Ecuador - Fifth Development Banking Project

Document of The World Bank FILE COpy FOR OFFICIAL USE ONLY Report No. P-3200-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 FIFTH DEVELOPMENT BANKING PROJECT February 3, 1982 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 The official exchange rate is US$1 = S/. 25. There is, however, a free market rate which has been fluctuating around US$1 = S/. 32 during the past few months. The currency equivalents given below are based on the official exchange rate. Currency Unit: Sucre (S/.) Calendar 1981 January 15, 1982 US$1 = S/. 25 = S/. 25 S/. I = US$0.04 = US$0.04 S/. 1,000 = US$40.00 = US$40.00 FISCAL YEAR January 1 to December 31 ABBREVIATIONS BNF Banco Nacional de Fomento (National Development Bank) CFN Corporacion Financiera Nacional (National Finance Corporation) COFIEC Ecuatoriana de Desarrollo S.A., Compania Financiera (Ecuadorian Development Finance Company) CONADE Consejo Nacional de Desarrollo (National Development Council) DFC Development Finance Company IDB Inter-American Development Bank USAID United States Agency for International Development  FOR OFFICIAL USE ONLY ECUADOR FIFTH DEVELOPMENT BANKING PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Ecuador Beneficiaries: Corporacion Financiera Nacional (CFN), Ecuatoriana de Desarrollo S.A., Compania Financiera (COFIEC), and other eligible development finance companies. Amount: US$60.0 million Terms: The portion of the loan to be onlent (US$59 million) to finance investment projects would be repayable in up to 15 years, including 3 years of grace, on a composite amortization basis with interest at 11.6 percent p.a.; the technical assistance portion (US$1 million) would be repayable on the same terms, with fixed amortization. Relending Terms: The Central Bank of Ecuador, as the Government's fiscal agent, would relend US$59 million of the loan's proceeds to participating development finance companies (DFCs) at 15 percent p.a. in sucres. This would include a fee of 2.9 percent p.a. for bearing the foreign exchange risk between the sucre and the currency pool and a 0.5 percent p.a. fee for administration. Project Description: The proposed loan-s objectives are to (i) provide additional long term financing for the industrial sector; (ii) promote domestic resource mobilization by Ecuador's DFCs; (iii) improve the institutional capacity of the DFCs to undertake loan appraisal and supervision; (iv) advance the policy dialogue between the Government and the Bank on industrial and financial reforms; and (v) stimulate industrial exports. Funds would be onlent for industrial and related activities through up to 13 DFCs in proportion to each DFC's ability to mobilize domestic term resources. Investments in some 60 sub- projects totalling US$240 million and directly creating around 8000 jobs would be partially financed from the loan. Export projects would receive at least US$20 million of the proposed loan. Co-financing of US$40-50 million from commercial banks is likely, although its terms are still to be negotiated. In addition, about US$10-20 million in credit lines from export credit institutions are expected. Technical assistance of up to US$1 million is included for a study of industrial incentives, for advisory services to DFCs in subproject analysis and management information systems, and to strengthen the operations, supervision and financial information capacity of the Superintendency of Banks. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Special Risks: The proposed project faces no unusual project risks. Market conditions and investor psychology may, however, constrain the domestic resource mobilization foreseen. A mid-project review of interest rates and other financial variables is programmed to identify and remedy these constraints if necessary. Estimated Costs: Local Foreign Total ----------US$ million--------- Investment Projects 120.0 120.0 240.0 Technical Assistance 0.4 1.0 1.4 Total 120.4 121.0 241.4 Financing Plan: Local Foreign Total ----------US$ million--------- Bank - 60.0 60.0 DFCs 39.0 - 39.0 Coml. Banks and Export Credits - 61.0 61.0 Sub-borrowers 81.0 - 81.0 Government 0.4 - 0.4 Total 120.4 121.0 241.4 Estimated Disbursements: ------- US$ millions by Bank FY ------- 1982 1983 1984 1985 1986 1987 Annual 6.0 16.0 30.0 6.3 1.2 0.5 Cumulative 6.0 22.0 52.0 58.3 59.5 60.0 Rate of Return: N.A. Staff Appraisal Report: Staff Appraisal Report No. 3571-EC dated December 23, 1981.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR A FIFTH 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$60 million to help finance a Fifth Development Banking Project. The loan would be repayable over 15 years, including three years of grace, with interest at 11.6 percent per annum. US$59 million would be onlent, in sucres, to participating DFCs at 15 percent p.a. and would be repaid on a composite amortization basis. The US$1 million balance for technical assistance would be repaid on a fixed amortization basis. Participating DFCs would onlend the loan's proceeds to ultimate beneficiaries for up to 15 years, including up to three years of grace, at 17.5 to 18.5 percent interest per annum, depending on the type of investment. PART I - THE ECONOMY 2. The most recent economic report on Ecuador, Report No. 3723-EC entitled "Ecuador: Economic Development Issues" was distributed to the Executive Directors on December 17, 1981. This President's Report reflects the main conclusions of the published economic report. Annex I summarizes the main social and economic indicators. Recent Economic Developments 3. Ecuador entered the seventies as one of the least developed Latin American countries. The discovery and subsequent exploitation of petroleum in the Amazon region, however, initiated a major boom. From 1970 to 1978, Ecuador's economy grew at an average annual rate of 8.6 percent. Since then, the rate of growth decreased to 5.8 percent in 1979 and to 4.6 percent in 1980 owing to (i) sagging investment by the important private sector because of political uncertainties; and (ii) declining petroleum output. Still, by 1980 per capita income had climbed to US$1,220 placing Ecuador within the middle range of the region's countries. 4. During 1979 and 1980, the growth of private investment slowed, as businessmen awaited the outcome of elections--the first in a decade--and the definition of economic policies to be carried out by the Government which took office August 10, 1979. These factors contributed to a slowdown of private investment which only increased at an average annual rate of 3.2 percent during those two years, compared to 14.1 percent per annum in the previous five years. The decline of economic activity would have been greater had it not been for a substantial improvement in the terms of trade between 1978 and 1980 as oil prices nearly tripled during this period. 5. For 1981, growth has been estimated at around 4.2 percent, owing to slack demand conditions for exports and continued slowdown of private invest- ment. The softness of the international market for petroleum forced Ecuador  - 2 - to curtail its production of oil during the second half of the year and to sell its production at lower prices than during 1980. International prices for Ecuador's main non-petroleum exports--cocoa and coffee--also declined in 1981. Based on information for the first nine months of the year, it is estimated that, as a result of these trends, export earnings in 1981 remained at about the 1980 level. 6. Private investment, also, was sluggish during 1981. A border incident with Peru at the beginning of the year created some uncertainty among private entrepreneurs and the airplane accident that took the life of President Roldos aggravated the situation. Moreover, the difference between domestic and international interest rates encouraged capital outflows, thus contributing to a reduction of international reserves and to a tight money situation. These two factors--political uncertainty and tight money--account for the slow growth of private investment (about 3.1 percent) during 1981. Social Development 7. During the rapid growth years of the seventies, Ecuador underwent major transformations which improved living conditions for many of its citizens. Nevertheless, mainly because of the low level of development which the country had experienced prior to the oil boom much of the Ecuadorian population continues to live in poverty. Thus, while a sizeable middle class has emerged, statistical evidence indicates that about 40 percent of the urban and 65 percent of the rural population live in absolute poverty. Population growth is estimated at 3.3 percent per year and, because the Government does not have a comprehensive family planning program, it is expected to continue at about present levels. This will continue to strain the ability of the Government to alleviate poverty through the provision of social services. 8. Most of the important reasons for Ecuador's skewed distribution of income are structural and of long standing. The two most significant are: (i) highly concentrated ownership of land and other productive resources; and (ii) unequal access to public services, especially education, health and agricultural extension. 9. With regard to the ownership of land--perhaps the single most important resource in Ecuador--60 percent of the economically active rural population derives its livelihood from only 11 percent of the arable land. The parcels that this segment of the population farms are small--less than 5 hectares--and tend to be of the poorest quality. Low levels of education, primitive cultivation techniques, and limited access to commercial marketing result in low productivity and incomes. On average, farms over 10 hectares produce anywhere from 1.3 to 2 times more per hectare than smaller farms, and the income of many small farmers barely exceeds subsistence levels. 10. Growth has benefited mainly the urban middle and rural upper classes. Public expenditures have been concentrated in urban centers. Tentative esti- mates indicate that during the seventies only about 25 percent of total public  investment was channeled into rural areas (e.g., for agricultural development, education), where 56 percent of the total population and most of the country's poorest live. These estimates also show that per capita public expenditures were 5.5 times higher in the modern sector of the economy than in the tradi- tional one. 11. Primary school coverage has been expanding significantly in recent years. As in the case in many other developing countries, however, the benefits of education are unequally distributed. According to official statistics, illiteracy in urban areas is around 6 percent versus around 38 percent in rural areas. Indians, who constitute about one-third of the population, live primarily in the rural areas, especially in the Sierra region. While they speak their own languages and have their own cultural patterns and value systems, the Spanish language and Western culture pre- dominate in the public schools as well as in local administration and businesses. Until 1979, illiterates were not allowed to vote. 12. In order to improve the lot of the poor, the Ecuadorian Government is pursuing a development policy with a strong social component. In rural areas, a strategy of seeking rapid agricultural growth is now complemented by an emphasis on integrated rural development. According to the Government's 1980-84 Develop- ment Plan, public outlays for agriculture are programmed to more than double during the five-year period in real terms over the preceding five years and in 1980, they increased from 1 to 1.2 percent of GDP. Public services for the rural sector have recently been drawn together under a rural development secretariat. Agricultural price controls are also under revision; prices of several items (sugar, wheat, milk) have already been raised. These and related measures are intended to provide better production incentives and the basis for more effective programs in the rural sector in the years ahead. Balance of Payments and Fiscal Policies 13. During 1972-80, imports increased at an average rate of 10.2 per- cent in real terms. The main forces behind this increase were: (i) the high investment rates achieved during the earlier part of the period and the related demand for imported capital goods, mainly for the industrial and transport sectors; (ii) the rapid growth of demand for inputs by the industrial sector; (iii) Government imports; and (iv) lately, the growing demand for foodstuffs. These imports have been stimulated in part by the high rate of growth of the country and, more recently, by the relatively low price of imported goods as a result of an exchange rate that has appreciated around 20 percent in real terms since 1971. 14. Real exports of goods, on the other hand, increased annually by only 2.2 percent during 1972-80. Export earnings increased mainly because world prices for Ecuador's exports went up. During 1978 and 1979, higher oil prices and the recovery in world prices of the country's main agricultural exports-- bananas, coffee and cacao--contributed to keeping export earnings high. During 1980, coffee and cacao prices declined, but the price of oil increased by 52.6 percent, adding an estimated US$515.4 million to the foreign earnings of Ecuador.  -4- 15. Owing mainly to these favorable developments in oil prices, the current account deficit in 1980 was held down to an equivalent of 5.1 percent of GDP. Moreover, because of a rapid increase in net borrowing, net official international reserves increased by approximately US$226 million in 1980 and towards the end of that year stood at US$856 million, nearly equal to 3.5 months of imports of merchandise and non-factor services. This level of reserves declined in 1981 owing to short-term capital outflows resulting from the border incident with Peru, the death of President Roldos, and the rising spread between domestic and foreign interest rates. By October 1981, net international reserves of the Central Bank stood at $531.8 million--equivalent to about 2 months of imports of goods and non-factor services. Even though the recent loss of reserves may be attributed to temporary problems, Ecuador could begin to encounter significant import capacity constraints in the coming years if the volume of exports does not increase, as is discussed in para. 19. 16. Income gains and a slow growth of the domestic supply of food resulted in inflationary pressures in the 1970s. Monetary and credit policies, price controls, and heavy imports of food staples, however, helped to curb these pressures: inflation during the decade, as measured by the consumer price index, averaged an annual rate of about 13 percent. Monetary policies during 1980 and 1981, however, have been less restrictive: the rate of growth of both the money supply and credit have expanded significantly. Moreover, in an effort to curb domestic demand of petroleum products and to stimulate the production of agricultural goods, the Government has (i) raised the prices of petroleum products and of some agricultural goods (sugar, wheat, milk) and (ii) embarked on a program of decontrolling prices. Whereas in the long run these actions should result in higher domestic production of agricultural goods and lower growth of domestic consumption of petroleum products, in the short run their impact will be most evident on prices. Finally, in 1980 a doubling of the minimum wage (decreed by Congress)--well above the increase in productivity and consumer prices--also added to inflationary pressures. As a result, consumer prices rose at an annual rate of about 15 percent during 1981. 17. Fiscal policies have been expansionary. After the public sector deficit reached 8.5 percent of GDP in 1977, the Government imposed budgetary restraints on public investment. These restraints, together with a doubling of world petroleum prices which provided additional oil tax revenues, helped to bring the deficit down to 2.0 percent of GDP in 1979. In 1980, however, the newly installed Congress approved a budget higher than that proposed by the Administration. Central Government expenditures increased by over 30 per- cent in real terms, raising the public sector deficit to an estimated 4.3 per- cent of GDP. These expansionary policies were continued in 1981; the public sector deficit for that year is estimated to have been about 5 percent of GDP. 18. Public external debt outstanding at end-1980 was more than twice that at end-1977, in large measure because the public sector deficit has been financed through external borrowing. Moreover, as most of the newly contracted debt was provided by commercial sources, terms, maturity, and grace periods have hardened. Consequently, Ecuador's public debt-service ratio increased from 5.8 percent of exports of goods and non-factor services in 1976 to 14.4 percent in 1980.  19. Ecuador's economy will require careful management in the coming years. Even though the country's foreign earnings have grown at an average rate of 23.8 percent per annum since 1972 because of rising world prices-- especially for petroleum--the volume of exports increased by only 2.2 percent per year. More significantly, petroleum exports--which in 1981 accounted for about 60 percent of the dollar value of all commodity exports--have been de- clining in real terms. Two main reasons account for this decline: (i) stagnat- ing petroleum output since 1976 and (ii) rising domestic consumption encouraged by low domestic prices for gasoline and other petroleum products. Nevertheless, petroleum could still provide the country with substantial amounts of foreign exchange well into the late eighties if: (a) oil reserves are increased soon through exploration and secondary recovery; and (b) domestic consumption is curbed as a result of the recent steep increases in domestic prices of petrol- eum derivatives, the development of natural gas and hydroelectric energy sources and further increases in domestic petroleum prices. The Government has taken some important steps in these directions, as mentioned in para. 23. Sectoral Developments 20. Agriculture accounted for 13 percent of GDP in 1980, a decline from 23 percent in 1972. While the sector grew at an average rate of only 1.2 percent between 1974 and 1980, it is still the single most important source of employment, absorbing close to half of the labor force. Agricultural exports also accounted for 26 percent of total exports in 1980, although their importance had declined from 75 percent of total exports in the early 1970s, before petroleum became the major export commodity. Specific constraints to sector growth include, inter alia, price controls, subsidies to competing imports, inadequate infrastructure (mostly roads), insufficient credit avail- ability, world market price fluctuations for main export crops and limited farm-level extension services. Domestic food production grew at only 1.9 percent annually between 1972 and 1978 as compared to the population increase of 3.3 percent per annum. As a result, food imports have risen sharply. In 1980-81, the Government began a process of decontrolling agricultural prices in order to improve incentives for production. 21. The manufacturing sector is discussed in Part III of this report. 22. Petroleum production on a major scale began in Ecuador in 1972. Increases in international prices since 1973 considerably enhanced the sector's role in the economy: in 1980 it contributed 13.1 percent to Ecuador's GDP, and accounted for 54 percent of export earnings and 48 percent of current Central Government revenues. Production has averaged about 70 million barrels per year since 1973. The Government is concerned about dwindling petroleum reserves and has begun to give priority attention to increased exploration and secondary recovery. Expansion of known reserves through adequate exploration efforts is essential to permit increased production, but the national petroleum company, CEPE, has until recently been short of funds and qualified personnel.  - 6 - In past years, oil export revenues were largely diverted to uses other than needed investment in exploration, but beginning in 1981, US$80 million per year is being allocated to CEPE for petroleum development, funded from the increased revenues resulting from the higher prices charged domestically for petroleum products. A final problem is CEPE's refining capacity, which has not fully met local demand of some products, forcing the company to import final products (i.e., gasoline and diesel fuel) at world prices costing it as much as US$200 million a year. 23. During the latter part of the seventies, the amount of petroleum available for export declined because of rapidly rising domestic consumption. By 1979, one-third of Ecuador's petroleum was consumed domestically compared to less than 15 percent in 1973. The growth rate of consumption, which reached 16 percent, has begun to slow down as a result of lower GDP growth and recent conservation measures. Specifically, in February 1981, the Government initiated serious efforts to curb domestic demand by raising consumer prices across the board for petroleum derivatives. Regular-grade gasoline which had been selling for US$.19 a gallon since 1972, now retails for US$.60 a gallon. Other fuels, similarly underpriced, had their prices doubled on average. Price adjustments are expected to continue although on a more gradual basis. These and other energy conservation measures--doubling import taxes on energy- inefficient vehicles, for example--should help to reduce the growth of demand of domestic consumption and curb contraband sales to neighboring countries. Recently, also, the Government has prepared new draft contracts in an attempt to renew foreign interest in petroleum exploration and a secondary recovery program is expected to add about 18 million barrels per year in 1984 to the country's present production level of 77 million. Finally, CEPE has added marginally to reserves--now estimated at about one billion barrels--by drilling a few successful wells. These actions, together with a planned major switch from thermal to hydropower generation, are expected to free more oil for export and the domestic price hikes are expected to increase Government revenues by an estimated US$240 million per year. This is to be used, in part, for oil exploration and improvement of social services. Exploration and conservation have become even more urgent because of the recent levelling off in the international price of petroleum. Summary and Outlook 24. During most of the past decade, the Governments of Ecuador directed the proceeds of petroleum exports to investment projects which generally corresponded to the needs of the country. They also fostered a climate conducive to private investment which, in turn, stimulated the process of industrialization. The Governments' use of incentives, however, proved largely ineffective for developing the agricultural sector and generating employment. Finally, serious distortions occurred in the past owing to the very low domestic prices for petroleum derivatives.  25. The present Government, which inherited a host of economic problems, has taken a number of important and politically difficult corrective measures. The most important of these was the tripling of domestic gasoline prices and the doubling of prices of other petroleum products (para 23 above). This Government has also taken steps to bring other prices more in line with market conditions. In mid-1980 it raised the price of several agri- cultural products; in 1981 it increased interest rates and local sugar prices, and it has lowered export duties on raw cocoa to encourage its production. These are steps in the right direction and should encourage exports, agricultural production and domestic savings. 26. Ecuador has considerable natural and human resource potential. To develop this potential fully and efficiently, continued adjustments in the country's economic policies are needed. The Government initially aimed at a 6.5 percent annual GDP growth rate for the 1980-1984 period. In light of current policies, 1980-81 growth rates, and the recent drop in the interna- tional price of petroleum, this goal seems overambitious. If the Government takes measures aimed at further petroleum conservation, expansion of production through secondary recovery and oil field rehabilitation, and vigorous promotion of exports other than petroleum, growth in the first half of the 1980s might average about 5 percent annually. Attainment of this growth rate, however, will entail considerable amounts of external borrowing. In order to reduce the need for borrowing after the mid-1980s and to lay a basis for resumed accelerated growth of GDP, oil exploration must be intensified in the very near future. If these efforts are made, Ecuador's creditworthiness will be further enhanced during the second half of this decade. Meanwhile, in light of its relatively manageable external debt--Ecuador's debt service ratio is projected to be about 30 percent in 1984--and given the policy measures already taken by the Government, Ecuador remains creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN ECUADOR 1/ 27. Bank Group operations in Ecuador date back to 1954 when a loan was made for a first highway project. The Bank and IDA have extended 28 loans and six credits to Ecuador totalling US$576.1 million net of cancellations. As of September 30, 1981, US$257.9 million of this amount had been disbursed. The IFC has approved eight loans in Ecuador. Two were for a large textile company and one each benefitted a sugar mill, a cement company, a mining enterprise, a pulp and paper firm, a palm oil plant and a leasing operation. The IFC has also purchased capital shares in COFIEC, a development finance company. These operations have amounted to US$28.1 million in commitments of which IFC now holds US$22.6 million. I/ Updated version of Part II in Report P-3103-EC of June 30, 1981 for the Power Transmission Project.  - 8 - 28. 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 economic and social development. Annex II contains a summary statement of Bank loans and IFC operations as of September 30, 1981, as well as notes on the execution of ongoing projects. 29. 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 31 percent of Bank Group lending has been for transport. Seven of the nine loans and credits extended for transport were to improve the country's road network and two to help finance the expan- sion of the port of Guayaquil. Lending for power accounts for 21 percent of total Bank lending to Ecuador. The first three power operations aimed at improving generation and distribution facilities in Quito; the recent power transmission loan will help expand the national power transmission grid. The first livestock development loan, approved in FY67, marked the beginning of a diversification in the Bank Group's lending program away from infrastruc- ture. Since then, the Bank Group has made nine other loans and credits for agriculture and fisheries, four DFC loans and one loan for small-scale enter- prise credit to support industrial development, a credit and a loan for education, one loan each for water supply and urban development and two technical assistance loans. Bank Group support for technical assistance activities and involvement in the directly productive and social sectors now accounts for about 48 percent of total Bank and IDA lending. 30. Turning to the future, Bank operations 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 to implement projects effectively; and (iv) the improvement of living conditions for the urban and rural poor. Bank lending will emphasize, wherever possible, the generation of exports and employment. In addition to the proposed development banking project, the Bank is preparing a second vocational training project, a low-cost housing project, a hydropower generation project and a second small scale enterprise credit project. The education and industry operations would improve employment prospects for the population while the hydropower project would lead to savings in fuels and greater volumes of petroleum available for export. In addition to Bank lending, the IFC is analyzing several possible operations, principally in agribusiness. 31. Substantial development financing has also been provided to Ecuador by the Inter-American Development Bank (IDB), the U.S. Agency for International Development (USAID) and, to a lesser extent, by other bilateral sources. IDB has been the single largest lender to Ecuador. Approved loans from IDB to the country as of December 31, 1981 totalled almost US$818 million equivalent.  -9- Past IDB lending has been concentrated in the power, agriculture, health/ sanitation and transport fields. Most of IDB's loans to the country have come from the Fund for Special Operations and normally carry 2 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 power, agriculture and socially-oriented projects continuing to account for a large share of its lending program. USAID, which had lent Ecuador US$103.6 million equivalent through 1972, made no new commitments to the country between 1973 and 1979. In 1980, however, USAID renewed its operations in the country, providing about US$36 million in new loans and grants since then. Its program concentrates on urban and rural development. 32. As of December 31, 1980, Ecuador's outstanding public external debt committed, including undisbursed, amounted to about US$3.7 billion. Bank Group lending constituted about 10 percent of this amount and accounted for about 5 percent of the public and publicly-guaranteed 1980 external debt service. IDB lending was equivalent to about 15 percent of Ecuador's debt and US bilateral assistance accounted for another 3 percent. Through 1985, the Bank's share of Ecuador's outstanding public foreign debt is expected to remain below 15 percent and the Bank's share of debt service is projected to remain between 8 and 9 percent. PART III - THE INDUSTRIAL AND FINANCIAL SECTORS Industrial Sector General Characteristics 33. Growth of manufacturing industry, excluding petroleum refining, was high during the 1970s -- 10 percent p.a. during 1972-80 -- fostered by the oil boom and a favorable investment climate. Despite this rapid growth, manufacturing's share of GDP was still only about 16 percent in 1980, partly because of the exceptional share of petroleum in GDP. Manufacturing is still dominated by consumer goods, which account for about 60 percent of output (value-added), compared to 33 percent for intermediate goods and 7 percent for capital goods. Transformation of domestic materials -- cocoa, coffee and fisheries products, sugar refining, textiles, cement and wood products -- continues to predominate. The fastest growing industries, however, have tended to be those importing their intermediate or raw inputs, such as paper, rubber and machinery firms. 34. In the two decades before 1970, Ecuador's industrial pattern changed from a preponderance of small scale enterprises (with six or fewer employees) to one of factory production. The former category experienced little or no growth between 1950 and 1970, after which its growth resumed, albeit at a slower rate than that of factory firms. In 1978, small-scale enterprises produced only 20 percent of manufacturing output, but provided 70 percent of the sector's employment. Of factory units, those in the smallest category (7-20 workers) have grown fastest in output, employment and productivity.  - 10 - 35. Factory production in most subsectors except textiles is concen- trated in few firms, which often have strong links with financial institu- tions or large agricultural and commercial enterprises. They are also largely centered in the provinces in which Quito and Guayaquil are located. In 1977 factories located in these two provinces accounted, respectively, for 40 and 39 percent of factory employment and 46 and 35 percent of industrial value added. 36. The share of manufacturing employment remained constant at about 12.6 percent of the total work force from 1970 to 1978. During this period minimum compensation--i.e. the minimum wage plus fringe benefits--rose by an average of 1.5 percent p.a in real terms. In 1979 the previous Government increased the real minimum wage by 30 percent. In 1980, as a consequence of congressional action raising the minimum wage and reducing the official work week from 44 to 40 hours, the real wage rose by a further 77 percent. As a result, Ecuador's minimum wages, in relation to its per capita income and stage of industrial development, are exceptionally high for Latin America. The Government, in recognition of the country's decreasing comparative advan- tage in this context, has been engaging in joint discussions with industry and labor to defuse pressure for future increases in the minimum wage. Institutional Framework 37. Generally, the Government views its role in industrial development as one of maintaining a favorable investment climate and providing necessary infrastructure, while allowing the private sector to take the lead in actual investment. Within the Government, the Ministry of Industry, Commerce and Integration is responsible for setting the sector's policies. It has dependent agencies which: (i) promote industrial development through feasibility analyses and sector studies; and (ii) encourage small enterprise development through training and technical assistance. The National Development Council (CONADE), the country's planning body, defines the sector's development strategy. The State-owned National Finance Corporation (CFN) is the country's largest devel- opment finance company and the major public source of financing for industrial sector activities including, more recently, for small scale industry. The State-owned National Development Bank (BNF) also provides financing for small industry. A number of private sector associations represent the country's industry. These include the Chambers of Agriculture, Commerce and Industry of the Coast and the Sierra and the small scale industrialists associations located in every province. Sectoral Policies and Constraints 38. Ecuador's present industrial incentives system has tended to favor import-substitution as well as capital- and import-intensive techniques. The minimum wage legislation constitutes a disincentive to labor-intensive produc- tion processes. This bias is reinforced by the exemption of imported capital goods from duties and the deduction from taxable income of amounts invested in  - 11 - priority industrial projects. Moreover, the real appreciation of the sucre vis-a-vis the dollar over the last decade has made capital and raw materials imports relatively cheap. 39. Industrial exports, excluding refined petroleum products, processed cocoa and processed coffee, amounted to 8.9 percent of exports of goods in 1980. Policies designed to promote exports have been moderately successful and include negotiable tax credits (estimated to constitute a 15-25 percent subsidy to export value added) and concessional Government-discounted loans. With these incentives, manufactured exports, excluding the above- mentioned products, increased from about $15 million in 1970 to about $226 million in 1980, equivalent to a real growth rate of about 12 percent p.a. Import-substitution industries are protected by differential tariffs, prior import deposits, licensing requirements and, in certain cases, quantitative restrictions and even absolute prohibitions, giving effective protection of 200 percent or more to some domestic manufactures. Domestic prices, never- theless, are not as high as the tariff levels would suggest, as competition from traditional local wage goods and smuggled products limit the protected industries' ability to set unduly high prices. 40. The advantages accruing to the industrial sector from Ecuador's association with the Andean Group have been less than anticipated. The country's former trade surplus with other Group members has turned into a small deficit. Moreover, its exports to other Group members have declined and now constitute only 5 percent of total exports. The product lines reserved for Ecuador in the Group's industrial programming include items such as petrochemicals and vehicles, which are capital intensive and may require a market larger than the entire Group to sustain an efficient production scale. There is thus growing awareness in Ecuador of the need to drop or delay major investments that are not economically justified even though assigned to Ecuador under Andean Pact accords. 41. In an attempt to create a more efficient industrial sector, the Government has drafted a revision to the industrial development law, but proposed improvements are marginal and basic reforms will still be needed to stimulate greater use of manpower in the sector and to spur industrial exports. At the Government's request, therefore, the Bank has agreed to provide finan- cial and technical support through the loan proposed in this report for a study of industrial protection/incentives, to be undertaken with the help of consultants. This study is expected to provide the data and analytical basis for an important restructuring of Government policy in support of a more dynamic, competitive and outward oriented industrial sector. In the meantime, for investments to be financed under the proposed loan, DFCs will reinforce their project economic analyses (by using opportunity costs in rate-of-return calculations) to take into account import restrictions and tariffs. 42. Industrial development is also constrained by several other factors. These include: inadequate infrastructure (electricity, transport, telecom- munications); a small domestic market; scarce medium- and long-term credit, especially for small firms; and a shortage of skilled workers. The Government is focussing on overcoming infrastructure constraints through road, electri- fication and port projects and on increasing skilled manpower through voca- tional training programs. The Bank has participated in those efforts. A  - 12 - greater emphasis on production for export, which is one objective of Ecuador's Five-Year Plan, could help overcome the limited local market. The proposed project, together with the domestic resources expected to be mobilized in conjunction with it, would respond, in part, to the need for more medium- and long-term credit. Finally, the proposed project would also encourage exports by earmarking a portion of loan funds for export-related investments. Industrial Outlook 43. Government strategy calls for manufacturing to become a leading growth sector as oil exports decline. Specifically, the Government's Develop- ment Plan sets out as objectives for the manufacturing sector: (i) greater use of the country's natural resources; (ii) deconcentration of industry away from Quito and Guayaquil; (iii) better linkages with other sectors of the economy; (iv) increased employment generation and exports; and (v) improved production of basic consumer goods. Actions taken to date in support of these objectives include the expansion of funds available for Government discounted loans to exporters, the easing of requirements by which exporters of non- traditional goods qualify for negotiable tax credits (raising them in most cases to 25 percent of FOB value of the exported goods), the opening of more branch offices for public credit and service agencies in provinces outside of the Quito-Guayaquil area and the greatly increased promotion of small-scale enterprise industries which tend to be more employment-intensive and decentral- ized. Furthermore, fiscal incentives are denied to off-shore assembly type industries which make no use of local goods. 44. Growth of manufacturing during the next two years is expected slightly to outpace the projected growth rate (four percent p.a.) of the economy as a whole. At this rate of annual expansion, the industrial sector would generate a need for investment of nearly US$850 million a year in 1982-83. The proposed loan would finance directly about 3.5 percent of this total, but would be associated with other financing (commercial banks, domestic resources) estimated at an additional 10.5 percent. The Financial Sector Institutional Framework 45. The Ecuadorian financial system comprises: regulatory agencies (including the Monetary Board, Central Bank, and Superintendency of Banks); Government-owned banks for agriculture/industry and for housing and 29 private commercial banks; the National Finance Corporation (CFN) and 12 private devel- opment finance companies (DFCs); 11 mutual savings associations; 24 insurance companies of which 8 are foreign affiliates; 21 foreign exchange houses; 2 ex- changes; 4 warehousing and 4 leasing companies; the Institute of Educational Loans; credit unions; and a number of small, unregulated finance companies. Financial institutions are headquartered mainly in Quito and Guayaquil, but their branch networks and the minor entitities cover most population centers. 46. Monetary and financial policies are set by the Monetary Board whose members include a Chairman appointed by Ecuador's president, and re- presentatives of key ministries (e.g. Finance, Agriculture, Industry), the banks and private sector interests. The autonomous Superintendency of  - 13 - Banks has become an increasingly effective agency of inspection and control of financial institutions, with a well conceived inspection manual and training programs. The Superintendency would help to fulfill the requirements for supervision under the proposed project, and funds would be included under the proposed loan for training of its staff and for studies to reinforce its capability (see para. 71). 47. Of public sector lending institutions, the Government's National Development Bank (BNF) is the largest, accounting for nearly 7 percent of credit extended during 1980. It lends mainly for agriculture and livestock activities and, in the industrial sector, for small-scale enterprise. The Housing Bank, also Government-owned, extended less than one percent of total credit in 1980. The State-owned CFN is the largest DFC, but has been under- going deliberate consolidation after a prior period of rapid growth and granted only 3 percent of total credit in 1980. CFN operations focus on the industrial sector and export financing. (The Ecuadorian Development Bank, established in 1979, is excluded from this analysis because it finances only Government institutions from oil export revenues.) 48. The private banks accounted for about 68 percent of credit extended in 1980, with diversified sectoral applications but emphasizing commerce. Their aggregate portfolios have expanded by 31 percent per year since 1975, fueled by the growth of demand deposits and by liberal access to Central Bank discount lines. The DFCs have grown still more rapidly; portfolios of the private companies through 1980 averaged 49 percent annual growth, sustained by Central Bank and foreign funding. The private DFCs' credit volume in 1980 was 20 percent of the financial system's total. Most of this was for short-term working capital loans for industry, although some DFCs are increasingly engaged in agriculture. Mutual savings associations outpaced other institu- tions in volume of operations through 1975 but slowed at the end of the decade, and in 1980, their credit volume was only one percent of the system's total. Savings and Financial Intermediation 49. During 1975-80, total financial savings grew at an average real rate of 12 percent p.a. A major factor was the growth of Government deposits, largely because of oil revenues. During this same period, real capital of DFCs increased annually by an average 38 percent. Growth of debt securities and time and savings deposits was slower, largely because of unattractive yields. Despite this recent performance, the ratio of financial savings (i.e., those channeled through the financial system) to GDP remains low relative to other Latin American countries, although real savings (i.e. including directly reinvested earnings) as a proportion of GDP (22.8 percent annually between 1975 and 1980) is near the average for middle income and industrialized countries. Only about 35 percent of real savings are interme- diated through financial institutions. 50. The lack of an organized capital market for debt securities is a significant handicap to greater mobilization of resources. Trading of private securities and mortgage bonds on the securities exchanges located in Quito and Guayaquil is very limited in scale -- about US$73 million in 1980 -- compared to Government and Central Bank securities, for which the volume was US$311 million in transactions during the same year.  - 14 - 51. Overall, 35 percent of credit is used to finance commercial activi- ties, 31 percent is directed to industry and 15 percent is invested in agri- culture, with the remainder for all other purposes. About 45 percent of Ecuador's financial savings are under the direct control of the Central Bank; some of these are Government deposits but most are required reserves of financial institutions. The Central Bank allocates these funds through its financial funds mechanism (basically a low interest rate discount window) to promote specified purposes. The three sectors benefiting most from this mechanism are commerce and industry, which receive about one-third each, and agriculture which receives about one-seventh of these funds. 52. Extensions of credit by the organized financial system grew slightly faster than financial savings during 1975-80. While maturities of credit lengthened slightly, they remain short: 11 months overall and only 9 months for private DFC operations. Reasons for the predominance of short-term lending include the relatively low spreads permitted by the Monetary Board for use of long-term resources (2 to 4 points), the availability of Central Bank funds for discounting short-term operations, the accustomed reliance on internal financing or short-term rollovers for corporate investment, the unattractive yield of long-term bonds and bond illiquidity in face of the lack of an organized capital market. 53. Banks and DFCs have also financed considerable investment with external sources because they are authorized to charge a 4 percent commission for guaranteeing these onlent foreign funds. The equivalent of 20 percent of all domestic credits in 1980 was derived from this type of lending. Such operations amounted to 15 percent of credit balances for CFN and 80 percent for private DFCs. In these transactions, the DFC arranges for the foreign banks financing to the final borrower, guaranteeing the loan for a fee. The final borrower thus pays a higher effective interest rate and assumes the ex- change risk, but obtains credit that would be unavailable from domestic sources. Operations 54. The Monetary Board establishes, and the Central Bank enforces, capital reserve requirements, portfolio ceilings for banks and financieras, open market operations, advances or rediscounts and foreign exchange regula- tions. The Board also fixes limits on interest and commissions. As mentioned, the Central Bank directly controls a substantial share of Ecuadorian financial savings and allocates them among the various credit institutions and purposes. 55. The interest rate ceilings fixed by the Monetary Board vary for different maturities, types and purposes of credit and for different institu- tions. In recent years, interest rate ceilings for lending have been between 9 and 12 percent, lower than market equilibrium but on average roughly in line with inflation. Savings interest rates were fixed at from 6 to 10 percent, depending on the type of account. These rate ceilings discouraged savers as well as lenders from intermediation through formal institutions. In March 1981, interest rates for lending were adjusted upward by 2-3 points, (to 12 - 15 percent) but allowable commissions on loans were narrowed, although that for guarantees was maintained. The effective term lending rates (i.e. 16- 18.5 percent, including commissions of I - 3.5 percent) are marginally above the expected 15 percent inflation. Savings interest rates were also increased to between 8 and 13 percent.  - 15 - 56. Under the March 1981 regulations, DFCs are permitted to pay 15 per- cent interest on bonds they issue to attract savings, but bond purchasers must pay tax on interest earned. The Government has recently issued its own bonds at 15 percent interest, exempting purchasers from taxes on that interest. DFCs and other institutional borrowers thus must discount their bonds in order to compete. The 4 percent commissions allowed for guarantees of foreign currency credits also encourage DFCs to promote such operations to the full extent possible, rather than mobilizing and relending domestic resources through bond issues. The full impact of the March 1981 adjustments on DFCs' ability to mobilize resources is not yet evident. A fundamental review of the DFCs' experience in this regard, would, therefore, be conducted by the Govern- ment in consultation with the Bank in connection with the proposed loan when one half of the loan is committed (or by December 31, 1982, if that date comes first). At that time, the adequacy of the current interest rates and commis- sions would be examined and, if necessary, revised in a manner satisfactory to the Bank (Section 3.03 of the draft Loan Agreement). Development Finance Companies 57. CFN is Ecuador's oldest and largest DFC. It is wholly Government- owned but mainly finances private industry. It has built up a relatively competent management team and staff. CFN has in the last two years deliberately curbed its earlier rapid expansion to consolidate its loan portfolio. Since 1978 CFN has also moved into more short-term operations, although still much less so than the private DFCs. Until two years ago, CFN financed fixed-interest sucre loans through floating interest foreign borrowings, but suffered serious losses as international interest rates rose. More recently, CFN has ceased this practice. Instead, it has turned to more profitable guarantee and letter-of- credit business. CFN's return on equity fell steadily from 1975 through 1979, when it lost US$2.6 million equivalent. Losses in 1980 were initially forecast at US$6 million, but CFN managed to earn a small profit instead. To continue to regain a healthy financial position, CFN has begun to increase gross margins by charging full market rates for its financial services. It is also examining ways to emphasize the more profitable lines of activity and control even more closely administrative costs. 58. In an effort to strengthen its portfolio, CFN has reduced its exposure to any single firm to 20 percent of equity, as it agreed to do under the Fourth Development Banking Project (Loan 1731-EC of December 1979). Never- theless, its earlier equity investments included two problem cases: AZTRA, a sugar refinery and Selva Alegre, a cement plant. CFN was used by earlier Governments to take over these troubled but economically important firms. As a result, it has suffered a chronic drain on its profits. CFN has recently made provisions for such losses from its earnings equal to almost 10 percent of its holdings. The current Government, for its part, recognized the causes for these two firms' financial problems (principally controlled prices) and is introducing basic solutions that would restore their profitability and permit divestment to private investors. As part of the Government's strategy to reduce subsidies, prices of cement and sugar were increased in 1981, and both AZTRA and Selva Alegre are expected to become modestly profitable. Furthermore, the Government has agreed to contribute to CFN, on terms and conditions satis- factory to the Bank, no less than US$20 million equivalent by June 30, 1983 to allow it to offset with higher return investments its equity investment tied  - 16 - up in these two firms (Section 4.10 of the draft Loan Agreement). Also, the Government has agreed to limit CFN-s maximum exposure to any single firm to 10 percent of equity, or if a larger amount of financing is required, to set up a mechanism, satisfactory to the Bank, which would protect CFN's equity from risk related to such financing (Section 4.07 of draft Loan Agreement). 59. Private DFCs have been the fastest growing segment of the financial sector and in 1980 provided over 35 percent of credits to manufacturing and smaller but increasing amounts to agriculture. The oldest and largest private company, COFIEC, has participated in the Bank's four previous DFC loans, and, like CFN, has developed a competent management staff and good project appraisal capability. COFIEC has been joined in recent years by 11 others, a few of them with a strong regional base outside the Quito and Guayaquil area. These private DFCs range in size from COFIEC (with 34 percent share of private DFC assets and contingent operations) to less than 2 percent for the newest DFC established. Their operational patterns also vary considerably with respect to proportions of term lending and of guarantees, rate of expansions, profitability, and sectoral and regional focus. 60. A major objective of the Bank-s last development banking operation was the participation and strengthening of the newer DFCs as a means to bring more competition to the industrial finance system in Ecuador as well as to augment the total volume of industrial lending. These more recently estab- lished DFCs have simple managerial structures generally headed by first-rate executives with banking experience. Because of the greater availability of short- and medium-term resources, they have had only limited experience with long-term lending. The DFCs that participated in the Bank's last two DFC Loans were, however, able to present some well-prepared subproject evaluations. All new DFCs operate under policy statements acceptable to the Bank or would adopt such statements as a condition of their participation in the proposed loan (see para. 68). Ecuadorian laws require that DFCs limit their debt-to- equity ratio to 10:1 and their exposure to a single firm to 25 percent of equity. Subsidiary Loan Agreements with the Central Bank, together with their policy statements, would further commit them to maintaining sound financial practices including: (a) making provisions for bad debts and investments of one percent of total portfolio; (b) limiting the maximum aggregate exposure of each DFC to its major stockholders to 200 percent of the value of each DFC's equity, a level which is prudent; and (c) holding at least 20 percent of their portfolios in term lending (50 percent for CFN and COFIEC). These and other aspects of their operations are covered in Schedule 5 of the draft Loan Agreement and would be supervised by the Superintendency of Banks. Past Bank Lending in the Sector 61. Since 1971 the Bank has made four loans to Ecuador for development banking projects and one for small enterprise credit, totalling US$114 million. In addition, IFC has made a small (US$500,000) investment in COFIEC. In the  17 - first two loans (721-EC of February 1971 and 930-EC of August 1973), all lending was through CFN and COFIEC but three additional private DFCs partici- pated in the Third Loan (1359-EC of February 1977) via a special arrangement with CFN. In the Fourth DFC Loan (1731-EC of December 1979) six newer DFCs were found eligible to participate. Their participation contributed to reducing the investment cost per job, broadening the clientele and to increas- ing attention to smaller firms, regions outside Quito and Guayaquil and export projects. 62. A Project Performance Audit Report prepared in connection with the first two projects (Report No. 2530 of June 1979) concludes that the projects were successful in increasing long term financing to industry and in helping build CFN and COFIEC into strong, mature institutions with improved subproject appraisal and supervision capacity. It recommended, however, that more be done to develop Ecuador's capital market as a means of aiding domestic resource mobilization, rather than concentrating only on interest rate issues. Thus, in the context of the Fourth Loan, the Government agreed to establish a Capital Markets Study Unit within the Central Bank (see para 64). 63. The Fourth loan was fully committed only four months after the Loan's effectiveness, in part because of vigorous investment demand. It is now over half-disbursed. The average size of subloan, of total project costs, and of investment costs per job were all substantially lower under the Fourth Loan than under the Third loan. The cost per job under the Fourth Loan (US$41,000) was also lower than that of the average Ecuadorian industry registered under the country's industrial promotion law (US$61,000). Seven percent of subproject investment costs under the project went toward export-oriented subprojects. The economic rate of return on sub-projects estimated ex ante, averaged over 20 percent; only one was below 15 percent. 64. Two of the objectives of the Fourth DFC Loan have not yet been fully met. First, the Central Bank was to have conducted a series of studies on resource mobilization to serve as a basis for possible financial reforms. The unit that is responsible for these studies was caught up in a general reorganization of the Central Bank, however, and is not yet properly staffed. Consequently studies agreed with the Bank have so far not been carried out, although the unit did prepare some informal proposals leading up to the March 1981 interest rate changes. Secondly, the Fourth Loan intended to encourage DFCs to mobilize domestic resources through bond issues as well as equity increases. Bond issues, however, were almost insignificant except for one type which the Central Bank discounted. Nevertheless, some US$50 million in domestic resources were mobilized by the DFC-s in conjunction with the Fourth Loan, primarily through equity increases. These increases permitted DFCs access to loan funds, even though they did little to create a strengthened market for financial instruments. To help address these problems, under the proposed loan, a review of interest rates and other conditions bearing on the DFC's ability to mobilize resources would be conducted when one half of the loan is com- mitted (para. 56). Moreover, the loan includes a mechanism linking access to loan funds to each DFC's domestic resource mobilization effort (para. 69).  - 18 - PART IV - THE PROJECT 65. The project was identified by a Bank mission in December 1980 and was prepared by CFN, COFIEC and other DFCs together with Bank staff. The technical assistance portion of the proposed project was prepared by the Superintendency of Banks and the Finance and Industry Ministries. The project was appraised in March 1981 and the appraisal mission's report (No. 3571-EC dated December 23, 1981) entitled "Ecuador - Staff Appraisal Report - Fifth Development Banking Project" is being distributed separately. Annex III contains a supplementary project data sheet. Negotiations of the loan were completed on December 15. Mr. Miguel Salazar, Director of Public Credit in the Ministry of Finance, led the Ecuadorian team. Objectives 66. Building on the experience of previous operations, the proposed loan would focus on the following objectives: (a) channeling additional term resources to industrial development; (b) promoting industrial exports; (c) encouraging, through increased incentives, the sale of longer-term debt instruments by the DFCs and the creation of an effective secondary market for these instruments; (d) maintaining progress toward an interest rate regime that is flexible and responsive to market forces; (e) encouraging greater competition and coverage by the DFCs and strengthening their appraisal and institutional capacity, as well as the supervisory and information systems of regulatory agencies; and (f) promoting a dialogue and eventual action on industrial policy reforms through a study of industrial incentives. Project Description 67. The project's main component would be a US$59 million line of credit to participating DFCs to finance about 60 subprojects. In addition, the following four technical assistance components would be financed under the project: (i) advisory services, through a resident expert hired by the Ministry of Finance, would be provided to DFCs on requirements and methodo- logies for subproject appraisal; (ii) the supervisory and data collecting capabilities of the Superintendency of Banks would be reinforced through training and consultants services for studies; (iii) CFN's accounting and budgeting system would be strengthened through assistance in designing and implementing a computer-based system; and (iv) the in-depth study mentioned in para. 41 of the industrial incentives and protection existing in Ecuador would be undertaken by the Government through field surveys and consultants studies.  - 19 - Loan Features 68. CFN and COFIEC (hereinafter referred to as Group I) and the six other financieras that were eligible to participate in the Fourth Loan (referred to as Group II) would participate in the proposed Loan under essentially the same conditions that prevailed in the previous operation. In addition to already operating according to policy statements satisfactory to the Bank, they would maintain a minimum portion of their portfolio in medium- and long- term operations (loans, guarantees, and investments in stock). Specifically, 50 percent of Group I's portfolio should be medium- or long-term while, after December 31, 1981, 20 percent of Group II DFC's portfolios would have to be in term lending. Moreover, by December 31, 1982, Group II DFCs would have to have 30 percent of their portfolios in term lending (Schedule 5(L) of the draft Loan Agreement). To participate, other DFCs not eligible under earlier Bank DFC Loans (Group III) would have to adopt satisfactory policy and procedures statements (Section 2.02(e) (v) of the draft Loan Agreement) and agree to meet the 20 percent medium- and long-term lending target by December 31, 1982 and the 30 percent term lending target by December 31, 1983 (Schedule 5(L) of the draft Loan Agreement). No DFC that had fallen short of these targets could have further access to Bank funds. To prevent the experienced Group I DFCs from absorbing a disproportionate amount of the proposed loan, US$15.0 million would be reserved until one year after the effectiveness date of the loan for Group II and III DFCs (Section 2.02(b)(ii) of the draft Loan Agreement). 69. To encourage vigorous efforts in mobilization of domestic resources by the DFCs, they would be eligible to use loan funds in proportion to their ability to mobilize term resources through certificates (6 to 18-month financial instruments), bonds or equity increases (Schedule 2 of the draft Loan Agreement). It is estimated that approximately US$118 million could be mobilized in this manner, about US$39 million of which would be term resources usable for sub- project financing. This latter amount, together with the subproject sponsors' contributions, loan proceeds, commercial bank loans and other associated external sources (suppliers' credits) should result in a total availability of about US$240 million for industrial investments during 1982-83. 70. An economic and financial rate of return would be calculated on all subprojects using US$300,000 or more in Bank funds or more than US$1 million equivalent in total term resources regardless of their origin (Schedule 5d(B)(i) and (ii) of draft Loan Agreement). These rate of return analyses would follow methodologies satisfactory to the Bank, including adjustments to take into account any policy-induced distortions (e.g., tariffs) and would also explain the consideration given to labor-intensive technological alternatives. The older DFCs, which have proven subproject appraisal abilities (CFN, COFIEC), would have a free limit of US$2,000,000; newer DFCs (Groups II and III) would have a US$350,000 free limit. In the case of Group III DFCs, which have never participated in Bank loans before, the Bank would have to approve two appraisals before the free limit would apply (Section 2.02(f) of the draft Loan Agreement). Project analysis by the newer DFCs needs further strengthening. To aid the DFCs in this respect, an important institution-building aspect of the proposed loan would be the financing of an internationally recruited resident advisor-- whose qualifications, terms and conditions of employment and terms of reference would be acceptable to the Bank--to aid DFCs in project appraisal (Sections  - 20 - 3.01(a) and 3.04 of the draft Loan Agreement). The Ministry of Finance would employ this advisor. Twenty-four person-months of these services are envisaged at US$8,300 per month, or a total of about US$200,000. 71. DFCs are overseen by the Superintendency of Banks which ensures their financial soundness and compliance with the numerous aspects of the Banking Law. Under the proposed project, the Superintendency would intensify this supervision of the DFCs and develop a reporting system in this regard for both country officials and the Bank. Technical assistance funds (US$350,000) from the proposed Loan would be used for training programs to upgrade the capabilities of the Superintendency's inspection staff and for studies, to be carried out by the Superintendency with consultants assistance, designed to improve auditing, reporting and financial information systems. Other studies also to be financed from these technical assistance funds would help DFCs, particularly CFN, develop mechanisms to reduce foreign exchange risk. CFN would also contract consultants to help it design and implement a computer- based financial control system. Loan funds of US$100,000 are allocated for this purpose. Overall, an estimated 45 person-months of foreign consultants services (at an average US$10,000 per month) would be provided for these purposes. The consultants' qualifications, terms and conditions of employment would be satisfactory and their hiring would be in accordance with Bank guidelines on use of consultants (Section 3.04 of the draft Loan Agreement). 72. To address the specific sectoral shortcomings discussed in Part III, the proposed loan would include three special features. First, to increase the proportion of onlending directed to generally labor-intensive export-oriented investments, US$20 million of loan funds would be earmarked for export-oriented operations (Section 2.02(b) of the draft Loan Agreement). Secondly, should the recently revised interest rate regime provide insufficient incentive for domestic resource mobilization, a mid-project review (described in para 56) would identify needed further revisions, which would have to be implemented before the final half of loan funds could be committed. Thirdly, an intensive dialogue on industrial policies would be undertaken by the Bank and the Government in the context of the policy study on industrial protection and subsidy measures (see para. 41) to be partly financed under the proposed loan (US$150,000 to cover foreign costs) and to be carried out by the Ministry of Industry, Commerce and Integration with the participation of CONADE. Agree- ment has been reached on draft terms of reference for this study. By no later than December 31, 1982, the Government would furnish to the Bank for comment the recommendations of the study; by no later than March 31, 1983, the Government would furnish to the Bank a satisfactory program of action for implementing the study's recommendations including proposed changes in industrial incentive measures. Finally, the Government would carry out this program of action according to a satisfactory timetable (Section 3.06 of the draft Loan Agreement). Relending Terms 73. The proposed loan of US$60.0 million to the Republic of Ecuador would be channelled through the Central Bank, the Government's fiscal agent, to eligible DFCs (US$59.0 million equivalent) through subsidiary loan agreements and to various Government agencies to finance technical assistance (US$1 million). The signature of a satisfactory fiscal agency contract between the  - 21 - Ministry of Finance and the Central Bank would be a special condition of loan effectiveness (Sections 4.01 and 6.01 of the draft Loan Agreement). Signature of satisfactory subsidiary loan agreements would be conditions of disbursement for each participating DFC (Section 2.02(e)(iv) of the draft Loan Agreement). Funds would be made available by DFCs to industrial and related enterprises who are final beneficiaries for financing the direct foreign exchange costs of investments in physical assets and associated permanent working capital through either loans or equity investments. The loan's proceeds for DFC investments would be repayable to the Bank within 15 years on an amortization schedule corresponding to the composite of subloans or, for investments, to a schedule agreed ad hoc (Section 2.09 of the draft Loan Agreement). The portion of the loan disbursed for technical assistance would be repaid on a fixed amortization schedule of 15 years, with three years of grace. Because funds under the Fourth DFC loan have been fully committed for nearly a year, up to US$6.0 million of the loan recommended in this report could be used to finance retroactively expenditures on agreed subprojects occuring after August 31, 1981 (Section 2.02(e)(ii) of the draft Loan Agreement). 74. The proposed loan would bear 11.6 percent interest. The interest rate charged participating DFCs by the Central Bank would be 15 percent. This would include a fee of 2.9 percent per annum for bearing the exchange risk, as well as a 0.5 percent fee for administration of the loan (Schedule 5(b) of the draft Loan Agreement). 75. Charges by DFCs to subborrowers (including interest and allowable commissions) would be fixed initially at 18.5 percent p.a. in sucres for subloans of greater than 7 years maturity or 17.5 percent p.a. if the maturity is less. Inflation between 1978 and 1980 averaged 11 percent, is estimated to have been 15 percent in 1981 and is expected to remain around 15 percent for the 1982-83 period. The onlending rates would thus be positive in real terms, and would permit DFCs margins of 2.5 percent or 3.5 percent. The adequacy of these margins to sustain the DFCs' medium- and long-term lending activity given the larger margins available on guarantee and letter of credit opera- tions and the erosion of equity through inflation would be tested during the first half of the loan commitment period. The success of the loan's formula in mobilizing resources would also be monitored during this time. As mentioned earlier, further commitment of the proposed loan would only be authorized if the interest rate regime and other financial policies were found satisfactory or if they were revised in a manner acceptable to the Bank if found inade- quate (para. 56). 76. The DFCs would set subloan terms according to the financial require- ments of the individual subprojects, provided that the final maturity of no subloan could fall due later than 15 years from the date of the Loan Agreement. DFCs could also use Bank funds for investments in share capital of subprojects and would repay these funds within 15 years of loan signing according to an agreed schedule. To prevent undue concentration of Bank financing, no firm or group of related firms would be able to borrow or receive investments of more than US$3.0 million in proposed loan funds or have outstanding more than US$4.0 million from the proposed and previous Bank loans (Section 2.02(e)(vi) of the draft Loan Agreement).  - 22 - Procurement and Disbursement 77. Procurement and disbursement procedures would follow standard Bank practice for DFC lending. For each subproject, the ultimate beneficiary would procure goods in accordance with sound business norms (i.e., at reasonable prices taking into account delivery time, maintenance facilities and similar factors); the DFCs would spell out the specific procurement procedures in each subproject evaluation. Disbursements of onlent resources would be made only for direct foreign exchange costs of subprojects and would be fully documented. Disbursements for technical assistance would be for foreign costs of employing full and part-time consultants. Associated costs of Ecuadorian consultants would be funded by the Government. The proposed loan's closing date would be December 31, 1986, while the terminal date for subproject submission to the Bank would be December 31, 1984. Co-financing 78. The Bank and several commercial banks have held discussions on arranging co-financing for the proposed loan. As a result, it is likely that a commercial bank, alone or in leadership of a consortium, would provide US$40.0 - US$50.0 million in co-financing on terms which are still to be negotiated. To the extent that this co-financing falls short of expectations, it is estimated that most of the shortfall would be covered by the sub-borrowers and/or by other foreign sources, albeit on less favorable terms. Because DFCs are prohibited from lending in foreign exchange, commercial banks normally lend directly to the subproject's sponsor with the DFC-s unconditional guarantee for which the subborrower pays the DFC a fee of up to 4 percent p.a. Any commercial bank in a co-financing scheme under the proposed project would negotiate with each DFC the amount of co-financing funds (if any) each could guarantee. The Bank and commercial banks would exchange information on the subprojects and on the participating DFCs. Co-financing funds would be disbursed only for subprojects approved by the commercial banks and, unless the commercial banks otherwise agreed, only for subprojects partially financed by the Bank in a proportion proposed by the DFC involved. No cross default clause is contemplated as the Borrower of the proposed loan is the Republic of Ecuador while the commercial bank subloans would be directly to subborrowers. The Government would not absorb the credit, foreign exchange or interest rate variability risks on the commercial bank subloan. The latter risks would be assumed by the subborrowers. In addition to commercial bank co-financing, about US$10-20 million in credit lines from export credit institutions are anticipated. Project Benefits and Risks 79. A principal benefit of the proposed project is that it would support participation by a much more numerous and varied group of private DFCs than was achieved under the earlier Bank-financed industrial credit operations. This shift should enhance competition and a wider distribution of credit to sub-borrowers outside Ecuador's two largest cities. Based on past experience, firms served by the newer, smaller DFCs also tend to follow more labor-intensive practices. 80. The economic benefits of the proposed loan should be similar to the four previous Bank loans. Approximately 60 subprojects would be financed with an average economic rate of return of over 20 percent. Around 8,000 new jobs (at an average cost per job of US$30,000) would be directly created by total investments in subprojects of some US$240 million. Export projects, which typically are more labor-intensive, would be especially encouraged.  - 23 - 81. An additional benefit of this project is that it would provide an opportunity to the Government and the Bank for conducting an increasingly informed dialogue on industrial and financial policies. The industrial incentives study to be undertaken by the Government with financing from the loan would provide supporting data for the magnitude and timing of appropriate policy reforms to be agreed between the Government and the Bank related to subsidies, import quotas, taxes and other incentives to industry. The reforms are expected to lead to more effective industrial development. The requirements that DFCs mobilize set amounts of resources in order to gain access to Bank funds and that review of this experience occur midway in project execution would serve to test the adequacy of financial policies to facilitate resource mobilization. 82. The main potential risk is that market conditions and investor psychology may constrain participating DFCs from mobilizing long-term funds at fixed rates on the scale required to match Bank funds. Also, margins offered for mobilization may not be adequate to induce the DFCs to make a sufficient effort to test the market limits. To help deal with this risk, the loan would provide for consultation by the Bank with the Government and DFCs to devise remedial measures in the context of the mid-project review. PART V - LEGAL INSTRUMENTS AND AUTHORITY 83. The draft Loan Agreement between the Bank and the Republic of Ecuador, the draft Project Agreement between the Bank and CFN and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed separately. 84. The draft legal agreements conform to the normal pattern for develop- ment banking projects. The main features of the Loan and Project Agreements are referred to in the text and listed in Section III of Annex III. A special condition of loan effectiveness would be that a fiscal agency contract, satis- factory to the Bank between the Ministry of Finance and the Central Bank be signed A condition of disbursement for each participating DFC would be the signature of a satisfactory subsidiary loan agreement between the DFC and the Central Bank 85. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank PART VI - RECOMMENDATION 86. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments February 3, 1982 Washington, D.C.  - 24- ANNEX I Page 1 of 5 TABLE 3A ECUADOR - SOCIAL INDICATORS DATA SHEET ECUADOR REFERENCE GROUPS (WEIGHTED AVEPjGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 283.6 MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL 51.7 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US$) .. 390.0 1050.0 * 1616.2 2609.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 208.3 316.9 654.1 1324.1 2368.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 4413.0 6015.0 8081.0 URBAN POPULATION (PERCENT OF TOTAL) 34.4 39.5 44.0 64.2 53.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 14.2 STATIONARY POPULATION (MILLIONS) 28.0 YEAR STATIONARY POPULATION IS REACHED 2085 POPULATION DENSITY PER SQ. KM. 15.6 21.2 28.5 34.3 80.6 PER SQ. KM. AGRICULTURAL LAND 93.5 123.1 151.0 94.5 133.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 44.4 45.4 44.5 40.7 30.1 15-64 YRS. 52.0 50.8 51.9 55.3 61.5 65 YRS. AND ABOVE 3.6 3.8 3.6 4.0 8.3 POPULATION GROWTH RATE (PERCENT) TOTAL 2.8 3.1/c 3.3 2.4 1.5 URBAN 4.8 4.S 4.5 3.7 3.1 CRUDE BIRTH RATE (PER THOUSAND) 46.5 43.0 40.3 31.4 22.9 CRUDE DEATH RATE (PER THOUSAND) 13.7 10.6 9.6 8.4 9.1 GROSS REPRODUCTION RATE 3.4 3.2 3.0 2.3 1.6 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 9.0 32.3 USERS (PERCENT OF MARRIED WOMEN) .. .. 6.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 104.0 101.0 100.0 108.3 119.8 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 84.0 91.0 92.0 107.6 125.7 PROTEINS (GRAMS PER DAY) 50.0 52.0 50.0 65.8 92.5 OP WHICH ANIMAL AND PULSE 26.0 27.0 25.0 34.0 39.7 CHILD (ACES 1-4) MORTALITY RATE 22.8 15.7 10.3 7.6 3.4 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 51.0 56.2 61.0 64.1 68.9 INFANT MORTALITY RATE (PER THOUSAND) 140.0 118.0 66.0 70.9 25.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 34.0 42.0 65.7 URBAN .. 76.0 84.0 79.7 RURAL .. 7.0 13.0 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 22.4 32.3 59.9 URBAN .. .. 60.0 75.7 RURAL .. .. 13.0 30.4 POPULATION PER PHYSICIAN 2664.9 2891.8 1621.5 1728.2 973.3 POPULATION PER NURSING PERSON 2280.0 1620.9 .. 1288.2 896.6 POPULATION PER HOSPITAL BED TOTAL 531.4 428.9 507.0 471.2 262.3 URBAN .. 305.3 .. 558.0 191.8 RURAL .. 4570.4 ADMISSIONS PER HOSPITAL BED .. 19.3 .. .. 18.2 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.1/e 5.2 5.3 URBAN .. .. RURAL .. .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.5/e .. URBAN 2.ITe .. .. RURAL 2.8T .. ... ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 32.0/e .. 41.2 URBAN 78.5je .. 84.3 RURAL 6.O/e .. 11.6  - 25 - ANNEX I TABLE 3A , Page 2 of 5 ECUADOR - SOCIAL INDICATORS DATA SHEET ECUADOR REFERENCE GROUPS (WEIGHTED AVERA9ES - MDST ReCENT ESTIMAFT - MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 / 1970 /b ESTIMATE /b IATIN AMERICA & CARIBBEAN EUROPE EDUCATION MUMED ENROLLMENT RATIOS PRIMARY: TOTAL 83.0 100.0 108.0 101.7 105.9 MALE 87.0 103.0 110.0 103.0 109.6 FEMALE 79.0 97.0 106.0 101.5 102.2 SECONDARY: TOTAL 12.0 26.0 46.0 35.3 66.3 MALE 13.0 28.0 48.0 34.9 73.2 FEMALE 10.0 24.0 43.0 35.6 59.5 VOCATIONAL ENROL. (2 OF SECONDARY) 29.0 11.0 11.O/d 30.1 28.4 PUPIL-TEACHER RATIO PRIMARY 39.0 38.0 36.0 29.6 26.8 SECONDARY 11.0 14.0 16.0 15.7 23.6 ADULT LITERACY RATE (PERCENT) 67.5/e 68.0 76.6 80.0 75.4 CONSUMPTION PAsSENGNER CARS PER THOUSAND POPULATION 2.0 4.5 7.4 42.6 83.9 RADIO RECEIVERS PER THOUSAND POPULATION 38.5 282.6 .. 215.0 181.6 TV RECEIVERS PER THOUSAND POPULATION 0.5 24.9 45.0 89.0 131.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 54.0 41.6 46.3 62.8 123.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. 4.0 5.6 3.2 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 1442.7 1936.2 2593.0 FEMALE (PERCENT) 16.3 19.1 20.8 22.6 32.9 AGRICULTURE (PERCENT) 57.4 50.9 51.6 35.0 34.0 INDUSTRY (PERCENT) 19.4 22.2 17.6 23.2 28.7 PARTICIPATION RATE (PERCENT) TOTAL 32.7 32.2 32.1 31.8 42.3 MALE 55.0 52.1 50.4 49.0 56.5 FEMALE 10.6 12.3 13.5 14.6 28.5 ECONOMIC DEPENDENCY RATIO 1.5 1.5 1.5 1.4 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 20 PERCENT OF HOUSEHOLDS .. LOWEST 40 PERCENT OF HOUSEHOLDS .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 269.0 RURAL .. .. 183.0 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 307.0 513.9 RURAL .. .. 77.0 362.2 385.1 ESTIMATED POPULATION BELOW ABSOUJTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 40.0 RURAL .. .. 65.0 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not 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 1976 and 1979. /c Intercensal growth rate is 3.2% (1962-74); /d 1975; /e 1962. * 1980 GNP per capita is US$1220 at 1978-80 prices and exchange rate. May, 1981  - 26- ANNEX I Page 3 of 5 fltPlffITIOMtf Of SDCIAL -INDICATORS Notes: Although the dot Itear dra f. ro ooo etrely judged th east authorIttive sad reltable, It should cite he u-od chat they ey not he itne- eaciocclluompsrahl heote of thlo of steedeedleed delnitiaee med .....pte tee d ity diffe....t ...uetvies ic olttn h dccc. The date ate, tone- thal1e ueflt ecleodr ofr b -scgnitade, leiacte treads, cad oh...teoere certeie ajar dtffere...oe keen e oaetrie The .frefe.enI groupe ere Cl) the eas c-tety group of cte. euhiect toantry cad (2) a -tarry g-op itch e-.Ame t highe, ovrae -etm thee the cou...try Ma-P at the eujeot cou.atry (en...pt tar "Capital turplut Oil tzatee roup cha- 'Middle tacoma Heach Afte. toed Middle tact" It oh...eb it..ue.o etr...gr eo-alaseffluitise). In the refsoesu group deco the vre are populetien wsihted eritheetic -ec for teak tediotcr and eh-r only viha maoity at the . touirke in a group h.. deco faor ctac indcae ..g . the .T9 nasog of . oocciaa a-n the tcdi.tctor depeede on the -rsileility of data and Ia net acif or, cuftio east he -eeiojed In relating avrgsof ar .fdiostr to enacthte. The. -evrage. ar only o..etul Ir coepartig the eslue of on irdi..ctat Ic tic. _soc the oouotry and ref ..rance . ropt. LARD AREA (thous.and eq.k.) Ppulstion par oepitliBte totl rcher, andura - ,poplation (catal, T.tel - Tota surface area cesprieteg lrd area and icleod -etra. aret 7ndrua) dtvtded hy chI. res..ocitonaia of heepinal had. Acri.ultur.1 - Eaztlen of sgioultara1 area oted temporcoily o ameol svilbile Iti pbit and private eee hc reilta iopitol ead ye- for crops,pttr, ekec end kociteh. gardee ort Ie falCon 1979 dais. hbhilitutioocoer . Hopitals are bollehe..nta permanenc ly etffad by cc leas.t one phyatian.. Etbtaliehe..nt pravldicg prinoipally o..eto- GNP PER CAPITA (US$) - GMP per .pyit. eatitee at crurret arket pricec, ccl- dial or or 0cc included. Sac.I hospitlsl;%..honevr,,ino1ud health cltd hybam tnvr"lo method at Word Batik Atlas (1977-79 btseis); 1960, and madic .. centers ncpacmae tlyefftd hy a phsiIan(o ts a 1970. on 99dc,mdica aeI s t,nrse, sidoitfey ec. hiok offer Ike (-ptiatarn dacto and pro-ida e lie iced rsvgE. otf') nate(frll e.Prscne ENRGtY CONSUMPTION PER CAPITA - An...aI coeunpctou. of oc .ecalocry (oa dial p-rpoteeorai os Ic teudtie ponielge raitpto. andleie erlu,tatocl gee cod hydro-, oulorad geotherml o:ac,an rura ho hia oclo ru h-itaitals end medical and -tocreity etrIity ) Itihlors ofto1o96le0pr aia;l , 1970, cad 1979 cetaa poele hositls re lolded only uadtr tetal. date. Adeleetaae oar oap'tia e Totel outer of edeiscion to or dlei-hrgee fr.e hoepitce1t dtidedhy tho -ueho of hede. POPULATION AND VITAL STATISTICS Total PeculatIon., MId-Year(rho...ods) - At of July 1; 1960, 1970, ond 1979 HOUSINGI data. era Slo Nof Ooahld Irrreca rr houtahold t oral oriab and act- brta P.clto 'oret of total) - oio of uchc to total population; A iuehol coecao ru fidvdulwho har.Ivigqat..a difecec etitoo ofura ara.a-ato oparability of dare sod theIr main ea A hoarder or lodger soy or may no.h. ecudI _seg __atioe; 1990, 1970, ond 1979 dat..f tho oehl,o ttala uyec Pouacc Prolotion Av...uae of Ircc. pe ae-ttl. can n cre1 _- Avrae ut Po2 ultion Ic rear 2000 - Cu-rro population projeocoi are hate..d on 1990 boo of poceu.e pry room in all urhan, cod tra1 occu pied -ennet-lo 1~totalpo.pulaniorhby age and arc en d their eart.llt end frlyrect. d ;llog ,ctpecotoly. Dcoellioaaeaotudo o-p ano truotoret cad Projeonie nrmtere for nortality catna c..Priar of thre leel cast- unccuPiedpne itg life enpeocanoy at kinkotah n rich oaunrY'e per capIta inoo Acot.. to Elactcioty (peccant of donllince) - tote1l.., ano. ad cralI - leve, en feal 110 a" ropacaroy aa Itta cc7.5 Y_a.. The Pare- Covnlcl delinga olth e1eotriotty In lliogs quart.. art atp-roeot eaer for frrnllity race also have three lvela asauIng deoline In fttl oho n ravel dr_llitgaree.prtivly. fertility ocoordiog tc St-e level ond puat fatly planning performance. Eaoh cou.tiry Ie char aeignnd cee of timee atea orelnai-tiu of mortalIty EDU7CATTIOD and rfrnility trede for prolec.tion yu-roaee Adluato Inclme t Oto Stationery ruru !tlo - Ice ec-n..nary pouaInthere Is ug roth elate hrloar Nehool - total, male ond fenele -Iroto total meled tamal tehth h rte I qual t. the death rate,nd als the ag sronci-enol tc of oil core at the prisacy loela. prone Iaof respective oina.c....a-t. Thit I0 cohitocd 017 after fertility'rcco decline to. prt_ry go-a populicico normaly includes children aged-l tho replacomet leve of unIttnt roprod-toior rate, hen maci geeato yoa.ro but ndjuatr d fordffrn lentha of primary eda..acion; fo of..o..rapIac.. itaolf Inool. .Tho stationery population ale ra o_ncrioc nich u-i-r-1o Ido..acte enrollmet ma erodI15percet etimated 0 the at of.i ctehcoj-d oheraterienice of the populatioo sice some h.pupia e.ra hel- or bitov the of fiolal :ch.o age. inteYea. ol o the coca of deolion of fertility race to replae ...oc che toal male Zo femal - Coptdsehv; eanedaf sent levol. r~~~~~~~~~~~~dcoationo-qutceatilacer for Year of approvd pro-ry lestruotme; perec .pnr .cclatino It reached -The year vita stationry population pcc-ido geocrol. voctionl. rtahr riigleratnafo ai sloe hat hate reaohtd. ..e.ally of 12 cc 17 yrare of ag; torcaspondooco oaras sot geeeell PoouLatioo Deceity acluded. Per so. ha. - Old-year pyltico Per aquar kilomter (100 hitto.er.e) of .o..oe erlmet Icmn of....ondaryC- VoeloI lestiouti..e ,tota are; 1990.1970 ard 1979 data. Inlde Itncnl , indusra,u otr ". proreiihpraeIdPend- Pe ks.h. oatunrl.led - Computed at ahiv. forarlor el bed sol ra ea et fecnaYintoiss ol;1960, 1970 aod 1975 dote. -ol-ene ai rmc.ed secdacy Tota s-dast eacolld Is Porolacion AS, Srutoc (oron) Cklldrea (0-l4 peace).origge(5 pImar adecoar y la a divddh uiaeoftahr est 64 yer) .ad retired (65 y.ara end-ovr) aa perce..cagat of s1id-lynoo papa.- .acresPending -el.- lacco 1960, 1970. cud 1979 date. Adnlt licray rt (orono Literate ada1te (itb tore d,ad ine) ticlelo Gc;th Oat Corc-t) - toca1 - Annual groeh recta of otet mid- aIaperc..ntago oftotal Idolt.poyletior aged 15 Ipare d ovr yerYopuatioo f 90-0 1960-70, ord 19 0_7 9. IPorltpion Growh Ste Coeroont) - urbao - Aacal1 Sroeh canes of uriban popa- COStSMPTlON laItiona focc 1950-60, 1961-70, aed 1970-79. P.......ar Cure (p-c thousan.d p ...aInoal - paen9oers opie oo Crde Birth lac (P.. thousnd)- Annual lIve hrtha per ctoosa...d of mud-yea care .taina lass then eight persan.. Iooldrsailnt. hearses. s.d ppcyulaion; 1960, 1970, ard 1979 dat.- milltroYile Crude leech tot (ocr thout...od) - ioAoal1 deathe par cthasaede of tid-p.ar Padio ROa.evnr. ( err thouccod ocon.ltioc) - All types of r-oaveefor radio .poplation; 19 60, 1970, ard 1979 dana. btreadoscos to gsora1 peiblic per thoaead of populto;acee.o CrostrdutortcAeaenmeroiogtoswenclinri liteedroier ncutIesan in pora k vgtreino ai her noma r-produ-cive period if cieh precepre.tea g-pc ficfr- sees oat Ieffect; date forr o....otyearsmay not its comparait sie tilcyraee usaly iv-yer vegs- ending In 1960, 190,cd 1979 arrtoisahleadicnng Paily PIl... o. - Aocaco ana (thooondsl A-1Ana reeke of accptors TVBcivr ea ko po olation' - TVrosvr for itroado...t to oLf, hlrnit-concIel dav reeuder me,Pi;,. ofnalelfmy planeing program. gae oicprthousand poptlotioa; -alades -lisn-d TV reoiver pall, Plaetoo-tsta Crecrat of _arridcme .- Pretage ofmridIn cotrist aod in -- yeas .wtnoeaiatratioo of TV eats aa in ffsnt. omcof ohild-hbring age (15-44 Year.e) -ho.otbirith-oc.rol1dvic_eto NEvE..a Crleo (crtotadrrlno) - ioe the aveag cir- all iacud nasa Ie set g grou.p. -oolo f "alpgnea intese nePp.'". defined aperiedionl paiblicatlon devoted primarily to recording g-ara nae It is oo...idmrd FOOD1 AD0 NUTRITIOOi to ho "doily" if it appears an least four times a km. adno of Prd Prodnotlo car Ca.e(99-110- Ind of per o,pita amorl Ciatt dA.o.1 Attedac ear CeriSe car Tear - hee.dastheseke o pedolnofalfo comdtiat Proucio esldssadadf a n oeasld darin th Lya,nluding admsionia to drhivei L. IIIm Is on clendar year itacia. Conodlitias neve prmay god.sg earaead btol.auite.. iractad of eager) oh irkho edibla n ooncnen (ei- .g.cfe e tea ace eatldod). Aggrsgato Production of each country Is hose;d on L.ABRFORC tE notionl average producerprIor etighte; 1961-65, 1970. ad 199dta. Toa ato ot thousan ds)- Ecnmialy tiv- P-reae lealedieg Per reite,: ooyof ralore ---a o euoeat)- Copte.re..mdfoo . n amy boa ht eacludn tcele tdas t. eegeq Ivaeto -r edaPplia avnilblah Ia coutry per capIt c ugpopulation of all ogr. tatntce in. tenI sonie r per day. Avalaitle sopples nomprlsedometlc productIon, importsleta. no -op-rbit;_1990. 1970 and 1979 data. ooporo, an oheoee I tnok. Nion aupplise eacde animal feed, tends, Feale (osocat) 1- tl atrfro spren of tonal labar forc.. vu..ocitio usd In food pro..ecing , end losses In dlsci.tuibto. Rsquir- Agricaltarn (preru t) - b Iitrfuo to arieg. forsotry, hitaaig and matt we- etimated by PAO head oo physiological.. neds for noma soni- fishing as p..roetage of total aitbr force.; 1960, 1970 and 1979 dan.. vicy and htnoirh rce..ld-rigotvio. temperature, body waightt, age Industry (prer..ten - Leho- force I in a gbe noos-cruo n tenfacctteg and can dlrihucb.ion of P.P""it," and allaying 10 perc..or f. ornte at end ctrrciliy, aster and gee te peroconag of itel. lbher oors; 1960, inuatnold level; 1961-95, 17, and 1977 data. 1970 ard 1979P dst. Per crira oerlyof crcrie oramare day) - Protein coon-n of per o.Pita Pri.oco ae s t -P toa,ml,ad teale - P-ertitpatie o ne .spply of food per day. Bet eapply of toed Is drfined as btve. to- attir eromytod as toal mae,cd tale labor force n qutreteoc for all o-utrios ettobliehed hy USDAk provldo for mlolmt perootcge of total, mal and female pepalatto. of all agan r-p-nci-nky; ellea..o. of 60 grs- of tonal procoin per day and 20 grom of nima1 end 1990, 1970, aod 9197dcc Thoseac keae..d:onILO'.l parloi panio rates Pulse protein, of tick1 gae Ihud he anial protein. Th.e. sInnd- reloigaesnarroao he populate end lom tim tren. A nrda are h.w . i those o8fr75 Sram of total protein cad 23 gram of f. tlreare re eacioa eIooI saimal potein to .v..sg for cte. -rld, propoe.sd bty tAO In the ThIrd Z.o.mi ,tc ..enY toio - "toct of potlnioaedr 15 and 65 and ovr eo1rld foo Suvy;16-6I170 and 1977 data, to cte. tonal lbhor fore. Pe oota rti sooly treaimal an rise - Pr-rol supply of food de- riv-d from nIma adpateI gram pr daY; 1961-65, 1970 sod 1977.data. INCiOME pSTRIBI(TIo Child Cages 1-4) Baclity Barr (prten choSed) - Annual deaths Per thoneand Ic Per-tnoco of Pvlvee Itrome Cboth In cask and kind) - R.oeived bp rrhe.te age grI..p 1-4 Years, to oitildroc in thit age group; for meet damloping co- 5 p.ro..et, rickost 20 percono, pocre.e 70 percent, and poareet 40 peroat inst da ta dorivod from lifo tbilee; 1960, 1970 and 1979 data. of h-neholde. HtALTH POVERTY TARtGET GOUItPS Life Earectacoy at Birth (y,tace - Acer-ge nombr of Poars of life raining The foll-wiog -retete art very oppr,tn asue tpevrty level, at bitci; 1960. 1970 and 1979 da, anZhad oitrpee th ocas.deraile ortIon. Inf et Ooralitytot (p.r thoumnd) - A-..Il deathe of iofence under one year Eteimotd Abterlot Povety loco_ t._v (05$ P.c caries) - uri_ and _atl- ofaoper thuad live bIrths. Aeln oet noelvli ha naelvlhl hc ig fronts no Safe Wate (orroent of corulaion)- total, arhen an.ua -fa-ntritionally adtqnet diet pine... eaetit so-fond requtrats is net her of rvolt(ttal uho ad rural) with -etoail ..ee trata rrat. -ecr supply (iIncldes created erfece waters or =areand hotunotlntd ttmtdBltvPvryIcmeLel(tprorna-annedrrl- mator sock at. tint from pect.ted hecehole, eprigs, and omainacy utIl) atcad RelativePovrt incm leve iUS ettdo naep rpn prrcgeof ohoic respective populatIons. Is an ohen area n pobli personalt Iora oftrho ornery. Urhac leve In derivd fro the rore foutai or cadpost located not mere the 200 str from aI I may he leve wIth adjuotmeo for higher oes. of liigino aea coce!dered as hogo 0thib ceasoablo accot. ofchat house. Ia`rurl ores cEntere~d Poul aIo Iheolut PovertyIncome Level (percet) --erte reatona_l aces Iwud imply tint cte. hoosamie or ebitrs of rte. hous.ahold a ue oo fpplco uhnadrrl h r aelt do 1 notinrropedadladiproyp-cioant part of the dey In fetohiog the .." Access to ftoccta lisore..l (preccect of porulatio - to..a. orbao. and -ure - Seeker of papln(otl urbat, and rural) s-od it .. esreta dispc..al e peretar o herrepotr populations. Ir.at diapas1 toy include th olscinad diepes tc or wihutceamoc fhu- ocet oool ad Sorie1 Bats Divinto cobac-etriy macr-hoe. syeta or the use otfi rvs and~. m1,i Ecoooeio Analytie cod Projctot Dapartasne le mtalleloes Bay 1qg1 Porul.t.. .. r P1hesoa Ppltn divided it7 nehr otpottf aphtyti. ria.. qualified fro a .madira1 sohtol an elvereity level. Porolation rer NoigPereonc- Population divided its ot.itr of panrn male sod f ale grad.ucotorot pr-tcloa nurs, so. .d asaco_ nrss  - 27 - ANNE3 I PaRa 6 of 5 ECUD00R - ECONOMIC IN0CAT70RS rcpciariun: 8 KS - (sid-1979, thcannds) GNP r capita: US$1220 - (1930) Ascunt Averl ! Anneal Once... (2) ShIt ce f at Marker Pric.. (5) (sillion USS (cracecFtact 1915 prices) (at curreot prices) Indicator at current prices) -------___----