Ecuador - Fourth Development Banking Project

Document of FILE COPY The World BankFIECP FOR OFFICIAL USE ONLY Report No. P-2586-EC REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR A FOURTH DEVELOPMENT BANKING PROJECT June 6, 1979 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Sucre (S/) Calendar 1978 May 31, 1979 US$1 = S/25 S/25 S/1 = US$0.04 US$0.04 FISCAL YEAR January 1 to December 31 ABBREVIATIONS BNF Banco Nacional de Fomento (National Development Bank) CFN Corporacion Financiera Nacional (National Finance Corporation) CMSU Unidad de Estudios del Mercado Financiero (Capital Markets Study Unit) COFIEC Ecuatoriana de Desarrollo S.A., Compania Financiera (Ecuadorian Development Finance Company) FONADE Fondo Nacional de Desarrollo (National Development Fund) IESS Instituto Ecuatoriano de Seguro Social (Ecuadorian Social Security Institute) JUNAPLA Junta Nacional de Planificacion y Coordinacion Economica (National Planning Board) MFF Mecanismo de Fondos Financieros (Financial Funds Mechanism)  FOR OFFICIAL USE ONLY ECUADOR FOURTH DEVELOPMENT BANKING PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Ecuador Beneficiaries: Caorporacion Financiera Nacional (CFN), Ecuatoriana de Desarrollo S.A., Compania Financiera (COFIEC) and eligible new development banks. Amount: US$40.0 million equivalent. Terms: Repayable in 15 years on a composite amortization basis, including three years of grace, at 7.9 percent interest per annum. Relending Terms: The Central Bank, as agent for the borrower, would onlend the loan's proceeds, in sucres, to participating development banks at 10.7 percent interest per annum. The 2.8 percent p.a. differential between the Bank's lending rate to the Republic of Ecuador and the onlending rate to the development banks would be collected by the Central Bank as a fee for administer- iag the loan and for assuming the foreign exchange risk on it. Participating development banks would relend to ultimate beneficiaries at between 14 and 16 percent p.a. interest, depending on the subloans' maturities which, in turn, would be up to 15 years, including up to three years of grace, depending on the type of investment. Project Description: The proposed loan would support the development of Ecuador's capital market and provide additional long- term financing for the industrial sector. Greater competition in the mobilization and channeling of long-term resources would also be promoted by opening participation in the proposed project not only to CFN and COFIEC, the country's traditional medium- and long-term financial intermediaries, but also to eligible new development banks. Special Risks: The proposed operation faces no unusual project risks. There is, however, some uncertainty since the industrial policy of the new Government, which is scheduled to be inaugurated in August, is still unclear. This iocument has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disciosed without World Bank authorization.  Estimated Disbursements: -- US$ million by Bank FY -- 1980 1981 1982 1983 Annual 3.00 12.00 21.10 3.90 Cumulative 3.00 15.00 36.10 40.00 Appraisal Report: Staff Appraisal Report No. 2414b-EC dated May 31, 1979.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUIIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR A FOURTH DEVELOPMENT BANKING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Ecuador for the equivalent of US$40.0 million to help finance a Fourth Development Banking Project. The loan would be repaid in 15 years on a composite amortization basis, including three years of grace, with interest at 7.9 percent per annum. The proceeds of the loan would be relent to participating development banks for up to 15 years, including up to three years of grace, with interest at 10.7 percent per annum. PART I - THE ECONOMY 2. The most recent economic report on Ecuador, Report No. 1382-EC entitled "Current Economic Position and Prospects of Ecuador" was distributed to the Executive Directors on April 1, 1977. A new economic report was re- viewed in draft with the Government in April 1979 and the final report will be distributed to the Executive Directors shortly. This President's Report incorporates the main conclusions of the economic report. Growth 3. During the past six years, the Ecuadorian economy has gone through a phase of rapid economic growth spurred mainly by exports. Between 1972 and 197E, GDP grew at an 8.8 percent annual rate in real terms and by 1977 the country's per capira income had climbed to about US$770. 4. Petroleum exports were the main engine of growth of the Ecuadorian economy through 1976, despite a decline in their volume since 1974. After reaching 59 million barrels in 1973, exports of crude oil began to fall and had dropped to 42 million barrels in 1978. Owing to the international oil price increases, however, petroleum (crude and derivatives) still accounted for 37 percent of total exports in 1978, a higher share than in 1973. 5. While economic growth continued to be high in both 1977 and 1978-- with increases of the GDP equal to 7.7 percent in 1977 and 6.8 percent in 1978--it has been nonetheless lower than the average growth of 10.2 percent that the country experiernced during the 1972-76 period, when revenue from petroleum was fueling this growth. Also, the sources of the most recent growth were different. Agriculture export prices increased rapidly in 1977, and preserved the growth momentum; increased volume of exports of agricul- tural products in 1978 lent buoyancy to the economy. Increased exports were the combined result of a good banana and cacao crops and of marginal depletion of coffee stocks. 6. Economic activiLty in 1978 was also partly affected by factors other than the impact of international markets. Uncertainty as to the outcome of elections began to mount during the first half of that year. This, coupled witlh the scarce availability of credit, contributed to a slowdown in thle rate of new private investment which, while it jumped by over 19 percent in 1977, remained practically at an unchanged level during 1978.  - 2- Social Development and Change 7. Despite the rapid economic growth which led to present relatively high average per capita income level, much of the Ecuadorian population continues to live in poverty. According to the 1974 Census, the per capita income of two-thirds of the rural population was less than one-third of the national average. The average annual per capita income of the poorest 25 per- cent of urban dwellers was only US$94 in 1975. While open unemployment is only about three percent of the country's labor force, underemployment is estimated to be as high as 30 percent. The high rate of population growth -- 3.5 percent per annum, one of the highest in the world -- remains an important cause of underemployment and poverty. 8. During the past decade -- and in particular during the years following the beginnings of exploitation of oil resources (1972) and the increase of oil export prices (1973) -- an important urban middle class has emerged. It is composed mainly of the small entrepreneurs, civil servants -- who account for over 10 percent of urban employment -- and of employees in the modern sectors. This urban middle class has been growing both in size and in relative income and has been the major beneficiary of recent economic growth. 9. Despite the considerable movement of the rural population to the cities -- the share of city dwellers in total population changed from 28.5 percent in 1950 to 41.6 percent in 1975 -- the economy and society of Ecuador still suffer from a pronounced dualistic structure. Indians account for 28 percent of the population, and it is in this group, settled predominantly in rural areas, as well as within the marginal urban population, that the poverty roots are deeply anchored. Not only is their average level of pro- ductivity severalfold smaller on a comparable basis -- per hectare in rural areas or per employee in urban areas -- than that in the modern sectors of the economy, but these groups benefit considerably less from the basic infra- structure -- education, public utilities, roads -- than the rest of population. 10. There is growing recognition that a social policy, to become effective, has to become integrated with the country's basic development strategy. This is reflected, in the rural areas, in a more vigorous attempt to develop agriculture within a regional context and, in the urban areas, in the increasing attention given to small and medium-scale enterprises and to exports of labor-intensive manufactured goods. These are, however, only the first steps in a long and intricate process. Basic External and Internal Financial Equilibria 11. Rapid increases in world prices for Ecuadorian agricultural exports contributed to the maintenance of the overall buoyancy of the economy during the past two years. It also led to substantial gains in incomes. The result of this was rapidly growing consumer expenditures which put pressure upon  - 3 - supplies cf domestically produced goods, with inflationary consequences. The rise in consumer prices accelerated in 1976, and continued strongly during 1977 reaching an annual rate of 12.9 percent. In 1978, price rises slowed slightly to 11 percent as inflationary trends were curbed by monetary and credit pol.icies. 12. During 1970-78, Ecuadorian imports increased at an average annual rate of 11.5 percent in real terms. The main forces behind this increase were: (i) the hi,gh investment rates achieved during the period and the related demand for imported capital goods, mainly for the industrial and transport sectors; (ii) the steep demand for inputs by the industrial sector; and (iii) the growing demand for some imported agricultural products. 13. Real exports of goods increased at an average rate of 9.7 percent per annum during 1970-78. Petroleum was responsible for most of this growth, since non-oil exports remained practically constant in real terms between 1970 and 1977. The resource gap, which was 2.2 percent of GDP in 1977, changed to a slight surplus in 1978 as a result of an eight percent increase in export earnings combined with a four percent decrease in payments for imports. Despite this small surplus on trade in goods and non-factor services, however, the current account balance of payments deficit was still equivalent to 2.3 percent of GDP because of the outflow for factor paymnents. The deficit may increase substantially in 1979 if, as expected, overall exports remain unchanged, but imports continue to grow. 14. Fiscal policies in the 1976-77 period were clearly expansionary and monetary growth accompanying them was strong throughout the first half of 1977. While revenues remained constant, budgetary expenditures grew at 12.7 percent during 1977. This refiected a rapid growth in current expenditures, as capital expenditures fell by 20 percent compared to 1976. The overall public sector deficit increased from 0.7 percent of GDP in 1975 to 2.4 percent in 1976 and 4.1 percent in 1977. In order to stem this trend and minimize the inila- tionary :Lnpact of fiscal policies, fiscal authorities turned strongly to foreign borrowing and launched sales of foreign-currency denominated bonds in the domestic capital maLrket. Starting from mid-1977, the monetary authorities introduced restrictive credit policies which resulted in a decline in the rate of growth of money and quasi-money from 35 percent in 1976 to 20 percent by the end of 1977. These policies, sustained during 1978, and accompanied by other efforts to lower the fiscal deficit, succeeded in reducing it to 3.4 percent of GDP in 1978. 15. As financing of the fiscal deficit was increasingly sought in external financial markets, public debt oustanding at the end of 1977 grew by 58.9 percent above the level at the end of 1976. Terms, maturity and grace periods of the newly contracted debt hardened somewhat as most of this new debt was provided by commercial sources. In 1978, however, the increase in public debt was held to 14 percent. Ecuador's debt-service ratio increased from 4.5 percent in 1975 to 14 percent in 1978. The Government made efforts during 1978 to soften the accumulated debt by being more careful in the choice of foreign credits used to finance part of its deficit. Moreover, at the beginning of 1979, Ecuador was able to renegotiate US$510 million -- or about one quarter of its foreign debt -- contracted on the least advantageous terms in order to improve the debt profile and lighten the future debt-service burden.  -4- Sectoral Developments 16. Domestic consumption of petroleum and of its products has been growing at 16 percent per annum in the last several years, nearly double the growth rate of GDP. By 1977, one-third of the country's petroleum output was consumed internally. Although the growth rate of domestic consumption is expected to slow in the coming years as a result of the lower GDP growth rate, the amount of petroleum available for export may still continue to decline, limiting the country's import capacity. Under these circumstances, and unless new petroleum resources are discovered and exploited, the country's import capacity would become a serious constraint to the growth of the economy. 17. The decline in the volume of petroleum exports may slow down if Ecuador resumes oil exploration, which has slackened in the past few years. Investments in rehabilitation of known oil fields will also be needed. To achieve this, two main economic decisions will have to be implemented -- first, the decision to invest substantially in oil exploration -- whether with own resources or by the risk-taking foreign enterprise, and, second, the decision to increase domestic prices of petroleum. Petroleum prices in Ecuador -- less than US$0.20 per gallon of gasoline -- are among the lowest in the world, and this has largely stimulated the excessive domestic consumption. 18. The agricultural potential of Ecuador is at present largely under- utilized and could be used both as an engine for the medium-term growth and as a means to alleviate social inequities. Ecuador has enough fertile land to expand agricultural and livestock output at a reasonable cost. Its forestry and fisheries potential is also considerable. While increases in production of crops and livestock should mainly satisfy the domestic demand, produce of forestry and fisheries could be directed to the foreign markets. In parti- cular, the agricultural potential of two important regions of the country -- the Costa and the Oriente -- is considerable. New regional institutions have been created in order to manage the exploitation of these regions. The use of new lands together with the extension of improved techniques of cultivation may slow down the rural exodus, relieve the pressure on urban labor markets, and improve the distribution of income. 19. Ecuador will have to make greater efforts to develop agriculture and to reverse the rising trend of food imports. Infrastructure such as feeder roads, flood control, and storage facilities, as well as technical assistance will have to be significantly strengthened. Administrative inefficiencies consisting of often conflicting decisions and frequently changing policies will have to be overcome. A particularly strong effort will have to be made toward a broader network of technical assistance and education in agriculture and a more intensive use of fertile but still underexploited land. This may involve some changes in the landholding pattern, which is still very heavily biased toward large-size ownerships. As a result of these measures, per hectare productivity could be increased and the agricultural sector could realize its potential as one of the leading forces in Ecuadorian development. 20. The industrial sector of Ecuador, representing 17.8 percent of the country's GDP, should help in sustaining moderate growth in the next several years. Ecuadorian industry, predominantly privately owned, has been largely  - 5 - geared to import-substitution in consumer goods, and has been operating in a strongly protective environment. This has deflected entrepreneurs' interest from transformation of the country's natural resources. Moreover, with the relative prices of capital and labor distorted by the system of investment incentives, which makes capital relatively cheap compared with the cost of labor, production techniquaes have become increasingly capital-intensive. Measures aiming at changes in these policies, which in the past have been largely responsible for discouraging the industrial sector from involvement in activities in which it could have a strong comparative advantage, have been discussed within the Ecuadorian Government. Their final design and implementation, to be decided by the newly elected Government, could have an important effect on restructuring the industrial sector and should then result in a stronger and more efficient growth pattern. This will require, in par- ticular, changes in tariff, price and interest rate policies in order to strengthen sectors with more favorable export prospects and to reduce the possibility that inefficient industries be established. Outlook 21. As far as the recent past is concerned, overall economic management in Ecuador could be considered as relatively adequate, although there were serious weaknesses in public administration. The Government has resisted the temptation to sink oil revenues into wasteful and grandiose schemes and has, instead, used the proceeds of petroleum exports for more modest invest- ment projects, generally corresponding to the real needs of the economy. It has also fostered a climate conducive to increased private investment which resulted in an acceleration of the industrialization process. Moreover, the authorit:ies have recently shown courage and determination in fighting inflation through a skillful use of short-term monetary tools. 22. Ecuador's GDP growth rate is expected to slow down to around 5 percent in 1979 as a combined result of an unfavorable turnaround in the terms of trade anid the stagnation in the petroleum sector. However, in the medium term, the Ecuadorian economy has fair growth prospects. It is unlikely that the external sector will continue to play as strong a growth-propelling role as in the past, mainly because oil exports are expected to continue to decline (at least until results are realized from the petroleum policies referred to in paragraph 17) and because agricultural exports may be constrained by adverse world market price movements. The prospects of the Ecuadorian economy could be strengthened, however,, through timely implementation of improved policies in the petroleum, agricuLture and manufacturing sectors. The present Govern- ment is now working on a new five-year development plan covering the 1980-84 period which it intends to submit to the future Government for consideration. Many of the above policies, which have been reviewed by the Bank staff and discussed with the Government, form a part of this strategy. 23. Ecuador has considerable natural and human resource potential. To develop it fully and efficiently, far reaching changes in its economic policies are needed. Some have already been initiated by the present Government but more remains to be done by the incoming Administration. A comprehensive dialogue between the Bank and the country's economic team on the need for policy reorientation has been carried out recently and will continue with the new  -6- Government. The size of the country's foreign debt is not excessive -- one-fifth of its GDP -- and its recent and successful attempts to improve the debt structure should make its debt service payments managable. Therefore, Ecuador remains creditworthy for borrowing on conventional terms. PART II - BANK GROUP OPERATIONS IN ECUADOR 24. Bank group operations in Ecuador date back to 1954, when a loan was made for a first highway project. In all, the Bank and IDA have ex- tended 22 loans and six credits to Ecuador, totalling US$294.7 million net of cancellations. As of April 30, 1979, US$165 million of this amount had been disbursed. The IFC has made eight loans and investment commitments in Ecuador. Two were for a large textile company, four in a development finance company and one each in a sugar mill and a cement company. These operations have amounted to US$22.4 million in commitments of which IFC now holds US$19.0 million. 25. Execution of Bank Group financed projects has often been hampered by weaknesses in Ecuador's implementation capacity. This, in turn, reflects the insufficiency of the country's public sector managerial and technical resources --a constraint that is still a serious obstacle to Ecuador's eco- nomic and social development. Annex II contains a summary statement of Bank loans, IDA credits and IFC operations as of April 30, 1979, as well as notes on the execution of ongoing projects. 26. Bank and IDA lending in Ecuador was originally concentrated in transport and power, where there were --and still are-- substantial bottlenecks to be overcome. To date, approximately 39 percent of Bank Group lending has been for transport. Nine of the eleven loans and credits extended for trans- port were to improve the country's road network and two to help finance the expansion of the port of Guayaquil. Lending for power has aimed at improving generation and distribution facilities in Quito. The first livestock develop- ment loan, approved in FY67, marked the beginning of a diversification in the Bank Group's lending program away from straight infrastructure. Since then, the Bank Group has made eight loans and credits for agriculture and fisheries, three DFC loans to support industrial development, a credit and a loan for education, one loan for water supply and two technical assistance loans. Bank Group involvement in the directly productive and social sectors has grown to the point where it now accounts for about 55 percent of total Bank Group lending. 27. Turning to the future, Bank lending will continue to assist in (i) the creation of a physical and social infrastructure base capable of fostering development; (ii) the expansion of productive capacity in crucial sectors; (iii) the strengthening of agencies so as to enable them to implement projects effectively; and (iv) the improvement of living conditions for the urban and rural poor. In addition to the fourth development banking project which this report recommends, the Bank is preparing a slum upgrading operation for Guayaquil, a second rural development operation, small-scale industry and petroleum projects and a possible highway loan. Most of these operations would have important institution building aspects and include sizable technical assistance components.  - 7 - 28. Substantial development financing has also been provided to Ecuador by the Inter-American Development Bank (IDB) and USAID and, to a lesser extent, bv other bilateral sources. IDB has been, by far, the single largest lender to Ecuador. Its commitments to the country as of January 31, 1979, totalled US$475.1 million equivalent. Past IDB lending has been concentrated in the agriculture, power, health/sanitation and transport fields. Most of IDB's loans to the country have come from the Fund for Special Operations and normally carry two percent interest, a 10 year grace period and repayment terms of up to 40 years. It is likely that IDB will remain Ecuador's major development lender in the immediate future with agriculture accounting for an increasingly large share of its lending program. USAID, which has lent Ecuador US$103.6 million ecluivalent, has not made any new commitments to the country since 1973. Recently, however, USAID has expressed an interest in renewing its operations in the country, primarily in the agricultural sector. 29. As of December 3]L, 1978, Ecuador's outstanding public external debt, including undisbursed, amounted to about US$2.14 billion. Bank Group lending constituted about Ll percent of this amount and absorbed about 3.6 percent of the Government's external debt service. Assuming increased recourse by Ecuador to long-term bilateral and multilateral debt, by 1985 the Bank's share of Ecuador's outstanding public foreign debt could reach 17 percent and its share in debt service would climb to around 12 percent. PART III - THE INDUSTRIAL AND FINANCIAL SECTORS THE INDUSTRIAL SECTOR General Characteristics 30. Ecuador's industrial sector experienced rapid expansion during the 1970-78 period growing by nearly 10.3 percent per annum. The sector's growth was even higher during the 1975-78 period, 12.4 percent. This expansion was stimulated by the oil boom, a favorable investment climate, supportive Govern- ment policies towards the private sector and, to a lesser extent, by the emergence! of the Andean Common Market. Despite this rapid growth, industry's share of GDP expanded only modestly -- reaching 17.8 percent at the end of the period -- because of the even faster growth of the petroleum and services sectors. Nevertheless, industry's share of exports rose vigorously, i.e., from 2.5 percent to 11 percent in the same period. All industrial subsectors participated in the expansion of the 1970s with above average growth rates in the food processing, beverages, tobacco and non-metallic mineral industries. Fixed investment in industry increased from US$60 million in 1970 to US$232 million in 1977 and industrial employment grew by about 67,000 jobs; the sector currently employs about 15 percent of the total labor force. 31. Investment in the industrial sector has been financed mainly from retained earnings and foreign loans and, to a lesser extent, by domestic credit. The Ecuadorian capital market was able to mobilize only a small fraction of the sector's financial requirements owing to (i) the relatively low yield on financial instruments issued by the private sector; (ii) the attractiveness of other long-term instruments, e.g., tax-free Government securities; and (iii) the  reluctance of companies to open participation in their equity to outside shareholders. The development of a more mature capital market--one of the proposed project's principal objectives--would improve this situation and enable the market to increasingly channel domestic savings to the industrial sector for investment. 32. Despite its rapid growth, industry remains at an early stage of development with traditional manufacturing (e.g., food processing, beverages and textiles) dominating industrial production. The sector is characterized by a relatively few large, modern companies -- most of which are import- substitution oriented -- and by a large number of traditional, small-sized firms. Small-scale enterprises (those employing less than seven persons) provide nearly two-thirds of industrial employment but account for only about one-third of industrial value added. Between 1970 and 1977, the share of consumer goods in industrial value added hovered around 60 percent. Interme- diate goods constituted about 30 percent of industrial value added and capital goods accounted for the remaining 10 percent. Institutional Framework 33. In the past, the private sector has taken the lead in industrial development and the Government has tended to view its role as being limited to maintaining a favorable investment climate and providing necessary infrastruc- ture. Within the Government, responsibility for stimulating industrial development is shared by the National Planning Board (JUNAPLA), the Ministry of Industry, Commerce and Integration and the state-owned National Finance Corporation (CFN). The first two establish the sector's policies and develop- ment strategy. CFN, the country's largest development bank, provides financing for industrial sector activities. The main private sector associations representing the country's industry are the Chambers of Agriculture, Commerce and Industry of the Costa and of the Sierra. Sectoral Constraints 34. In the next few years, the industrial sector will face a number of limitations that are likely to acquire increasing importance. These include insufficient infrastructure development (particularly power supply, but also transport and telecommunications); the limited size of the domestic market; the scarcity of long-term financing, particularly for small firms; a shortage of skilled workers; and a system of industrial incentives and protec- tion that has contributed little to increase industrial efficiency. The Government is taking steps to overcome some of these constraints and short- comings. With the help of external donors, it is building up Ecuador's infrastructure base and vocational training program. The Bank has actively participated in these efforts. The Government is also moving to provide the sector with stronger financial backing. The proposed project would assist in providing additional financing to the industrial sector and would help strengthen the country's capital market system. Finally, the Government is preparing, with Bank assistance, a small-scale industry project which would address the sub- sector's financial and operational needs.  -9- Sector Strategy 35. Since the early sixties, successive governments have aimed at advancing industrialization in order to improve the country's balance of payments situation, generate employment and further a more balanced regional development of the country. They strove for industrial development through implementation of fiscal incentives, the provision of credit, tariff protection and, to a lesser extent, through incentives for exports. While industry has responded to these generous policies, as is evidenced by the sector's rapid growth, the incentives have often stimulated capital- and import-intensive forms of production to the detriment of industries making fuller use of Ecuador's abundant human and natural resources. 36. The present Government's strategy has been to accelerate industrial development so that the sector can (i) help take up the slack in foreign exchange earnings when the value of petroleum exports start declining; (ii) complement efforts to increase production in the agricultural sector; and (iii) offer in- creasing employment opportunities to the rapidly growing labor force. The Government is also aware of the desirability of promoting industries which make greater use of local raw materials. In this regard, it recently started taking steps to modify industrial incentives in order to render the sector more efficient and to spur a more intensive utilization of domestic resources. Specifically, it began (i) to restrict import duty exemptions for industries making extensive use of capital goods and imported intermediate products; (ii) to reduce other fiscal stimuli to these industries; (iii) to grant special incentives to labor intensive industries and to those using domestic raw materiaLs; and (iv) to provide relatively better incentives to small-scale firms. On the other hand, the Government has, for some time, also been contem- plating the creation of large-scale, technologically complex industries -- such as steel, automobile manufacturing and petrochemicals -- which are capital intensive and recluire sophisticated management. The Bank has urged the Government to review carefully these large projects to avoid the danger that some of them might not be competitive and that their capacity might not be fully utilized, even though they are viewed as regional undertakings which would produce not only for domestic consumption but also for other Andean Group countries. 37. The industrial policies of the recently elected administration which will be inaugurated next August are, as yet, undefined. President-elect Roldos has, however, put together teams of experts to advise him on economic matters including industrial policy. Bank staff already had preliminary contacts with members of the incoming administration and will be engaging in a dialogue with the new Government on, inter alia, industrial policy. The recently completed economic report on Ecuador will serve as a basis for this dialogue. Moreover, an industrial sector mission will visit Ecuador during the second half of 1979 and its findings will also be the subject of discussion with the new Government. THE FINANCIAL SECTOR Institutional Framework 38. The monetary and financial policies of Ecuador are established by the M4onetary Board which includes, inter alia, the Ministers of Finance and of Industry, Commerce and Integration, as well as the presidents of the Central  - 10 - Bank and the National Planning Board (JUNAPLA). Private sector representatives also sit on the Board, whose chairman is appointed directly by the President of Ecuador. The Board's policy decisions are executed by the Central Bank. The Monetary Board sets capital and reserve requirements, interest rates and commissions, and portfolio ceilings. In administering the Board's policies, the Central Bank is more active in open market operations than many other central banks in the region. To control the money supply, for example, it buys and sells tax-free participation certificates, securities and monetary stabilization bonds. 39. In addition to the institutions already mentioned, a Financial Funds Mechanism (MFF)--basically a discount window to complement the financing operations of the private banking sector and aimed at promoting specific Government programs in agriculture, tourism, small industry and fishing -- was established in the Central Bank in 1973. In 1974, the Government created a National Development Fund (FONADE) to channel part of the growing oil revenues to priority public investment. The principal supervisory body of the financial system is the Superintendency of Banks, an autonomous technical entity exercising broad control over financial institutions. It also deter- mines the accounting practices that financial agencies must follow and author- izes the establishment of new banks. 40. In addition to the agencies and funds mentioned before, the finan- cial system includes 26 banks (24 private and two government owned), a coopera- tives bank, 11 savings and loan institutions, 23 insurance companies, two stock exchanges, a warehousing firm, several foreign exchange houses, the Ecuadorian Social Security Institute (IESS) and eight financieras (seven private and one government-owned). Financieras, within the Ecuadorian context, are develop- ment finance companies that lend only to the productive sectors and which can not accept deposits from the public. Banks and financieras lend to industry, agriculture and commerce. The housing sector is mainly financed by savings and loan institutions, commercial banks, the IESS and the government-owned Ecuadorian Housing Bank. The IESS, besides providing typical hospital and health care services, extends loans to its affiliates and to the public sector. The credit operations of the government-owned National Development Bank (BNF) are oriented towards agriculture, forestry, fishery and livestock development. BNF also provides funds for small-scale industry. BNF is Ecuador's largest financial institution both in terms of its coverage (63 branches throughout the country) and its capital. 41. In 1963 the Government transformed the former Securities Commission into a financiera -- the Corporacion Financiera Nacional (CFN) -- primarily to serve the financial needs of industry. Currently CFN is the largest and oldest financiera in the country. In 1966, private business interests founded Ecuatoriana de Desarrollo S.A., Compania Financiera (COFIEC), Ecuador's second largest financiera. Both CFN and COFIEC have a long standing association with the Bank through three previous development banking loans and both are mature and efficient institutions. Six new private financieras have been established in the 1975-78 period.  - 11 - Operations 42. Ecuador's capital market is still in its infancy. It is small and the number of instruments available to investors is limited primarily to stocks, tax-free Government securities, mortgage bonds and long-term bonds offered by financieras. Owing to the market's size and the attractiveness of other instruments -- particularly tax-exempt bonds -- financieras have had diffi- culties in mobilizing long-term domestic resources. They are also generally restricted by existing regulations from passing along to their domestic clients the exchange risk on their foreign borrowings. 43. The maximum nominal interest rate for lending in Ecuador is 12 percent per annum. The lending rates on medium- and long-term loans rise to 14-16 percent per annum, including allowable commissions. In addition, the effective rate on mortgages currently exceeds 16 percent per annum and interest rates on foreign loans guaranteed by local financial institutions are set at LIBOR (or the US prime rate) plus 4 to 6 points per annum. Since recent domestic inflation has averaged 12 percent annually, normal financial operations in Ecuador now yield a positive interest rate in real terms. The exceptions to this rule have been (i) Central Bank loans through the MFF, which carry an interest of 9 percent per annum to ultimate borrowers; (ii) export promotion loans (8 percent interest annually); and (iii) loans to small faLrmers at 11 percent per annum. Despite these exceptions, on balance Ecuador's interest rate structure has been improving through a gradual increase of interest rates, an institution building feature of previous Bank operations in Ecuador. 44. Interest rates on savings range from 6 to 14 percent in Ecuador. These variations, coupled with differing lending rates, result in a wide range oi- spreads depending on the source, use and maturity of the operation. CFN, for example, obtains spreads of 6 to 8 percent annually when financing long-term loans with its own bonds. Banks, on the other hand, obtain only a 2 percent margin on mortgage loans. 45. The current structure of interest rates and commissions, although a considerable improvement on the past, has not yet given the financieras or other institutions sufficient incentive to intermediate long-term resources. Under present market condlitions, for example, it would be difficult for financieras to issue bondLs at less than 14 percent per annum. Thus, lending at 14-1i6 percent per annum would produce a 2 percent per annum spread, at most, on long-term operations. This is far less than the 4 percent per annum margin on easily available foreign short- and medium-term resources or the six percent per annum margin on MFF resources. A further rationalization of the interesit rate structure iLs, therefore, needed. 46. The proportion of credit to GDP, around 40 percent, reflects the relatively low level of intermediation in the economy, compared to industrialized countries. Moreover, this ratio failed to increase during the period of rising rea:L income in the early and mid seventies. Only in 1977 did the level of intermediation exceeded that of 1970, as a result of of further participation of official banks -- mainly the Central Bank -- and financieras in the credit market.  - 12 - 47. The proportion of credit granted by financial institutions changed during the 1970-77 period, basically as a result of the establishment of new financieras and the growth of CFN and COFIEC. Financieras intermediated 13.1 percent of total credit in 1977 compared to 6.9 percent in 1970. Credit provided by the private financieras outgrew that provided by CFN although the maturity of the former is mainly short-term as opposed to the longer term financing provided by CFN. Among banks, the shifts in intermediation have also been noteworthy. Since the oil boom, official banks have become one of the major sources of credit. Between 1970 and 1977, the share of credit they provided grew from 30 to 38 percent, mainly at the expense of private banks. The operations of the BNF substantially increased in 1973 and 1974 and the Central Bank has become a major source of credit both to the public and financial institutions. 48. The sectoral distribution of credit during 1977 showed commerce as the largest recipient (40 percent), followed by industry (28 percent), agriculture and livestock (13 percent), and other sectors (19 percent). Most credit is still oriented towards financing working capital. Banks, which lend almost exclusively to the commercial sector, are still the main source of credit (87 percent). Financing to industry, albeit still insuf- ficient, has substantially expanded since 1974. Banks account for 45 percent of industrial credit, financieras for 31 percent and the Central Bank for the remaining 24 percent. Past Bank Lending and Strategy 49. The Bank has extended three development banking loans to Ecuador totalling US$53.8 million, net of cancellations. In addition, the IFC has made a small (US$250,000) investment in COFIEC. The Bank loans have been primarily on-lent to CFN and COFIEC although newly established financieras are also eligible to participate in the most recent loan. 50. Both the first and second development banking projects (financed with the help of Loan 721-EC approved on December 15, 1970 and Loan 930-EC approved on June 26, 1973) are completed. The third project, financed by Loan 1359-EC approved on December 28, 1976, is well advanced; US$17.8 million of the loan's US$26 million amount has already been disbursed and about two-thirds of the balance is committed. 51. A Bank Project Performance Audit Report has been prepared in connec- tion with the first two projects and will be issued in the first half of June. It concludes that both projects were successful in increasing long-term financing to industry and in helping to build CFN and COFIEC into strong and mature institutions with improved subproject appraisal and supervision capabilities. It adds, however, that more needs to be done in the area of long-term mobilization of domestic resources and suggests that both the Government and the Bank should focus increasingly on ways to develop Ecuador's capital market rather than concentrating only on interest rate issues. 52. The third development banking project was already moving in this direction. The loan agreement called for the Government to set up an office which would recommend ways of strengthening Ecuador's capital market. Dis- agreements within Ecuador concerning under whose auspices the office would  - 13 - function, however, prevenited its establishment. More recently, this issue has been resolved and the Government is setting up a Capital Markets Study Unit (CMSU) within the Central Bank. The CMSU would carry out studies leading to reforms of law, regulations and practices governing financial institutions and Ecuador's capital market. During negotiation of the proposed loan, the Bank reached preliminary agreement with the Central Bank on an initial program of priority studies to be undertaken by the CMSU. The Bank would be afforded an opportunity to comment on the draft studies' terms of reference and recom- mendations and on the legislative or regulatory measures proposed by such studies (Section 4.10 of the draft Loan Agreement). In this way, the project discussed below would provide a vehicle for a continuation of the dialogue between the Government and the Bank on ways of overcoming weaknesses in Ecuador's capital markets. IV. THE PROJECT 53. The project was identified by a Bank mission in March 1978 and was prepared by the Central Bank, CFN and COFIEC with the help of Bank staff. It was appraised in October/November, 1978 and the appraisal mission's report (No. 2414b-EC dated May 31], 1979) and entitled "Staff Appraisal Report - Fourth Development Banking Project" is being distributed separately. Annex III contains a Supplementary Project Data Sheet. Negotiations of the loan took place in Washington from May 7 through 18, 1979 and the Ecuadorian Delegation was headed by Mr. Mario Erazo, Ecuador's Attorney General. Projqct EVi ctive s 54. Building on the achievements and experience of the first three devel- opment banking projects, the proposed loan would continue the shift begun under the third project towards fuller development of Ecuador's capital market. More specifically, it wouLd aim at: (i) studying and adopting measures which would strengthen the capital market; (ii) encouraging financieras to inter- mediate additional medium-- and long-term resources for financing efficient investment projects, part:Lcularly in the industrial sector; and (iii) promoting competition in the mobilization and channeling of long-term resources by opening participation in the proposed projects not only to CFN and COFIEC but also to the newer financieras. Participating Institutions 55. The proposed loan would be made to the Republic of Ecuador with the Central Bank acting as its financial agent. CFN, COFIEC and eligible newly established financieras would participate in the project. All financieras would have access to loan funds in accordance with their ability to mobilize and lend medium- and long--term resources and taking into account the efficiency with which they process subprojects (paragraph 77). a. CFN 56. CFN is Ecuador's oldest and largest financiera. It is Government- owned. Seven of the nine members of its Board are ministers, thus ensuring  - 14 - that CFN's policies and operations follow the Government's development strategy. However, CFN enjoys a large measure of autonomy in its day-to-day operations and is mainly active in the private industrial sector. 57. Over the years CFN has built up a competent management team and a strong and highly motivated staff. This has enabled CFN to double its assets in real terms since 1975 (to about US$250 million equivalent) with only a 50 percent increase in professionals (to 152). Because of efficient management and economies of scale, CFN's administrative costs have been lowered to 2.1 percent of its average total assets. 58. CFN's operations are, in general, soundly managed. With a few exceptions discussed below, its staff submit projects to a rigorous appraisal and systematically supervise ongoing operations. CFN also strictly monitors disbursements and ensures that its clients follow appropriate procurement procedures. CFN's accounts are satisfactorily audited and no recent reports have had any qualifications. 59. Through 1977, roughly half of CFN's resources came from equity and long-term loans. Of the latter, all but a small fraction were foreign loans. CFN has also raised large amounts of domestic resources through tax exempt bonds. CFN's most important lending activity consists of long-term lending to industry. In 1977 CFN made 97 loans averaging about US$500,000 in size. Approximately 60 percent of the loans were made to firms located in Quito and Guayaquil, the country's two largest growth poles. Two of the fastest growing components of CFN activities are letter of credit and guarantee operations. CFN has also invested about 15 percent of its assets in equity participations in 47 firms. 60. CFN's return on equity in 1977 was 6.5 percent in nominal terms and is estimated to have been only about four percent in 1978. In real terms, its returns on equity in 1977 and 1978 were -5.6 percent and -7.2 percent, respectively. The financiera's financial performance was clouded by its excessive exposure -- through investments, loans and guarantees equal to 88 percent of its equity -- in a sugar refinery which it now almost wholly owns. Because of its recognized administrative competence, CFN was directed by the Government to intervene in the Government-sponsored refinery to stave off its bankruptcy owing to depressed sugar prices. 61. Because of the experience and competence of its staff, CFN may in future be directed by the Government to participate, as its financial agent, in other large industrial ventures which Ecuador is considering. Assurances were, therefore, obtained during negotiations that CFN would not normally make any loans or investments, or extend guarantees, which result in an aggregate exposure to a firm or group of related firms exceeding 20 percent of its equity or which failed to meet its usual appraisal standards. Those investments which the Government caused CFN to make and which did not comply with the financiera's usual investment criteria would have to be channelled through a mechanism, satisfactory to the Bank, which would protect CFN from all risks arising from these investments (Section 4.08 of the draft Loan Agreement). The funds so invested would be directly provided by the Government and administered by CFN but would be legally separate from CFN's ordinary operations. In addition, it was agreed during negotiations that by June 30, 1980, CFN would submit to the Bank a program  - 15 - for dispos:ing of its existing excessive exposure in individual firms, including t:he sugar refinery. CFN would carry out its divestment program according t:o a timetable satisfactory to the Bank (Section 2.11(a)(i) and (ii) of the draft CFN Project Agreement). Finally, to enhance CFN's profitability, assurances were obtained during negotiations that its policy statement would be modified so as to explicitly state the objective that CFN would earn sufficient net income to at least maintain its equity in real terms (Section 2.13(ii) of the draft CFN Project Agreement). Adoption of this change in the policy statement would be a condition of disbursement to CFN (Section 2.02(b)(v) of the draft Loan Agreement). 62. Another worrisome aspect of CFN's finances is that it is currently bearing the foreign exchange risk on about US$130 million in loans. This is due to CFN's extensive foreign borrowings and to existing regulations which prohibit financieras from passing along the exchange risk on foreign borrow- ings to their sub-borrowers.. CFN will conduct a study of this problem and submit to the Bank a program by June 30, 1980 to reduce foreign borrowings on which it would bear the exchange risk (Section 2.11(b)(i) and (ii) of the draft CFN Project Agreement). In addition, one of the first priority studies which the CMSU would carry out would deal with changes in regulations to permit domestic financial institutions to pass along the exchange risk on foreign borrowings to ultimate beneficiaries. This should pave the way for reform on this matter by the Monetary Board. In the meanwhile, the Government would fully reim.burse CFN for losses on existing and future borrowings arising from exchange rate fluctuations (Section 4.06(a) of the draft Loan Agreement). 63. With the safeguards referred to in the two preceding paragraphs, CFN's return on equity and overall financial situation is expected to improve markedly. Moreover, its portfolio -- 16 percent in arrears as of end 1978, mainly because of loans to the sugar refinery -- would also return to satis- factory levels. For these reasons, CFN would be permitted to increase its debt equity ratio from the present 6:1 to 8:1 (Section 2.09 of the draft CFN Project Agreement). b. COFIEC 64. With assets of about US$145 million, COFIEC is Ecuador's second largest financiera. It was founded in 1966 by private business interests and has grown over the years into one of the most widely held companies in Ecuador w:ith over 400 shareholders. Since first receiving Bank support under the first development banking loan in 1970, COFIEC has greatly matured as an institution. It has a competent management and improving professional staff. The financiera is pursuing an aggressive training program, both in Ecuador and abroadl, to further upgrade its staff. 65. COFIEC conducts :its operations in accordance with a generally sound policy statement. The statement limits COFIEC's exposure to a single borrower to 25 percent of its equity and prohibits the company from bearing the exchange risk on its foreign borrow:ings. In line with a similar restriction on the new financieras expected to participate in the proposed loan, COFIEC's participa- tion in the project would be conditional on its modifying its policy statement so as to limit the company's aggregate exposure to firms controlled by its principal shareholders -- those holding more than one percent of COFIEC's  - 16 - equity -- to no more than 200 percent of the company's equity (Section 2.15 (ii) of the draft COFIEC Project Agreement and Section 2.02(b)(vi) of the draft Loan Agreement). 66. In its day-to-day operations, COFIEC has made considerable progress. Its staff now thoroughly appraise subprojects, closely supervise clients in arrears and have developed adequate disbursement procedures. COFIEC's accounts are satisfactorily audited and recent reports have no significant qualifications. 67. Since 1974 COFIEC's portfolio has increased by 10.4 percent per annum in real terms, although growth slowed down somewhat after 1976. About 60 percent of COFIEC's portfolio is in industry, 15 percent in agriculture and the balance in other sectors, e.g., tourism. COFIEC's efforts to decentralize credit have enabled it to make about a third of its loans to clients located outside Quito and Guayaquil. COFIEC's portfolio is sound. As of end-1977, arrears accounted for only 3.5 percent of the total portfolio. 68. COFIEC earned an average nominal return on equity of 17.2 percent during the 1976-78 period. Because of inflation in Ecuador, however, the real return was considerably less, about four percent. Looking towards the future, projected lower inflation and new higher commissions on long-term lending should enable COFIEC to improve its profitability. In order to improve the company's finances still further by giving it a higher leverage, and because COFIEC enjoys a sound financial position, during negotiations the Bank agreed to increase the financiera's debt equity ratio from 8:1 to 10:1 (Section 2.11 of the draft COFIEC Project Agreement). c. The New Financieras 69. Between 1975 and 1978, six new financieras have been founded in Ecuador. Several have foreign capital but Ecuadorians hold a majority of shares in all six; CFN is a minority shareholder in four of them. The new financieras' sponsors are varied. Three are backed by regional groups--two from Guayaquil and the third from Cuenca, Ecuador's third largest city. Another is sponsored by a commercial bank. Quito and Guayaquil businessmen not previously associated with the financial sector are active in the remaining two. 70. All six new financieras are organized along conventional lines. They have boards of directors, executive committees and strong presidents or general managers. Because they are new and small, their administrative procedures are somewhat informal. In general, the quality of management and staff at the new financieras is, however, good with one or two exceptions where low salaries may be a problem. All have drawn some of their personnel from local financial institutions -- COFIEC, CFN and commercial banks -- or from foreign commercial banks (e.g., Citibank) and international organizations. 71. To date, none of the new financieras have drawn up policy statements. They operate on the basis of their statutes, which are quite broad. The adoption of policy statements satisfactory to the Bank would, therefore, be a condition of disbursement to any new financiera (Section 2.02(b)(vii) of the draft Loan Agreement). The statements would establish satisfactory limits to the amount of foreign exchange risk they could bear and would stipulate that aggregate lending to companies controlled by a financiera's shareholders could not exceed 200 percent of the financiera's equity.  - 17 - 72. Although the new financieras have staff members with some experience in long-term lending and project evaluation, all have to develop appropriate appraisal and supervision capabilities. Through close supervision of partici- pating new financieras, the Bank will assist them in this process. CFN will also provide technical assistance to those new financieras which request it. 73. Thus far, the new financieras have operated with only equity resources arLd short- and medium-term foreign commercial bank lines of credit. The amount of equity they have attracted, however, is noteworthy, totalling about US$17 million by end-1977. This amount slightly exceeds COFIEC's equity. In order to be eligible to participate in the proposed project, a new financiera would have to have a paid-in capital of at least S/50 million, equivalent t:o US$2 million at the current exchange rate (Section 5.01(b)(i) of the draft Loan Agreement). The new financieras' resource mix has caused most of their lending to be short- and medium-term; 80 percent of loan amounts are due within one year. As a condition of participation in the proposed loan, new financieras would be required to have at least five lending operations in their portfolio with an original final maturity of not less than three years (Section 5.01(b)(iii) of the draft Loan Agreement). 74. The new financieras have not encountered serious financial problems owing to their generally good management, the close oversight of the Super- intendency of Banks and their very newness. Loans in arrears constitute a neg- ligible percentage of their portfolios and all but one of the financieras are adequately profitable. Unti:L they are more firmly established, however, new financieras would have to have debt equity ratios not exceeding 7:1 in order to participate in the project (Section 5.01(b)(ii) of the draft Loan Agreement). 75. By June 30, 1980, the Bank would assess each potentially eligible new financiera to determine which had developed sufficiently to have access to loan funds. In making this determination, the Bank would flexibly apply the criteria referred to in paragraphs 73 and 74. It would also evaluate (i) the adequacy of each new financiera's management, staff and procedures; (ii) the financiera's financial soundness; (iii) each company's ability to prepare, evaluate and supervise subprojects; and (iv) the ability and willingness of each new financiera to progressively orient its operations to medium- and long-term financing (Section 5.01(a) of the draft Loan Agreement). Upon completion of each review, the Bank would enter into a project agreement with each financiera which was found eligible to participate in the project (Section 5.01(c) of the draft Loan Agreement). Loan Features 76. Ihe proposed US$40 million loan would fill 70 percent of the finan- cing gap--estimated at about US$57 million--which Ecuador's development banks are expected to face during the 1979-81 period. This gap assumes that the demand for long-term loans will grow by about 6 percent per annum in real terms during the three years; in question, which is reasonable. The remaining 30 percent of the gap is expected to be met by additional domestic resources which the financieras would be able to mobilize as the result of the incentive allocation mechanism discussed below.  - 18 - 77. Loan funds would be allocated to eligible financieras in proportion to their ability to mobilize term domestic resources, e.g., through bonds, medium- and long-term loans or equity contributions. Due regard would also be given to the speed with which participating financieras were able to commit loan funds (Schedule 2(a) of the draft Loan Agreement). Based on past experi- ence, CFN is expected to use about US$18 million (or 45 percent) of eligible loan funds while COFIEC would use about US$14 million (35 percent). The remain- ing amount (20 percent) is expected to be drawn down by the new financieras. Both the Government and the Bank would review the allocation mechanism from time to time with the first review to take place no later than December 31, 1980. Any needed adjustment in the mechanism would be made by the Bank after exchanging views with the Government (Schedule 2(c) of the draft Loan Agreement). These reviews would help assure that all eligible financieras were having fair access to loan funds while encouraging them to mobilize other term domestic resources. 78. CFN would have a free limit of US$1.5 million, COFIEC's free limit would be US$1.25 million and the new financieras would have a free limit of US$250,000 except that the Bank would review the first two sub-loans of each new financiera regardless of their amount (Section 2.02(c) of the draft Loan Agreement). These limits are appropriate considering each financiera's size, maturity and previous relationship with the Bank under the first three development banking loans. An economic rate of return would be calculated on all subprojects receiving more than US$150,000 in Bank funds or more than US$500,000 in other medium- and long-term funds (Section 2.04(b) of'the draft CFN and COFIEC Project Agreements). Relending Terms 79. The proposed Bank loan would be made to the Republic of Ecuador at 7.9 percent interest. It would be repayable within 15 years on a composite amortization basis including three years of grace. The Central Bank would on-lend the loan's proceeds, in Sucres, to participating financieras at 10.7 percent interest per annum. The differential, 2.8 percent per annum, would be collected by the Central Bank as a fee for assuming the foreign exchange risk on the loan and for serving as the Government's financial agent. Participating financieras would re-lend the loan's proceeds to the ultimate beneficiaries at an interest rate of 14-16 percent per annum, depending on the subloans' maturities. Subloans would have maturities of up to 15 years and grace periods of no more than three years, depending on the type of investment being financed. With inflation in Ecuador expected to average about 11 percent per annum in the 1979-82 period, the interest rates to be charged sub-borrowers by the financieras would be positive in real terms. They would also afford participating financieras satisfactory spreads of between 3.3 and 5.3 percent per annum. No more than US$3 million in Bank funds under the proposed loan or more than US$5 million under this and previous development banking loans would be committed to a single firm or group of related firms (Section 3.02(b) of the draft Loan Agreement). Disbursement and Procurement 80. The terminal date for submission of subprojects would be June 30, 1982, and the proposed loan's closing date would be June 30, 1983. Disburse- ments would be made only against foreign exchange expenditures associated with the financieras' subloans. Procurement would be in accordance with the standard practice for Bank development banking loans.  - 19 - Project Benefits and Risks 81. Based on the experience of the first three development banking loans to Ecuador, the average subloan would be for about US$500,000. Approximately 80 subprojects can be expected to benefit from the proposed loan. These would require total investments of around US$160 million. Most subprojects are expected to be in the food processing, beverage, textiles and forest products subsectors--where Ecuador enjoys a comparative advantage -- and would have an economic return of over 20 percent. The subprojects would also directly generate about 3,200 new jobs. 82. Creation of the CMSU would be an important institution-building feature of the project which is expected to have far-reaching effects. Through its studies and proposals for reform of the capital market, the CMSU would enable Ecuador's financieras to tap an increasing share of the country's important savings potential and to channel these resources towards efficient investments which would spur growth. By conditioning access to loan funds on a financiera's ability to mobilize term resources, the proposed project would give Ecuador's development banks an additional incentive to engage in this necessary task. 83. Establishment, as needed, of a special mechanism to allow the Govern- ment to invest in large industrial ventures through CFN while protecting the financiera's equity is another important institution-building element of the project. The mechanism would enable the Government to make use of CFN's unique technical and administrative abilities to help carry out large state- sponsored ventures without compromising the company's financial soundness. 84. The proposed operation faces no unusual project risks. There is, however, some uncertainty as to how the private sector will react to the as yet undefined industrial policies of the new administration which will be inaugurat:ed in August. In view of recent statements by President-elect Roldos inviting the private sector to continue playing a major role in Ecuador's development and since many of Mr. Roldos' key advisors are well- known businessmen or respected economists, it is unlikely that Ecuador's investment climate will deteriorate owing to the upcoming political change. PART V - LEGAL INSTRUMENTS AND AUTHORITY 85. The draft Loan Agreement between the Republic of Ecuador and the Bank, the draft Project Agreements between the Bank and CFN and COFIEC, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of the draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 86. The draft agreements conform to the normal pattern for loans for development banking projects. The main features of the draft Loan and Project Agreements are referred to in the text and listed in Section III of Annex III. Special conditions of disbursement for CFN and COFIEC would be the modification of their policy statements in a manner satisfactory  - 20 - to the Bank (paragraphs 61 and 65). A special condition of disbursement for each new financiera would be their adoption of policy statements satisfactory to the Bank (paragraph 71). 87. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 88. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 6, 1979 Washington, D.C.  - 21 - ANiIEX I TABLE 3A Page 1 of 5 pages ECUADOR - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES ECUADOR /a LAND AREA (THOUSAND SQ. EM.) - HOST RECENT ESTIMATE) TOTAL 283.6 SAME SAME NEXT HIGHER AGRICULTURAL 65.2 MfOST RECENT GEOGRAPHIC INCOHE INCOlE 1960 /b 1970 /b ESTIMATE /b REGION /c GROUP Id GROUP /e GNP PER CAPITA (US$) .. 360.0 770.0 1066.7 867.2 1796.4 ENERGY CONSUMPTION PER CAPITA (EtLOGRAMS OF COAL EQUIVALENT) 201.0 297.0 442.0 911.1 578.3 1525.0 POPULATION AND VITAL STATISTICS TOTAL POPULATION, KID-YEAR (MILLIONS) 4.2 5.9 7.6 URBAN POPULATION (PERCENT OP TOTAL) 36.0 /fLL 38.3 41.6 57.9 46.2 52.2 POPULATION DENSITY PER SQ. KD. 15.0 21.0 27.0 25.6 50.8 27.6 PER SQ. SK. AGRICULTURAL LAND 89.0 99.0 117.0 77.6 93.3 116.4 POPULATION AGE STRUCTURE (PERCENT) C-14 YRS. 45.0 /fi. 47.6 If 44.5 /1 42.0 42.9 34.8 15-64 YRS. 51.8 /f.R 49.5 /f 51.7 /f 52.2 53.5 56.0 65 YRS. AND ABOVE 3.2 /f.a 2.9 /f 3.8 If 3.7 3.5 5.7 POPULATION GROWTH RATE (PERCENT) IOTAL 3.0 3.5 3.6*** 2.7 2.5 1.6 URBAN 5.0 /h 4.1 /i 5.6 4.3 4.7 3.4 CRUDE BIRTH RATE (PER THOUSAND) 46.3 45.0 41.8 35.8 37.8 27.0 CRUDE DEATH RATE (PER THOUSAND) 16.9 12.0 9.5 9.1 10.8 9.9 GaCss REPRODUCTION RATE .. 3.3 3.1 2.6 2.5 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 9.0 34.8 VSERS (PERCENT OF MARRIED WOMEN) .. .. 6.3 15.1 20.0 19.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION EtER CAPITA (1970-100) 88.9 100.0 95.1 102.1 107.3 103.8 PEE CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 81.0 91.0 93.0 103.9 105.3 110.4 P'ROTEINS (GRAMS PER DAY) 46.0 49.0 47.4 60.3 63.0 77.7 OF WHICH ANIMAL AND PULSE 24.0 22.0 21.9 26.7 21.7 22.2 CHILD (AGES 1-4) MORTALITY RATE 21.5 14.6 .. 8.7 8.0 1.9 HEALTH LIST EXPECTANCY AT BIRTH (YEARS) 51.0 57.2 59.6 62.6 57.2 63.0 THRANT MORTALITY RATE (PER THOUSAND) 100.0 76.6 70.2 56.9 53.9 38.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) 'OTAL .. 34.0 36.0 60.7 56.8 67.7 DRBAN *- 76.0 67.0 78.0 79.0 83.5 RURAL .. 7.0 8.0 34.9 31.8 41.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 61.1 30.9 70.3 DRBAN .. .. .. 80.3 45.4 90.7 RURAL .. .. 7.0 25.4 16.1 38.3 POi?ULATION PER PHYSICIAN .. 2870.0 2110.0 1899.3 2706.8 1310.8 PO'?ULATION PER NURSING PERSON .. 2640.0 2820.0 /I 1220.1 1462.0 849.2 POPULATION PER HOSPITAL BED rOTAL 520.0 /I,k 430.0 470.0 422.3 493.9 275.4 JRBAN .. 190.0 .. 258.2 229.6 129.9 RURAL .. 4740.0 .. 2281.6 2947.9 965.9 ADM3AISSIONS PER HOSPITAL BED .. 17.0 *- 25.6 22.1 18.9 HOUS lNG AVERAGE SIZE OF HOUSEHOLD TOTAL 5.1 /j 5.2 .. 5.2 5.2 3.9 SRBAN .. .. .. .. 5.0 RURAL .. .. .. .. 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.5 /R *- *- 2.0 2.0 0.9 CRBAN 2.1 L . .. 2.1 1.5 0.8 RURAL 2.8jj .. .. 2.7 2.7 1.0 ACCESS TO U.ECTRICITY (PERCENT OF DWELLINGS) TOTAL 32.0 jj .. 41.0 51.2 64.1 59.2 URBAN 78.5 .. .. 77.3 67.8 78.0 RURAL 6.0 /R ' 12.0 12.8 34.1 12.5  - 22 - ANNEX I TAWLE 3A Page 2 of 5 pages ECUADOR - SOCIAL INDICATORS DATA SHEET REPERENCE GROUPS (ADJUSTED AVERAGES ECUADOR - MOST RECENT ESTIMATE) SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 Lb 1970 /b ESTIMTE Lb REGION /c GROUP Id GROUP /e EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 83.0 97.0 102.0 103.5 99.8 97.6 FENALE 79.0 95.0 100.0 102.9 93.3 87.4 SECONDARY: TOTAL 12.0 26.0 38.0 37.2 33.8 47.8 FEKALE 10.0 24.0 36.0 37.9 29.8 42.6 VOCATIONAL (PERCENT OF SECONDARY) 29.0 29.0 23.0 14.7 12.8 22.7 PUPIL-TEACHER RATIO PRIMARY 39.0 38.0 39.0 32.8 34.9 25.4 SECONDARY 11.0 15.0 16.0 17.8 22.2 24.9 ADULT LITERACY RATE (PERCENT) .. 68.0 69.0 /1 74.9 71.8 96.3 CONSUMPTION PASSENIGER CARS PER THOUSAND POPULATION 2.0 5.0 5.0 26.9 12.4 32.3 RADIO RECEIVERS PER THOUSAND POPULATION 41.0 279.0 .. 173.5 104.5 201.9 TV RECEIVERS PER THOUSAND POPULATION 0.5 25.0 36.0 69.4 28.1 97.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 54.0 41.0 41.0 72.8 45.2 70.9 CINEMA ANNUAL ATTENDANCE PER CAPITA .. 4.0 5.6 4.3 4.6 4.4 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 1400.0 1700.0 1900.0 FEMALE (PERCENT) 16.2 19.1 20.1 21.4 25.7 17.4 AGRICULTURE (PERCENT) 57.0 54.0 43.5 37.8 46.2 38.4 INDUSTRY (PERCENT) 19.4 22.2 PARTICIPATION RATE (PERCENT) TOTAL 32.5 31.7 31.6 30.8 33.8 33.7 MALE 54.3 51.0 50.2 47.2 48.1 50.8 PEMALE 10.5 12.2 12.8 13.2 17.3 12.6 ECONOMIC DEPENDENCY RATIO 1.7 1.8 1.8 1.7 1.4 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY RICHEST 5 PERCENT OF HOUSEROLDS .. .. .. 28.9 23.6 20.2 HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. .. 57.7 52.3 47.9 LOWEST 20 PERCENT OF HOUSEHOLDS .. .. .. 3.2 4.3 3.2 LOWEST 40 PERCENT OF HOUSEHOLDS .. .. .. 10.7 13.1 13.7 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. .. 251.9 191.9 RURAL '- * 196.0 200.6 193.1 157.9 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) UR8AN '- *- 161.0 403.1 319.8 448.8 RURAL .. . 115.0 258.0 197.7 313.1 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 23.0 24.8 19.8 23.2 RURAL '- *- 90.0 65.2 35.1 54.5 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme valus of the indicacor and the moet populated country in each group. Coverage of countries among the indicators depends on availability of data and i nort uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between L973 and 1977. /c Latin America & Caribbean; /d Intermediate Middle Income ($551-1135 per capita, 1976); Se Upper Middle Income (S1136-2500 per capita, 1976); /f Excluding nomadic Indian jungle population; /g 1962; /h 1950-62; /i 1962-70; LI 1972; /k Government hospital establishments only. Sepretmber, 1978 A* recent economic mission (1978) has estab lished that the actual annual groywth of populationis35  - 23 - ANNEX I Page 3 of 5 pages DEFINITIONS OF SOCIAL INDICATORS No_tA: The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. Due to lack of data, group averages for Capital Surplus Oil Exporters and indicators of access to water and excreta disposal, housing, income distribution and poverty are simple population-weighted geometric m.emos without the eaclasiom of extreme values. LAND AREA (thousand sq. kn) Population per hospital bed - total, urban, and rural - Population (total, Total - Total surface area comprising land area and inland waters. urban, and rural) divided by their respective number of hospital beds Agriculcural - Most recent estimate of agricultural area used temporarily available in public and private general and specialized hospital and re- or permanently for crops, pastures, market and kitchen gardens or to habilitation centers. Hospitals are establishments permanently staffed by lie fallow. at least one physician. Establiahments providing principally custodial care are not included. Rural hospitals, however, include health and medi- GNP PER CAPITA (US$) - GNP per capita estimates at current market prices, cal centers not permanently staffed by a physician (but by a medical as- calculated by same conversion method as 'World Bank Atlas (1975-77 basns); sistant, nurse, midwife, etc.) which offer in-patient accommodation and 1960, 1970, and 1977 data. provide a limited range of medical facilities. Admissions per hospital bed - Total numnber of admissions to or discharges ENERGY CONSUMPTION PER CAPIPA - Annual consumption of cosmarcial energy from hospitals divided by the number of beds. (coal and lignite, petroleum, natural gas and hydro-, nuclear and geo- thermal electricity) in kilograms of coal equivalent per capita. HOUSING Average sine of household (persons per household) - total, urban, and rural- POPULATI0N1 AND VITAL STATIS1'ICS A household consists of a group of individuals who share living quarters Total population. mid-year (millions) - As of July 1; if not available, and their main meals. A boarder or lodger nay or may not be included in average of two end-year estimates; 1960, 1970, and 1977 data. the household for statistical purposes. Statistical definitions of house- Urban population (percent of total) - Ratio of urban to total popula- hold vary. tion; different definitions of urban areas may affect comparability Average number of persons per room - total, urban, and rural - Average nom- of data among countries. ber of persons per room in all, urban, and rural occupied conventional Population density dwellings, respectively. Dwellings exclude non-permanent structures and Per sq. km. - Mid-year population per square kilometer (100 hectares) unoccupied parts. Of total area. Access to electricity (percent of dwellings) - total, urban., and rural - Per sq. km. agriculture laRnd - Computed as above for agricultural land Conventional dwellings with electricity in living quarters as percentage only. of total, urban, and rural dwellings respectively. Population age structure (percent) - Children (0-14 years), working-age (1;-64 years), and retired (65 years and over) as percentages of mid- EDUCATION year population. Adjusted enrollment ratios Population growth rate (percent) - total, and urban - Compound annual Primary school - total, and fendls - Total and female anerllmn.t of all ages growth rates of total asd urban mid-year populations for 1950-60, at the primary level as percentages of respectively primary school-age 1960-70, and 1970-75. populations; normally includes children aged 6-11 years but ad5usced for Crude birth rate (per thousand) - Annual live births per thousand of different lengths of primary education; for countries with sniversal edu- oid-year population; ter-year arithmetic averages ending in 1960 and cation enrollment may exceed 100 percent siace acne pupils are below or 1970 and five-year avera.ge ending in 1975 for most recent estimate. above the official school age. Crude death rate (per thousand) - Arnual deaths per thousand of mid- Secondary school - total, and female - Computed as above; secondary oduca- year population; ten-year arithmAetic averages ending in 1960 and 1970 tion requires at least four years of approved primary instruction; pro- and five-year average enxding in 1975 for most recent estimate. vides general vocational, or teacher training instructions for pupils Oross reproduction rate - Average number of daughters a woman will bear usually of 12 to 17 years of age; correspondence courses are generally in her normal reproduct:Lve period if she experiences present age- excluded. specific fertility rate,;; usually five-year averages ending in 1960, Vocational enrollment (percent of secondary) - Vocational institutions in- 1970, and 1970. clude technical, industrial, or other programs which operate independently Family planning - accepto:s., annual (thousands) - Annual number of or as departments of secondary Institutions. acceptors of birth-control devices under auspices of notional family Pupil-teacher ratio - primnary, and secondary - Total students enrolled in planning program. primary and secondary levels divided by numbers of teachers in the corre- Family planning - users (percent of married women) - Percentage of sponding levels. married women of child-oearing age (15-44 years) who use birth-control Adulc literacy rate (percent) - Literate adults (able to read and write) as devices to all maried oee in same age group. a percentage of total adult population aged 15 years and over. FOOD AND NUTRITION CONSUDMPTION Index of food production per capita (1970-100) - Index number of per Passenger cars (per thousand population) - Passenger cars comprise motor cars capita annual production of all food commodities. seating less chan eight persons; excludes ambulances, hearses and military Per capita supply of calories (percent of requirements) - Computed from vehicles. energy equivalent of rat food supplies available in country per capita Radio receivers (per thousand population) - All types of receivers for radio per day. Available supplies comprise domestic production, imports less broadcasts to general public per thousand of population; excludes unlicensed exports, and changes in stock. Net supplies exclude animal feed, seeds, receivers in countries and in years when registration of radio sets was in quantities used in food processing, and losses in distribution. Re- effect; data for recent years may not be comparable since most countries quirements were estimated by FAO based on physiological needs for nor- abolished licensing. mal activity and heaslt, considering environmental temperature, body TV receivers (per thousand population) - TV receivers for broadcast to general weights, age aed sex distributions of population, and allowing 10 per- public per thousand population; excludas unlicensed TV receivers in coon- cent for waste at housethold level. tries and in years when registration of TV sets was in effoct. Per capita supply of prot:ein (grams per day) - Protein content of per Newspaper ctrculation (per thousand population) - Shows the average circula- capita net supply of f,ood per day. Net supply of food is defined as tion of "daily general interest newspaper", defined as a periodical publi- above. Requirements for all countries established by USDA provide for cation devoted primarily to recording general news. It is considered to a minimum allowance of 60 grams of total protein per day and 20 grams be "daily" if it appears at least four times a week. Of animal and pulse pro,tein, of which 10 grams should be animal protein. Cinema annual attendance per capita per year - Based on the number of tickets These standards are lower than those of 75 grams of tocal protein and sold during the year, including admissions to drive-in cinenas and mobile 23 grams of animal protein as an average for the worldl, proposed by units. FAO in the Third World Food Survey. Per capita protein suppli from animal and pulse - Prote:lm supply of food EMPLOYMENT derived from animals and pulses in grams per day. Total labor force (thousands) - Economically active persons, including armed Child (ages 1-4) mortality rate (per thousand) - Annual deaths par thous- forces and unemployed but exoluding housewives, students, etc. Defini- and in age group 1-4 years, to children in this age group. tions In various countries are not comparable. Female (percent) - Female labor force as percentage of total labor force. HEALTH Agriculture (percent) - Labor force in farming, forestry, hunting and fishing Life expectancy at birth (years) - Average number of years of life as percentage of total labor force. remaining at birth; usually five-year averages ending in 1960, 1970, Industry (percent) - Labor force in mining, construction, manufacturing and and 1975. electricity. water and gas as percentage of total labor force. Infant mortality rate (per thousand) - Annual deaths of infants under Participation rate (percent) - total, male, and female - Total, male, and one year of age per thousand live birhts. ' female labor force as percentages of their respective populatioin. Access to safe water (percent of population) - total, urban, and rural - These are ILO's adjusted participation rates reflecting e-sex Number of people (total, urban, and rural) with reasonable access to structure of the population, snd long time trend. safe water supply (includes treated surface waters or untreated but Economic dependency ratio - Ratio of population under 15 and 65 and over to uncontaminated water Euch as that from protected boreholes, springs, the labor force in age group of 15-64 years. and sanitary wells) aes percentages of their respective populations. In an urban area a public fountain or standpost located not more INCOME DISTRIBUTION than 200 meters from a house may be considered as being within rea- Percentage of private income (both in cash and kind) received by richest 5 sonable access of thal: house. In rural areas reasonable access would percent, richest 20 percent, poorest 20 percent, and poorest 40 percent imply that the housev:.fe or members of the household do not have to of households. spend a disproportionate part of the day in fetching the family's water needs. POVERTY TARGET GROLPS Access to excreta dispos;al (percent of nopulation) - total, urban, and Estimated absolute povertv income level (USS per capita) - urban and rural - rural - Number of peopls (total, urban, and rural) served by excreta Absolute poverty income level is that income level below which a minimal disposal as percentagese of their respective populations. Extreta nutritionally adequate diet plus essential non-food requirements is not disposal may include the collection and disposal, with or without affordable. treatment, of human eKcrets and waste-water by water-borne systems Estimated relative poverty income level (US$ per capita) - urban and rural - or the use of pit privies and similar installations. Relative poverty income level is that income level less than one-third Population per physician - Population divided by number of practicing per sapita personal income of the country. physicians qualified from a medical school at university level. Estimated population below poverty income level (percent) - urban and rural - Population per nursing person - Population divided by number of Percent of population (urban and rural) who are either "absolute poor" or practicing male and female graduate nurses, practical nurses, and "relative poor" whichever is greater. assistant nurses. Economic and Social Data Division Economic Analysis and Projections Departrent  - 24 - ANNEX I Page 4 of 5 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1978 ANNUAL RATE OF GROWTH (%, constant 1970 Sucres) US$ Mln. _ 1970 - 77 1978 GNP at Market Prices 6,937 100.0 8.6 6.8 Gross Domestic Investment 1,784 25.7 11.1 _10.0 Gross National Saving 1,624 23.4 7.0 26.7 Resource Balance 6 0.1 22.2 - Exports of Goods, NFS 1,734 25.0 8.1 15.5 Imports of Goods, NFS 1,728 24.9 12.4 21.0 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1977 Value Added1/ Labor Force2/ V. A. Per Worker US$ Mln. l %__ US$ % Agriculture 1,248 20.3 *943 43.1 1,323 47.1 industry 2,188 35.6 .449 20.5 4,873 173.5 Services 2,716 44.1 .788 36.4 3,403 121.1 Unallocated .. ..... Total/Average 6,152 100.0 2.190 100.0 2,809 100.0 GOVERNMENT FINANCE General Government Central Government Sucres Mln. % of GDP (Sucres Mln.) % of GDP 197977 74-76 1977 1977 1974-76 Current Receipts 27,366 17.8 20.3 17,033 11.1 11.6 Current Expenditures 21,659 14.1 12.1 12 352 8.0 6.8 Current Surplus 5,707 3.7 8.3 4,681 3.0 4.8 Capital Expenditures 13,495 8.8 11.5 2,704 1.8 2.4 External Assistance (net) 3,869 2.5 .5 MONEY, CREDIT and PRICES 1973 1974 1975 1'976 1977 1978 (Million sucres outstanding end period) Money and Quasi Money 12,515 17,430 19,816 26,814 32,238 36,215 Bank Credit to Public Sector (net) - 53 -1,427 -2,134 -2,132 -4,972 -6,531 Bank Credit to Private Sector 11,444 16,441 21,340 29,018 36,354 43,649 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 19.6 18.6 18.3 20.6 21.0 15.7 General Price Index (1970 = 100) 132.0 162.0 185.2 204.1 230.5 260.7 General Price Index (Annual growth rate) 12.0 22.7 14.3 10.2 12.9 13.1 not available not applicable NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. _ Industry includes mining, manufacture, electricity and water and construction. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists krtaiuly of unemployed workers seeking their first job. Labor force for 1977 are estimated based on average annual growth rates by sector during the period 1972-76.  - 25 - ANNEX I Page 5 of 5 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1976-78) 1975 1976 1977 1978 US $ Mln. % (Millions US $) Exports of Goods, NFS 1110 1419 1603 1734 Petroleum 678 48.0 Imports of Goods, NFS -1295 -1340 -1811 -1728 Bananas 163 11.5 Resource Gap (deficit Coffee 220 15.6 - -) - 185 79 - 208 6 Cacao 48 3.4 Fishery 39 2.8 Net Factor Payments - 67 - 117 - 170 - 206 All other commodities 265 18.8 Net Transfers 32 31 36 40 Total 1,413 100.0 Balance on Current Account - 220 - 7 - 341 - 161 Direct Foreign Investment 95 - 20 35 40 EXTERNAL DEBT, DECEMBER 31, 1978 Net MLT Borrowing Disbursements 137 233 637 514 US $ Mln. Amortization - 33 - 56 - 47 - 247 Subtotal 104 177 590 267 Public Debt, incl. guaranteed 1,401 Capital Grants - - - - Non-Guaranteed Private Debt Other Capital (net) - 45 53 - 172 - 109 Total outstanding and disbursed Other items n.i.e. - - - - Increase in Reserves (-) 65 - 203 - 112 37 1/ Gross Reserves (end DEBT SERVICE RATIO for 1978 year) 312 559 744 765 Net Reserves (end % year) 257 457 613 646 Public Debt, incl. guaranteed 14.1 Fuel and Related Materials Non-Guaranteed Private Debt Imports Total outstanding and Disbursed of which: Petroleum 14 7 9 9 Exports of which: Petroleum 617 737 648 678 IBRD/IDA LENDING, (Apr. 1979) (Million US $): IBRD IDA RATE OF EXCHANGE (official Rate) Through - 1971 Since - 1971 Outstanding and Disbursed 69.9 36.5 US $ 1.00 = 25 Sucres US $ 1.00 - 25 Sucres Undisbursed 128.1 1.6 S 1.00 = US $ 0.04 S 1.00 - US $0.04 Outstanding incl. Undisbursed 198.0 38.1 not available not applicable 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.  - 26 - ANNEX II Page 1 of 6 THE STATUS OF BANK GROUP OPERATIONS IN ECUADOR A. STATEMENT OF BANK LOANS AND IDA CREDITS* (as of April 30, 1979) -------US$ million