Ecuador WT/TPR/S/148 
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 I. ECONOMIC ENVIRONMENT 
(1) RECENT ECONOMIC DEVELOPMENTS  
(i) Structure and employment 
1. Ecuador has a population of about 13 million.  In 2004, annual per capita income stood at 
US$2,325. 
2. The petroleum sector is one of the mainstays of Ecuador's economy.  In 2003, crude oil and 
derivatives accounted for approximately 10 per cent of GDP, 43 per cent of exports, and practically 
one quarter of fiscal revenue.  The share of the agricultural sector in total production amounted to 6.7 
per cent, while the share of the manufacturing sector stood at approximately 11 per cent (Table I.1).  
The services sector accounted for approximately one half of GDP.1 
Table I.1 
Structure of GDP and employment, 1998-2004 
 1998 1999 2000 2001a2002a 2003a 2004b
I.  Gross Domestic Product (GDP)   
 Current GDP (US$ million) 23,255 16,674 15,934 21,024 24,311 27,201 30,282
 Real GDP (2000 US$ million) 16,541 15,499 15,934 16,749 17,321 17,781 18,957
 Real GDP. rate of growth (per cent) 2.1 -6.3 2.8 5.1 3.4 2.7 6.6
 Per capita GDP (US$) 1,946 1,376 1,296 1,685 1,920 2,118 2,325
Breakdown by sector, percentage of current GDP   
  Agriculture. livestock. hunting and forestry 9.9 9.9 9.2 7.8 7.9 6.7 6.4
  Fishing 3.9 1.8 1.4 1.2 1.1 1.0 0.9
  Mining and quarrying 4.2 12.4 21.5 12.3 11.7 13.1 16.8
  Manufacturing (excluding oil refining) 12.5 14.1 13.6 11.7 11.0 10.7 10.2
  Oil refining -0.6 -4.5 -8.5 -3.5 -4.0 -4.3 -5.0
  Electricity and water 1.4 1.4 1.1 1.7 1.8 1.6 1.7
  Construction 5.5 5.4 7.1 7.1 7.9 7.6 7.3
  Trade 14.3 14.2 15.6 13.8 13.9 13.6 12.9
  Hotel and restaurants 1.5 1.1 1.2 2.0 2.0 2.0 1.9
  Transport, storage and communication 9.9 10.9 10.8 16.0 15.5 16.8 16.0
  Financial intermediation 3.1 1.5 1.9 2.8 2.8 2.8 2.7
  Real estate, business and rental activities 11.9 9.8 6.3 7.4 7.6 8.1 7.8
  Public administration and defence 6.6 7.0 5.2 5.4 5.6 5.3 4.9
  Education 4.9 4.7 3.4 4.3 4.6 4.9 4.5
  Health and social services 3.0 2.2 1.6 1.9 1.9 2.0 1.9
  Other community, social and personal services 0.8 0.8 0.7 0.7 0.7 0.8 0.8
  Private households with domestic staff 0.3 0.3 0.2 0.2 0.2 0.2 0.2
  Financial intermediation services indirectly measured -3.2 -2.1 -2.4 -3.4 -3.3 -3.3 -3.0
  Other elements of GDP 10.2 9.1 10.1 10.5 11.1 10.4 11.0
II.  Employmentc   
Total urban employment (t housands of employees) 1,474 1,490 1,583 1,605 1,668 1,403 1,404
 Breakdown by sector (per cent of total urban employment)    
 Agriculture and mining 1.5 1.9 1.8 3.0 2.2 1.9 1.1
 Extractive industry 0.2 0.3 0.4 0.6 0.4 0.4 0.3
 Manufacturing industry 17.5 17.3 16.1 14.2 14.4 15.6 16.3
 Electricity, gas and water 0.5 0.3 0.6 0.6 0.5 0.6 0.4
 Construction 7.4 6.5 6.9 7.1 8.1 7.3 7.4
 Trade 30.2 28.3 31.1 32.4 30.5 32.0 31.1
 Hotels and restaurants 4.7 4.9 4.0 4.3 3.8 3.6 4.3
 Transport, storage and communication 5.8 6.6 7.5 7.7 7.6 7.2 7.4
Table I.1 (cont'd) 
                                                      
1 This figure does not include public administration and defence, education, health and social services 
and other community, social, and personal services. WT/TPR/S/148 Trade Policy Review 
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  1998 1999 2000 2001a2002a 2003a 2004b
 Financial intermediation 2.1 1.9 2.1 1.4 1.5 2.5 1.7
 Real estate, business and rental activities 5.7 5.2 4.5 4.8 6.0 5.9 6.9
 Public administration, defence and social security 5.0 5.4 5.0 4.2 5.1 4.1 4.6
 Education, social services, health and other 13.8 14.4 13.2 12.6 13.0 13.3 12.9
 Household services 5.3 7.0 6.8 7.0 7.0 5.3 5.5
 Extraterritorial organizations 0 0 . 1000  0.0 0
 Unreported 0 . 40000  0.2 0
Urban unemployment rate (as a percentage of the workforce) 11.8 15.1 10.3 8.1 7.7 9.3 11.0d
Underemployment ratee (as a percentage of the workforce) 51.8 46.0 49.9 34.9 30.7 45.8 42.7d
III.  Memo item   
Urban labour forcef 1,671 1,754 1,744 1,774 1,808 .. ..
Population (thousand) 11,948 12,121 12,299 12,480 12,661 12,843 13,027
.. Not available. 
a Preliminary figures. 
b Provisional figures. 
c Covers Quito,Guayaquil and Cuenca. 
d Information as at November. e Members of the labour force that work less than 40 hou rs per week or earn less than the minimum salary. 
f Persons 12 years of age or more. 
Source:  Central Bank of Ecuador. 
3. The share of investment in GDP amounted to 22. 8 per cent in 2003 (Table I.2).  The evolution 
of investment to a great extent reflects the fluctu ations in private investment, fuelled largely by 
investment in the petroleum sector.  Total cons umption accounted for slightly more than three 
quarters of GDP in 2003, significantly less than in 1998.  As a proportion of GDP, trade in goods and services has gradually decreased, from slightly over 68  per cent in 2000 to 52.6 per cent in 2003. 
Table I.2 
Structure of GDP by expenditure, 1998-2004 
 1998 1999 2000 2001a 2002a 2003a 2004b
I.  Gross Domestic Product (GDP)       
 Current GDP (US$ million) 23,255 16,674 15,934 21, 024 24,311 27,201 30,282
Breakdown by expenditure (per cent of current GDP)       
 Total consumption 81.6 78.7 73.8 79.1 79.7 77.4 74.5
  Private 69.3 66.2 64.0 68.9 69.3 67.9 65.3
  Public 12.3 12.5 9.8 10.1 10.5 9.5 9.2
 Gross fixed capital formation 19.9 17.0 20.5 21.6 22.8 22.8 21.7
  Private 16.3 13.2 16.2 17.7 19.3 18.6 18.2
  Public 3.6 3.8 4.3 3.9 3.5 4.2 3.5
 Variations in stocks 5.4 -2.2 -0.4 4.1 4.9 4.9 5.5
 Exports of goods and services 21.5 31.5 37.1 26.7 24.0 23.8 26.5
 Imports of goods and services 28.4 25.0 31.0 31.4 31.4 28.8 28.2
a Preliminary figures. 
b Provisional figures. 
Source:  Central Bank of Ecuador. 
4. Total urban employment amounted to 1.4 million in 2003 (Table I.1), with a  little less than 
one third of employees working in the trade sector.  In addition to trade, the sectors whose share in 
total employment has increased since 1998 are the extractive industry;  transport, storage and 
communication, real estate,  business and rental ac tivities;  and household services.  The share of 
manufacturing jobs in overall em ployment has partially recovered from the decline recorded in Ecuador WT/TPR/S/148 
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 2000-2001.  The central Government and other government entities a ccount for 17 per cent of total 
employment.2 
5. According to the World Bank, the informal  economy accounts for one third of national 
income.3 
(ii) Economic growth 
6. Since 2000, economic policy has focused larg ely on fulfilling the performance criteria 
established in the standby agreements signed by Ec uador with the IMF, the most recent of which 
expired in April 2004.  Although Ecuador did comp ly with the macroeconomic objects set forth in 
that agreement, it had trouble fully adhering to the agreed programme. 
7. Average GDP growth between 1994 and 1998 reach ed 3 per cent per year.  The relatively 
modest performance of the economy during that period partly reflects the behaviour of productivity.  
A survey found that in the vast majority of the 28 sectors of the economy studied, growth in production between 1994 and 1999 was not based on increased productivity.
4  During that period, 
total factor productivity suffered a particularly sh arp downturn in the case of non-food commodities.  
Total factor productivity remained st agnant regarding processed products. 
8. Another factor that may have affected economic  performance is the political instability, which 
interfered with the formulation of medium- an d long-term economic policies.  However, the 
authorities pointed out that in recent years, there had been a certain amount of continuity in the management of fiscal policy, which had resulted in  a downward trend in Ecua dor's country-risk since 
October 2002 and an upgrade in its sovereign debt rating by international rating firms. 
9. In recent years, the economic scene in Ecuador  has been dominated by the economic and 
financial crisis of 1998-1999 and the subsequent readjustment (Box I.1) .  This crisis caused real GDP 
to drop by slightly more than 6 per cent in 1999.  According to some observers, various structural problems, including heavy reliance on the petroleu m sector for public revenue, inadequate banking 
supervision, and the high level of public debt, made it impossible to come up with policies capable of 
countering the impact of the external shocks that precipitated the crisis.
5 
10. The adoption of the US dollar as legal tender in  January 2000 eliminated the exchange risk 
and stabilized the expectations of economic operators.6  Between 2000 and 2004, real GDP grew at an 
average rate of slightly more than 4 per cent.  However, there was a serious discrepancy between the 
performance of oil GDP and non-oil GDP.  While oil GDP grew at a real average rate of almost 
10 per cent per year between 2000 and 2004, the rate for non-oil GDP was 3.3 per cent. 
 
  
                                                     
 
2 Does not include local government employment. 
3 World Bank (2004b). 
4 Baquero and Freire (2003). 
5 Beckerman (2002). 
6 Central Bank of Ecuador (2001). WT/TPR/S/148 Trade Policy Review 
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 Box I.1:  Overview of the economic and financial crisis of 1998-1999 
 
Ecuador was hit by three external shocks during 1997-1998, which precipitated one of the most severe economic 
and financial crises of its recent history:  El Niño, th e weather disturbance which ca used an estimated US$2,600 
million worth of damage and resulted in a drastic decline in agricultural exports;  the fall in oil prices, which in 
1998 made a serious dent in the public sector tax revenue;  and the turmoil on the international financial 
markets, which resulted in a sharp reduction in the extern al credit available for Ecuador 's banks.  According to 
the authorities, the financial liberalization that Ecuador had undertaken was another factor that contributed to the 
crisis in that it broadened the scope of action of private banking without any corresponding reinforcement of 
supervision.  In 1999, real GDP fell by 6.3 per cent, and the unemployment rate rose to 15 per cent. 
 
The closure of Solbanco in April 1998 triggered a run on the banking system which led to solvency problems in 
a number of banks whose portfolios were weakened by the external shocks.  Not having any effective legal 
instruments to deal with a crisis of this kind, the Cent ral Bank decided to grant emergency loans to 11 financial 
institutions.  By the end of September 1998, these loans represented 30 per cent of the monetary base.  In an 
attempt to absorb the excess liquidity resulting from the emergency loans, the Central Bank issued monetary 
stabilization bonds.  However, this did not prevent the sucre from depreciating by about 25 per cent in nominal 
terms between September and November 1998.  During that same period, the Central Bank's international 
reserves decreased by almost 8 per cent.  Ac cumulated inflation reached 15 per cent.   
 
In December 1998, in an endeavour to  restore stability to the banking syst em, the authorities created a deposit 
protection guarantee scheme.  At the same time, in order to reinforce public finances, they introduced a one per 
cent tax on all financial transactions in lieu of the income tax.  As it turned out, this tax had the perverse effect 
of creating an incentive to conduct tran sactions outside the banking system, thereby speeding up the withdrawal 
of deposits.  Between December 1998 and January 1999, the Government cl osed six insolvent banks and took 
control of another.  However, the massive withdrawal of deposits continued owing to the lack of confidence in 
the capacity of the new Deposit Guarantee Agency to honour the guarantees swiftly. 
 
With the demand for US dollars rising and Central Bank reserves dwindling, the maintenance of a policy of 
floating exchange rates within a band became problematic.  In February 1999, the authorities decided to float the 
sucre.  With the depreciation of the sucre between January and February 1999 , there was a sharp deterioration in 
bank portfolios.  This was due to the fact that many banks had granted US dollar loans to borrowers whose 
income was in sucres. 
 
In March 1999, the Government froze bank deposits.  A lthough, by averting withdr awals of deposits, this 
measure halted the rise in inflation an d the weakening of the national currency, at the same time it interfered 
with the smooth functioning of the system of payments. 
 
In September 1999, Ecuador suspended its debt-related payments, a measure which affected not only foreign 
creditors, but also national banks holding government bonds.  
 
The gradual unfreezing of deposits st arting in the middle of 1999 was acco mpanied by a new run on the banks 
and an increase in the demand for US dollars.  In response to this situation, the banks tried to increase their 
liquidity by selling bonds issued by the Deposit Guarantee Agency to the Central Bank.  The monetization of the 
banking crisis represented 12 per cent of GDP in September 1999.   
 
In October 1999, the Deposit Guarantee Agency and the Central Bank took control of another two banks.  
Meanwhile, the flow of credit from the Central Bank to the banks continued, and the monetary base increased 
by 50 per cent in real terms by the end of 1999.  At that point, the Central Bank could no longer absorb the 
economy's excess liquidity, given the sharp fall in demand for sucres.  The result was a surge in inflation, which 
led the Government to adopt the US dollar as legal tender. 
 
Source:  Beckermann (2002) and Jácome (2004). 
 Ecuador WT/TPR/S/148 
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 (iii) Fiscal policy 
11. The Ministry of the Economy and Finance is in charge of formulating and implementing 
fiscal policy.7  The Constitution of 1998 stipulates that the State shall maintain "a disciplined fiscal 
policy".8  According to the authorities, the priority of  Ecuador's fiscal policy is to "achieve fiscal 
stability and reduce the level of public indebte dness as a means of contributing to macroeconomic 
stability and to a more flexible central government budget". 
12. Following the 1998-1999 crisis, there was a marked  improvement in Ecuador's fiscal position, 
due in part to improved tax administration and the in crease in oil prices.  The authorities consider that 
the financial disciplines inherent in the adoption of  the US dollar as legal tender also contributed to 
this improvement.  In 2000, the non-financial public sector recorded a 1.5 per cent surplus, while the 
central government surplus amounted to 0.1 per cent of GDP (Table I.3). 
Table  I.3 
Central Government finances, 1998-2004 
(US$ million) 
 1998 1999 2000 2001 2002 2003 2004a 
Revenue 3,226.7 2,687.7 3,249.5 3,844.7 4,572.2 4,770.7 5,169.8 
  Oil 887.6 993.6 1,396.5 1,279.9 1,362.6 1,561.2 1,558.4 
      Exports 224.2 690.5 1,223.4 883.4 943.7 993.1 1,128.8 
      Sale of derivatives 663.4 303.1 173.1 396.4 418.9 568.1 429.6 
  Non-oil 2,339.0 1,694.1 1,853.0 2,564.8 3,209.6 3,209.5 3,611.4 
      Taxes 1,997.5 1,481.8 1,623.2 2,369.6 2,747.6 2,789.5 3,156.2 
          On goods and services 955.4 625.4 910.4 1,477.3 1,749.1 1,763.7 1,921.7 
                Value Added Tax (VAT) 831.2 556.0 835.8 1,340.1 1,529.0 1,583.2 1,719.6 
                Specific Consumption Tax (ICE) 124.3 69.4 74.6 137.3 220.1 180.5 202.1 
          On income 353.8 108.5 293.5 475.6 531.4 591.8 701.9 
          On capital movement 0.0 326.2 168.7 7.7 0.0 0.0 0.0 
          On trade and internationa l transactions 622.8 340.8 237.6 372.6 418.9 382.1 444.4 
                 Tariffs 592.2 310.1 216.9 354.4 413.7 382.1 444.4 
                 Upon exit 13.2 13.7 16.6 18.2 5.2 0.0 0.0 
                 On foreign exchange purchases 17.4 16.9 4.0 0.0 0.0 0.0 0.0 
          On credit operations 25.3 1.4 2.4 1.3 1.5 0.0 0.0 
          On vehicles 14.4 60.0 10.8 23.2 46.7 52.0 56.4 
          Other 25.7 19.6 0.0 11.9 0.0 0.0 31.8 
      Non tariff 177.6 137.6 236.8 138.9 437.6 374.9 445.3 
      Transfers 163.9 74.7 -7.0 56.3 24.5 45.1 9.8 
Expenditureb 4,185.9 3,163.4 3,230.2 4,067.0 4,757.0 5,009.6 5,496.4 
  Current expenditure 3,140.5 2,427.2 2,571.7 2,628.3 3,530.5 3,692.5 4,103.3 
       Interest 941.3 1,121.4 1,009.3 937.5 822.6 826.9 813.5 
            External 708.1 780.5 812.3 727.6 621.1 614.4 598.1 
            Internal 233.3 340.9 197.0 209.9 201.5 212.5 215.4 
Table I.3 (cont'd) 
                                                      
7 Organic Law on Financial Administration and Supervision, Article 24. 
8 Political Constitution of the Republic of Ecuador, 1998, Article 244. WT/TPR/S/148 Trade Policy Review 
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  1998 1999 2000 2001 2002 2003 2004a 
       Wages 1,509.7 898.0 706.9 1,088.0 1,672.2 1,863.7 2,048.8 
       Purchase of goods and services 197.0 122.8 174.5 121.7 318.0 329.1 363.4 
       Other 64.8 205.6 541.5 300.4 351.4 257.3 286.5 
       Transfers 427.7 79.4 139.5 180.7 366.4 415.6 591.1 
  Capital expenditure 1,045.4 736.2 658.5 1,438.7 1,226.5 1,317.1 1,393.2 
       Gross fixed capital formation 602.1 485.4 424.5 644.6 610.6 659.8 709.7 
       Other 0.0 0.0 0.0 232.6 -2.5 14.8 656.8 
       Transfers 443.3 250.8 234.0 561.5 618.4 642.4 26.7 
Balance -959.2 -475.7 19.3 -222.3 -184.9 -108.5c -326.6 
As a percentage of GDP        
Revenue 13.9 16.1 20.4 18.3 18.8 17.5 17.1 
Expenditure 18.0 19.0 20.3 19.3 19.6 18.4 18.2 
Balance -4.1 -2.9 0.1 -1.1 -0.8 -0.4 -1.1 
a Provisional figures. 
b Records of expenditure on an accrual basis. 
c Includes treasury adjustment. 
Source:  Ministry of the Economy and Finance. 
13. During 2001 and 2002, the non-financial public sector balance was down to zero per cent and 
0.8 per cent of GDP respectively.  During that same  period, the central Government's fiscal position 
recorded a deficit.  Central government revenue fell as a percentage of GDP between 2000 and 2002, 
largely owing to the considerable decrease in reve nue from the oil sector as a result of the decline in 
output of PETROECUADOR and the fall in oil prices.   At the same time, salary payments and capital 
expenditure rose. 
14. In 2003, the non-financial public sector surplus amounted to 1.7 per cent of GDP.  The central 
Government's overall fiscal position showed a defic it of 0.4 per cent of GDP.  The share of tax 
revenue in GDP decreased, reflecting the slowdown in economic activity in the non-oil sector.  As 
regards expenditure, central government salary paymen ts increased by 11 per cent in nominal terms, 
more that twice as much as overall expenditure. 
15. Several observers have pointed out  that Ecuador's fiscal policy is  not flexible enough to be a 
useful macroeconomic adjustment tool.9  There appears to be an urge nt need for increased flexibility 
in this respect, since with the adoption of the US dollar as legal tender, fiscal policy is the only 
macroeconomic adjustment tool still availa ble to the Government (section (iv)). 
16. There are several factors that account for the rigidity of fiscal policy.  First of all there is the 
high level of debt, the servicing of which is a signifi cant burden on the budget.  In 2002, interest and 
amortization payments on the public debt represe nted approximately 44 per cent of the central 
Government's budget. 
17. Also responsible for this rigidity are the legal provisions that require earmarking of a 
considerable share of tax revenue to di fferent areas and levels of government.10  In 2004, for example, 
US$559 million worth of tax revenue were earmarked;  10.5 per cent of VAT revenue was earmarked, 
                                                      
9 IMF (2003c), p.8, and López-Cálix (2003), p.12. 
10 López-Cálix (2003), p.13. Ecuador WT/TPR/S/148 
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 chiefly to the Permanent University and Polytechni c Development Fund;  and 38.5 per cent of income 
tax was earmarked. 
18. Another factor limiting the use of fiscal polic y as a macroeconomic adjustment tool is the 
limited size of the tax base.11  Indeed, the large number of exemp tions, in particular income tax and 
VAT exemptions, reduces overall revenue a nd increases reliance on oil sector revenue 
(Chapter III (1)(v)). 
19. In June 2002, Congress approved the Organic Law on Fiscal Responsibility, Stabilization and 
Transparency.12  This Law lays down a number of rules governing the preparation and approval of the 
budget:  annual growth of primary central government  expenditure must not exceed 3.5 per cent in 
real terms;  the fiscal deficit as a percentage of  GDP (excluding oil export revenue) must decrease by 
0.2 per cent each year;  and the budgets containing current operational expenditures of public sector 
financial institutions must not increase by more than  2.5 per cent in annually real terms.  The Law 
also provides for a programme to reduce the public debt until the balance reaches 40 per cent of GDP.  
Once that level has been attained, the La w stipulates that it should not be exceeded. 
20. The Organic Law on Fiscal Responsibility, Stabilization and Transparency established a fund 
for stabilization, social and productive investment, and public debt reduction, which is fed by State 
revenue from crude oil transported through the Heavy Crude Oil Pipeline (OCP ).13  The Law allocates 
the fund's resources as follows:  10 per cent for e ducation and health;  20 per cent to stabilize oil 
revenue, to cover the costs of a disaster or to deal with emergencies;  and 70 per cent to buy back the 
public debt.  According to the authorities, the fund' s resources are allocated automatically every year. 
21. Some of the provisions of the Organic Law on Fiscal Responsibility, Stabilization and 
Transparency represent an important step forward in the area of fiscal reform.  However, in the 
absence of other fiscal reforms, for example with  respect to the earmarking of resources and tax 
exemptions, the extent to which the Government can use the budget as a ma croeconomic adjustment 
tool would appear to remain limited. 
(iv) Monetary and exchange rate policy 
22. The Constitution stipulates that the Centra l Bank is responsible for monitoring and 
implementing monetary and exch ange rate policy in Ecuador.14 
23. The Law for the Economic Transformation of Ecuador15, adopted in March 2000 as part of 
the programme to overcome the economic and financ ial crisis, establishes a new monetary regime 
based on the adoption of the US dollar as the currency of  legal tender.  To that end, the Law prohibits 
the issue of national currency (with the exception of  coins, which must be duly backed by freely 
disposable monetary reserves);  requires the Central Bank to change the sucres in circulation for US 
dollars at a fixed exchange rate and to withdr aw the sucres thereby obtained from circulation;  
stipulates that accounting is to be carried out in US  dollars;  and specifies that contracts concluded by 
State institutions are to be concluded in US dollars. 
                                                      
11 Shenone (2003), p.46. 
12 Law No. 72, Official Journal/589, 4 June 2002. 
13 Organic Law on Fiscal Responsibility, St abilization and Transparency, Article 14. 
14 Political Constitution of the Republic of Ecuador, 1998, Article 261. 
15 Law No. 4, Official Journal/Suppl. 34, 13 March 2000. WT/TPR/S/148 Trade Policy Review 
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 24. The new monetary regime was implemented ra pidly.  Between March and July 2000, the 
Central Bank exchanged and withdrew  from circulation approximately three quarters of the sucres in 
circulation. 
25. Inflation remained high during 2000 in spite of the adoption of the US dollar, reaching 
approximately 90 per cent at the end of that year (Table I.4).  However, by the end of 2001 it had 
fallen to about 23 per cent, a downward trend which  has been confirmed over the past few years. 
Table I.4 
Leading monetary indicators, 1998-2004 
  1998 1999 2000 2001 2002 2003 2004 
Interest rates        
Deposit ratea .. .. 8.36 6.58 5.47 5.53 4.07 
Lending ratea .. .. 15.89 16.66 15.87 14.93 12.66 
Inflation        
Consumer price variation, December to 
December (percentage change) 43.4 60.7 91.0 22.4 9.4 6.1 2.0b 
Consumer price variation, annual average 
(percentage change) 36.1 52.2 96.1 37.7 12.5 7.9 2.7b 
Exchange rate        
Nominal exchange rate (one US$/S) 5,402.9 11,632.0 24,875.5 25,000.0 n.a. n.a. n.a. 
Real effective exchange rate (index 2000 = 
100, increase = appreciation) 65.0 89.2 100.0 70.9 62.8 61.2c .. 
.. Unavailable. 
n.a. Not applicable. a Rates applicable to 30-  to 83-day private bank operations in US dollars. 
b Provisional figures. 
c Preliminary figures. 
Source:  Central Bank of Ecuador, Superintendenc y of Banking and Insurance and CEPAL (2004).  
26. Interest rates have also dropped sharply sin ce 2000.  Between the beginning of 2000 and 
December 2004, the average deposit ra te decreased from 8.4 per cent to 4.01 per cent and the average 
lending rate from 15.57 per cent to 10.23 per cent.   The Law for Economic Transformation provides 
for an interest rate ceiling equivalent to 1. 5 times the Central Bank's reference lending rate.16  I n  
March 2005, the ceiling stood at 12.89 per cent. 
27. At July 2004, Ecuador maintained an excha nge restriction subject to approval by the 
International Monetary Fund (IMF).  This measure consisted in freezing the funds deposited in closed 
banks under the control of the Deposit Guarantee Ag ency.  There are no other restrictions on current 
or capital accounts.17 
28. As a result of the new monetary scheme a dopted in 2000, the Central Bank's terms of 
reference were redefined.  Accord ing to its new Organic Statute, its task is now to "promote and 
contribute to the country's economic stability".18  To that end, the Central Bank is responsible for 
"following up the macroeconomic programme;  c ontributing to the formulation of policies and 
                                                      
16General Provisions (ninth), Law for the Economic Transformation of Ecuador, amended by the Law 
for the Promotion of Investment and Citizen Participation, Article 124. 
17 IMF (2003c), p.20. 
18 Central Bank of Ecuador (2001). Ecuador WT/TPR/S/148 
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 strategies for the nation's development;  and impl ementing the monetary regime of the Republic, 
which involves administering the system of paymen ts, investing the freely disposable reserves, and 
acting as depositary for public funds and fiscal and financial agent of the State19". 
29. The Central Bank's capacity to act as lender of l ast resort disappeared with the adoption of the 
Law for Economic Transformation.  Among the othe r fundamental changes introduced by the Law is 
the limitation of open market operations to the recycli ng of liquidity in the financial market.  Thus, the 
placement of Central Bank securities has been restri cted to absorbing the financial system's excess 
liquidity and, where necessary, using those securities to cover temporary demands for liquidity in the 
financial system.20 
30. There is a Bank Liquidity Fund, to which fi nancial institutions subject to the reserve 
requirement are required to contribute 1 per cent of their deposits subject to the reserve requirement.  
At December 2004, the Fund cont ained about US$135 million. 
31. Since the adoption of the US dollar as legal te nder, the Central Bank's capacity to influence 
prices has been limited.  However, it is difficult to quantify the balance between the costs and benefits 
of the decision to dollarize.  One of the factors that  needs to be determined is the degree of symmetry 
between the economic shocks to the economies of Ec uador and the United States.  If there is a high 
degree of asymmetry between the shocks to the two economies, the cost associated with the loss of 
control over monetary policy could be high.  One observer pointed out that "there was no evidence whatsoever to suggest that the North American economic cycles coincided with those of Ecuador".
21  
This is chiefly because Ecuador is an oil producin g country, while the United States is a major oil 
consumer.  Another factor that needs to be borne in  mind in determining the effects of dollarization is 
the flexibility of the Ecuadorian labour market, th rough which the adjustment s to external shocks 
would take place in an economy that is unable to devalue its currency. 
(v) Balance of payments and external debt 
32. In 1998, the current account deficit amounted to approximately 9 per cent of GDP, reflecting 
the fall in exports and a sharp increase in imports (Tab le I.5).  The deficit was financed through short-
term commercial loans, international reserves, a nd the accumulation of external payment arrears. 
Table I.5 
Balance of payments, 1998-2003 
(US$ million)  
 1998 1999 2000 2001 2002 2003
I. Current account -2,001. 3 876.8 920.5 -665. 3 -1,357.7 -455.4
 Goods -1,034.6 1,545.2 1,399.3 -397.2 -997.7 -71.3
 Exportsa 4,318.8 4,516.5 5,056.7 4,781.5 5,198.3 6,196.6
 Importsa -5,353.4 -2,971.3 -3,657.4 -5,178.7 -6,196.0 -6,268.0
 Services -563.1 -451.1 -420.0 -571.9 -709.1 -691.3
 Revenue 678.3 729.5 849.3 862.2 922.5 898.3
  Transport 227.8 261.0 290.0 248.3 281.9 284.7
  Travel 291.0 343.0 402.0 430.0 447.2 406.4
  Other services 159.5 125.5 157.3 183.8 193.4 207.3
Table I.5 (cont'd) 
 
                                                      
19 Central Bank of Ecuador (2001). 
20 Regulation 059-2000 of 21 March 2000. 
21 Schuldt (2001). WT/TPR/S/148 Trade Policy Review 
Page 10 
 
 
  1998 1999 2000 2001 2002 2003
 Payments -1,241.4 -1,180.6 -1,269.3 -1,434.1 -1,631.6 -1,589.6
  Transport -503.5 -367.6 -438.8 -557.3 -674.8 -658.4
  Travel -241.0 -271.0 -299.0 -340.0 -363.9 -354.4
  Other services -496.9 -542.1 -531.5 -536.8 -592.8 -576.9
 Income -1,170.5 -1,306.7 -1,410.6 -1,335.0 -1,304.8 -1,464.4
 Revenue 119.4 75.2 70.5 47.5 29.9 27.1
  Compensation of employees .. 5.2 5.6 6.1 6.0 6.0
  Investment income .. 70.0 64.9 41.5 23.9 21.1
 Payments 1,289.9 -1,381.9 -1,481.0 -1,382.5 -1,334.7 -1,491.6
  Compensation of employees -5.0 -5.0 -6.0 -6.9 -7.3 -6.5
  Investment income -230.5 -1,376.9 -1,475.0 -1,375.6 -1,327.4 -1,485.1
  Direct investment .. -249.0 -279.6 -333.0 -301.9 -366.5
  Portfolio investment -395.6 -390.4 -462.9 -300.5 -291.8 -317.5
  Other investment -658.9 -737.5 -732.6 -742.1 -733.7 -801.1
 Current transfers 766.9 1, 089.5 1,351.8 1, 638.8 1,653.8 1,771.7
  Current transfers receive d .. 1,188.1 1,436. 8 1,685.9 1,711.7 1,794.1
  General government .. 46.3 72.9 200.5 195.0 217.5
  Other sectors .. 1,141.9 1,363.8 1,485.4 1,516.7 1,576.6
   Workers' remittances 793.7 1,084.3 1,316. 7 1,414.5 1,432.0 1,539.5
   Other current  
   transfers .. 57.6 47.1 70.9 84.7 37.2
  Current transfers sent .. -98.7 -85.0 -47.1 -57.8 -22.4
  General government .. -16.4 -15.1 -4.1 -3.0 -21.3
  Other sectors .. -82.3 -69.9 -43.0 -54.8 -1.1
II. Capital account 14.1 2.1 -1.4 -62.6 19.8 25.1
III. Financial account 1,445. 2 -1,344.3 -6,606.0 1 ,030.3 1,118.0 301.8
 Direct investment 870.0 648.4 720.0 1,329.8 1,275.3 1,554.7
 Portfolio investment -34.4 -45.8 -5,582.6 117.1 0.2 8.1
 Other investment 609.6 -1,946.9 -1,743.4 -416.6 -157.5 -1,261.0
III. Errors and omission s -243.3 -479.3 - 20.4 -532.5 92.5 264.9
IV. Overall balance -785.3 -944.6 -5,707.3 -230.1 -127.5 136.4
V. Financing 785.3 944.6 5,707.3 230.1 127.5 -136.4
VI. Memo items   
 Internal public debt 2,434.6 3,014.6 2,832.5 2,801.4 2,771.1 3,016.2
 External public debt (end-of-year 
balance) 13,061.9 13,372.4 10,987.2 11,337.7 11,336.9 11,482.7
 External public debt (as a percentage 
of GDP) 56.2 80.2 69.0 53.9 46.6 42.2
.. Unavailable. 
a Total exports and imports include the trade recorded by the Ec uadorian Customs Corporation, "unrecorded" trade, and "other". 
Source:  Central Bank of Ecuador.  
 
33. In 1999, the flight of private capital forced a drastic change in the current account of the 
balance of payments, which recorded a surplus of 5.3 per cent of GDP.  Imports decreased by 46 per 
cent.  In 2000, imports remained below their 1998 le vel and oil exports increased in absolute terms, 
contributing to a current account surplus of just below 6 per cent of GDP. 
34. In 2001, the current account recorded a defic it once again, partly because of the sharp 
increase in imports of capital goods in connection with the construction of the OCP pipeline.  The 
strength of domestic demand and the appreciation of th e real exchange rate further stimulated imports 
in 2002, which caused the current account deficit to c limb to 5.6 per cent of GDP.  In 2003, there was 
a significant decrease in the current account deficit,  which fell to slightly below 2 per cent of GDP, Ecuador WT/TPR/S/148 
 Page 11 
 
 
 partly owing to the high oil prices.  The Central Bank expects the current account balance to be 
positive in 2004.  As regards the capital account, fore ign direct investment increased to almost 5 per 
cent of GDP in 2003, partly as a result of the revi val of investment in the non-oil sector.  Capital 
flows to the public sector are negative, refl ecting the amortization of the external debt. 
35. Current transfers, which reached US$1,770,000,0 00 in 2003, contributed significantly to the 
performance of the current account of the balance of payments over the past few years.  The bulk of 
current transfers consists of remittances by Ec uadorian workers living abro ad, which increased by 
slightly more than 40 per cent between 1999 and 2003. 
36. At the end of 2003, the external public debt balance stood at US$11,482,700,000, slightly 
over 40 per cent of GDP.  In absolute terms and as a proportion of GDP, the external public debt has 
decreased considerably over the past  few years (Table I.5).  Thirty-eight per cent of the debt reflects 
commitments to private creditors, 37 per cent to multilateral organizations, a nd the remaining 25 per 
cent to bilateral creditors. 
37. In 1999, Ecuador declared a moratorium on its Brady bonds and Eurobonds.  Subsequently, it 
submitted a proposal to cash in these bonds for 12- a nd 30-year global bonds.  Most of the creditors 
backed this initiative, and the debt stoc k in bonds decreased from US$6,500,000,000 to 
US$3,900,000,000.22 
(2) TRADE IN GOODS AND INVESTMENT FLOWS23 
38. In 2003, imports of goods amounted to US$6,53 4 million (Tables AI.2 and AI.4), while 
exports amounted to US$6,038 million (Tables AI.1 and AI.3).  From 1991 to 2003, imports and 
exports increased at annual average rates of 13.5 pe r cent and 7 per cent respectively.  At the same 
time, there were significant changes in the com position and geographical distribution of trade. 
(i) Composition of trade 
39. Oil continues to be Ecuador's main export prod uct.  Average crude oil exports accounted for 
39 per cent of total exports between 2000 and 2003, as compared to 33.2 per cent during the period 
1990-1999. 
40. Between 1990 and 1995, five pr oducts – bananas, coffee, cocoa, shrimps, and unprocessed 
fish24 - accounted for approximately three quarters of non- oil exports.  However, their share in exports 
fell to slightly less than 50  per cent between 2000 and 2003. 
41. Processed fish25 and flowers have seen their share in exports increase significantly, the former 
reaching 12.7 per cent and the latter reaching 8.6 pe r cent of non-oil exports in 2003.  The average 
share of manufactures in exports rose from slightly more than 5 per cent during the 1990-1995 period 
to 9.1 per cent during the 1996-2003 period chiefly owi ng to the rapid growth in exports of machinery 
and transport equipment, textiles, and iron and steel.  Non-oil exports as a whole increased at an average annual rate of 9 per cent between 1991 and 2003. 
                                                     
 
22 Tinsley (2003), p.66. 
23 The figures used in this section come from the Comtrade Database of the United Nations Statistics 
Division.  Export figures are f.o.b.;  import figures are c.i.f. 
24 Unprocessed fish covers fresh or frozen whole fish. 
25 Processed fish covers prepared or preser ved fish and fresh or frozen fish fillets. WT/TPR/S/148 Trade Policy Review 
Page 12 
 
 
 42. According to the authorities, this diversifica tion of the export basket could be explained, inter  
alia, by the implementation of the National Export Promotion Plan, the development by the Export 
and Investment Promotion Corporation of pr omotion services (Chapter III (2)(v)), improved 
international cooperation in the area of export prom otion, reforms to the national legal framework, 
and the entry into force of free-trade agreements .  At the same time, given the exchange policy 
limitations imposed by dollarization, an appreciation of the real exchange rate could adversely effect 
Ecuador's competitiveness. 
43. Close to 80 per cent of imports consist of manufactured goods, particularly machinery and 
transport equipment, and chemical products.  Since 1991, there has been a significant increase in the 
share in total imports of mining products and fuels,  office machinery, telecommunications equipment, 
and other consumer goods, while the share of non- electrical machinery, chemical products, and iron 
and steel has diminished. 
(ii) Geographical distribution of trade 
44. The most significant development with respect to the geographical distribution of trade over 
the past few years is the increased importance of the Andean Community as a trading partner.  The 
average export share of the Andean Community rose steadily between 1991 and 2003 from 8 per cent 
during the 1990-1995 period to 16.3 per cent during the 2000-2003 period.  Within the Andean Community, Peru and Colombia are the main mark ets for Ecuador's products.  While oil accounts for 
slightly more than three quarters of exports to  Peru, exports to Colombia consist mainly of 
manufactures. 
45. The United States is the main destination for Ecuador's exports, accounting for 40 per cent of 
the total.  Another major destination is the Eu ropean Union, with 17 per cent of the total. 
46. The main sources of Ecuador's imports are the Andean Community, East Asia, and the United 
States.  Colombia accounts for 60 per cent of total imports from the Andean Community. 
(iii) Foreign direct investment 
47. Foreign direct investment stock in Ecuador amounted to US$9,686 million in 2002 (the last 
year for which data is available), representing almost 40 per cent of GDP.
26  Between 1991 and 2003, 
annual foreign direct investment flows to Ec uador increased from US$162.3 million to US$1,554.7 
million (Table AI.5).  Some observers have qualified this performance as noteworthy, particularly in 
view of the slow pace of privatization in comparison to other countries of Latin America, not to mention the economic and political difficulties that Ecuador has had to face.
27 
48. A central feature of the structure of foreign inv estment in Ecuador is the predominant role of 
the oil sector, which absorbed, on average, three quart ers of foreign direct investment flows between 
1991 and 2003.  The annual average share of th e manufacturing industry, which occupies second 
place, barely amounted to 7 per cent during the same period. 
49. The bulk of foreign investment in the manufacturing sector goes to food processing and the 
chemical industry, in particular the productio n of lubricants and other petroleum products.28  T h e  
agricultural sector's share of foreign direct investment  is limited, particularly in comparison with the 
                                                      
26 UNCTAD (2003). 
27 UNCTAD (2001), p.15. 
28 UNCTAD (2001), p.10. Ecuador WT/TPR/S/148 
 Page 13 
 
 
 sector's contribution to employment and exports.  In 2003, foreign direct investment in the 
agricultural, forestry and fisheries sector amount ed to US$48 million, which represents 3 per cent of 
the total.  Foreign investment in the electricity, water, gas, transport, storage and communications 
sectors amounted, on average, to 2 per cent of total investment between 1991 and 2003, reflecting in 
part the lack of any significant priv atization initiatives in those areas. 
50. The United States has traditionally been the leading source of foreign direct investment in 
Ecuador, although its share in total investment h as been declining.  Between 1991 and 1997, the 
average annual share of direct inv estment from the United States in total foreign direct investment 
stood at 57.3 per cent.  That share had decreased to one fifth in 2002-2003 (Table AI.5). 
51. Over the past few years, a number of countries, including Canada, Spain, Italy, and 
Argentina, have become major sources of investment, thanks largely to the investments made by their 
companies in connection with the OCP pipeline. 
(3) OUTLOOK  
52. The Central Bank forecasts a real GDP growth of  3.9 per cent in 2005.  The estimate for real 
oil GDP growth during that year is 7.2 per cent, while for non-oil GDP growth, it is 3.3 per cent.  
According to Central Bank estimates, inflation s hould be about 2 per cent, and the current account 
deficit US$283 million, or 0.9 per cent of GDP.