards the free market. Foreign investment is being encouraged, as evidenced by the November 1984 signing of an agreement with the U.S. Overseas Private Investment Corporation. The June 1985 changes in the government's interpretation and implementation of Andean Pact Decision 24 also should improve significantly Ecuador's investment climate. Price controls and subsidies are being dismantled. A new class of negotiated interest rate certificates of deposit was created in March 1985. In August, the official and Central Bank intervention exchange rates were unified. Finally, a new tariff schedule which would reduce the degree of protection enjoyed by domestic industry is being drafted.

The outlook for the remainder of 1985 is good. The government appears able to meet the targets contained in its current IMF standby agreement. Rescheduling agreements reached in December 1984 and April 1985 cover the bulk of Ecuador's debts to private banks and Paris Club official creditors. Interest rates have fallen thus far in 1985, further reducing the debt service burden. Increases in the volume of oil produced and exported should be sufficient to offset approximately the impact of lower per barrel prices. Non-oil exports are performing well and could be higher than projected. Question marks remain, however, regarding the government's ability to attain two goals: 2.5 percent real GDP growth and the reduction of the inflation rate to 20 percent.

The United States continues to be Ecuador's most important trading partner. According to preliminary Central Bank data, Ecuador exported over $1.6 billion (f.o.b.) worth of merchandise to the United States in 1984. Most of those exports were crude oil. Ecuador imported $528 million (c.i.f.) worth of merchandise from the United States in 1984. The bilateral trade surplus, $1.12 billion, grew 47.7 percent from its 1983 level. Sixty-three percent of Ecuador's total exports were sold to the United States. Thirty-one percent of Ecuador's total imports originated in the United States. An additional 15 percent of total imports came from subsidiaries of U.S. firms operating in third countries.

The government steadily lifted import restrictions during 1984. The number of goods on the prohibited import list has been sharply reduced. In addition, the government is developing a new tariff schedule which is expected to lower both nominal tariff rates and the degree of effective protection against imports. However, foreign exchange availability will continue to constrain imports.

Overinvoicing of imports and underinvoicing of exports are significant problems. In October 1984, the government contracted with Societe Generale de Survellance (SGS) for technical services designed to eliminate those practices. SGS verifies that import and export shipments conform to stated specifications and that prices are consistent with prevailing market conditions. Then it issues a certificate of conformity, with which the transaction can be concluded. Exporters have complained that SGS causes undue delays in shipments to Ecuador, and that SGS's price standards are unrealistic.

Electric Power Equipment: Ecuador's plans give priority to developing its vast hydroelectric potential in order to free up the nation's petroleum for export. INECEL, the state organization responsible for power generation and distribution, is planning a number of projects in the hydroelectric field. They include a $30 million feasibility study on the Coca-Codo Sinclair project, a mobile substation (30 MW), radio communication equipment, and a study for the National Energy Control Center. Ecuador also seeks small-scale hydroelectric projects and solar heating, especially in the rural areas. Aging gas and diesel generators in generating plants must be replaced if growing power requirments are to be met. Electronic distribution equipment also offers some interesting prospects for U.S. companies.

Chief competition is from Japan, West Germany, and Great Britain. Through 1986, this sector may grow at a 5 percent annual rate. In order to improve participation in this expanding market, American companies should form consortia to bid against major foreign competitors and provide imaginative and generous financial terms.

Best prospects within this category include substation equipment, transformers, switchboard apparatus, and distribution-transmission cables and hardware.