Ecuador - An agenda for recovery and sustained growth

Report No. 5094-EC Ecuador: An Agenda for Recovery and Sustained Growth October 5, 1984 Latin America and the Caribbean Reggional Oifice FOR OFFICIAL USE ONLY U Document of the World Bank This document has a restricted distribution and may be used by recipients oniv in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Annual Averages of Official Rate 1971-1981: 1 Sucre = 0.04 US$ I USS = 25.0 Sucres 1982: 1 Sucre = 0.033 US$ 1 US$ = 30.0 Sucres 1983: 1 Sucre = 0.023 USS I US$ = 44.12 Sucres FISCAL YEAR January 1 to December 31 GLOSSARY OF ABBREVIATIONS BEDE Banco Ecuatoriano de Desarrollo (Development Bank of Ecuador) BKF Banco Nacional de Fomento (National Development Bank) CEPE Corporacion Estatal Petrolera (Ecuadorian State Ecuatoriana Petroleum Corporation) CFN Corporacion Financiera Nacional (National Finance Corporation) ENAC Empresa Nacional de Almacenamiento (National Entity for Storage and y Comercializacion de Productos Sale of Agricultural Products) Agropecuarios ENPROVIT Empresa Nacional de Productos (National Entity of Vital Vitales Products) FONAPAR Fondo Nacional de Participaciones (National Participation Fund) FOPEX Fondo de Promocion de Exportaciones (Export Promotion Fund) IDB Inter-American Development Bank IESS Instituto Ecuatoriano de Seguridad (Ecuadorian Social Security Social Institute) IETEL Instituto Ecuatoriano de Telecomu- (Ecuadorian Telecommunications nicaciones Institute) IMF International Monetary Fund INE Instituto Ecuatoriano de Energia (Ecuadorian Energy Institute) INEC Instituto Nacional de Estadisticas (National Institute of Statistics y Censos and Census) INECEL Instituto Ecuatoriano de Electri- (Ecuadorian Electrification ficacion Institute) INIAP Instituto Nacional de Investi- (National Institute of Agricultural gaciones Agropecuarias Research)  FOR OMCIAL USI. ONLY SYNOPSIS Ecuador entered into an economic recession in late 1982 after a decade of rapid economic growth. The purpose of this report is to analyze the causes of the recession and to recommend policies which would encourage both a recovery and accelerate growth thereafter. The report traces the windfall gains from petroleum exports, the favorable terms of trade they brought during 1974-80 and their effects on public finances, relative factor and product prices, and the exchange rate. Ecuador may encounter a domestic savings constraint to its development during the remainder of the 1980s and, depending on oil exports, a foreign exchange constraint as well. The report, therefore, reviews ways to marshall increased private and public savings by more attractive interest rates, greater efficiency in public programs, a tax reform, more appropriate pricing for public utilities, and greater care in public investment allocations. The report assesses the country's petroleum prospects as well as the impact of recent devaluations on agricultural export prospects. Although agricultural and petroleum export prospects seem reasonably buoyant, the recently adopted foreign exchange policy could be complemented by a revision of trade policies to attenuate their present anti-export bias. Since Ecuador will find it difficult to generate more employment in the medium-term future, the report also analyses the sector price distortions that have discriminated against employment-generation and suggests possible reforms. Finally, the report projects a future scenario of Ecuador's macro economic variables to demonstrate a need for, and effect of, suggested reforms on the nation's balance of payments, GDP growth, and public finances. I b document has a ried distnbution and may be used by recipients oniy in the perfornance of I their ofcial duties. Its contents maY not otherwise be discosed without World Bank authorization.  ECUADOR: AN AENDKA FOR RECOVERY AND SUSTAINED GROiTH TABLE OF CONTENTS Page No. SYNOPSIS COUNTRY DATA SUMMLARY AND CONCLUSIONS i-vii INTRODUCTION I CHAPTER I. PRIOR GROWTH TRENDS .............................. 3 A. 1970-1973 .............................................. 3 B. 1974-1979 .............................................. 3 C. 1980-1983 .............................................. 5 CHAPTER II. EXPORTS AND IMPORTS .............................. 8 A. Exchange Rate Policies ................................. 10 B. Export Taxes and Subsidies ............................. 12 C. Exports ......... 13 D. Imports . ................................................ 17 CHAPTER III. PUBLIC SECTOR FINANCES ........................... 23 A. Performance 1973-1983 .................................. 23 B. Revenues of the Public Sector .......................... 29 C. Expenditures of the Public Sector ...................... 30 D. Functional Distribution of Expenditures .... ............ 32 E. Public Enterprises ..................................... 34 F. Earmarking and Other Administrative Problems .... ....... 39 G. Recent Events .......................................... 42 H. Public Investment ...................................... 43 This report is based on the findings of an economic mission that visited Ecuador in October/November 1983. The mission was composed of Pedro Belli (chief), Marcos Sugar (external debt expert), Mario Reyes (industrial economist), Jorge Culagovski (industrial economist), Christopher Barham (public investment analyst), Eileen Evans (research assistant), Jorge Garcia (consultant, fiscal economist), Robert Vogel (consultant, monetary economist), William Simmons (consultant, petroleum e-.pert), and Juan R. Vargas (consultant, public enterprises). Paul Meo (Senior Economist) assisted the mission in the field and contributed to the writing of the report. Mrs. Irene Chacon typed the report and its tables. A draft report was discussed with the Government of Ecuador in July and September, 1984.  -2- Page No. CHAPTER IV. MONETARY POLICIES .... ........................ . ... 51 A. Resource Mobilization by the Monetary System ........... 51 B. The Sucretization Program .............................. 55 C. Interest Rate Policies ................................. 57 CHAPTER V. INDUSTRIAL DEVELOPMENT AND POLICIES .... .......... 63 A. Manufacturing Performance ............................. 63 B. Manufactured Exports ...... .. .. .. ........................ 68 C. Sources of Growth ...... .. ........................... ... 69 D. Location and Ownership Concentration . ................... 70 E. Financing for Industry .... .......... ............... 70 E. Recent Events ......................................................... 73 G. Prospects and Policy Reforms .. ......................... 72 H. Transition Toward a New Medium-Term Strategy ........... 74 CHAPTER VI. AGRICULTURAL DEVELOPMENT AND POLICIES ............ 76 A. Production Trends and Structural Change in the 1970s ... 77 B. Pricing Policy ....................... .................. 78 C. Agricultural Finance, Marketing and Extension Services 82 D. Prospects and Policy Reforms ........................... 84 CHAPTER VII. PETROLEUM RESOURCES AND PROSPECTS ........... ..... 89 A. Reserves ............... ................................ 89 B. Foreign Investment ... ................................... 91 C. Production and Development ..... ........................ 92 D. Petroleum Investments . .................. * .. ............ . 94 E. Domestic Prices .... ............. ...................... 96 CHAPTER VIII. AN AGENDA FOR DEVELOPMENT AND SUSTAINED GROWTH ... 99 A. Export Prospects ....... ................................. 99 B. Balance of Payments .................................... 104 C. Economic Growth ...........099969-0 ...... 106 STATISTICAL APPENDIX ................ .. .... .. ..... . 108 MAP  LIST OF TEXr TAILES Page No. CHAPTER I: I.1 Growth of Real Expenditures, 1970-1983 ................ 4 I.2 Sectoral Growth of Gross Domestic Product; 1970-1983 .. 5 CHAPTER II: MI.1 Annual Export Growth Rates, 1975 Prices, 1970-1983 .... 9 I1.2 Export Composition, 1970, 1974, 1980, 1982-1983 ....... 10 I1.3 Effective Exchange Rates for Exporters, 1970-1982 12 I1.4 Exporters' Real Competitive Exchange Rates, 1970-1982 14 II.5 Selected Fishery Exports, 1977-1983 ................... 16 II.6 Current Account, 1970-1983, Selected Years ............ 20 I1.7 Capital Account, 1970-1983, Selected Years .. . 21 I1.8 Public External Debt, 1975, 1980, 1983 ................ 22 CHAPTER III: III. I Public Sector Finances, 1973, 1979, 1980-1983 ......... 24 III. 2 Public Sector Deficit by Institutions, 1973-1983 ...... 27 III. 3 Income and Expenditure Savings and Capital Expenditures by Level of Government ....... ................. 28 III. 4 Revenue Composition of the Central and Local Government 1973-82, Selected Years .......... 29 III. 5 Public Expenditures, 1973 and 1982 ... .......... 31 III. 6 Expenditures of the Central Government, 1973-1982, Selected Years. . .. . ............ 32 III. 7 Functional Distribution of Expenditures, 1973-1982, Selected Years ....... ... ... ......... .... 33 III. 8 CEPE Efficiency Indices, 1973-82 ...................... 35 III. 9 Consolidated INECEL Indices, 1981-1983 ........o....... 37 III.10 IESS Contributions and Current Expenditures, 1973-1982, Selected Years. ..................... 38 II1.11 Petroleum Tax Recipients, 1978-1983.. .........0 41 III.12 Estimates of Resources Available for Public Investment 111413988ECl's Investment.Program, 1984-1987 ....o . . . 44 III.13 INECEL's Investment Program, 1984-1987 ............................ e 47  -2- Page No. CHAPTER IV: IV.1 Summary Real Monetary Indices, 1973-1983 .............. 52 IV.2 Central Bank Credit, 1973-1983 Selected Years ......... 53 IV.3 Repayment Schedule for Sucretized Private Debt, 1984-1986 . ......................................... 56 IV.4 Interest Rate Ceilings, 1973-1983, Selected Years ..... 57 IV.5 Alternative Real Debt Services on 5-Year 100-Sucre Loan ..................................... 0................. 61 CHAPTER V: V.1 Indicators of Manufacturing Growth, 1972-1982 ......... 63 V.2 Real Effective Exchange Rate for Domestic Sales and Exports, 1981 and 1983 ................ ......... 67 v.3 Manufacturing Sector Balance of Trade ................. 68 v.4 Manufacturing Sector Sources of Growth, 1965-1982 ..... 69 V.5 Manufacturing Investment Financing, 1980-1983 ......... 71 CHAPTER VI: VI.1 Indicators of Agricultural Growth, 1970-1982 .......... 76 VI.2 Price Variability in Selected Commodities 1970-1982 ... 79 VI.3 Nominal Protection Rates ................... ........... 80 VI.4 Prices Relative to Rice, 1975-1982 .................... 81 VI.5 Bank Credit to Agriculture, 1970-1982, Selected Years .... .................................. 82 VI.6 Recent Changes in Agricultural Protection, 1983 ....... 86 CHAPTER VII: VII.1 Proved and Probable Petroleum Reserves, January 1, 1983 90 VII.2 Petroleum Production Projections, 1984-1990 .93 VII.3 Selected Petroleum Investments, 1984-1990 .. ........... 94  -3- Page No. CHAPTER VIII: VIII.1 Social Indicators, 1960, 1970, 1980 ................... 99 VIII.2 Export Volume Growth Projections, 1983-1990 ........... 101 VIII.3 Selected Exports to Andean Market, 1981 ............... 102 VIII.4 'Low Case- Balance of Payments Projections, 1983-87, 1990 ................................................. 104 VII1.5 "Highi Case" Balance of Payments Projections, 1984-1987, 1990 ............ .................................. 105 VIII.6 Economic Growth, 1983-1990 ........ .................... 106 CHARTS 2.1 Merchandise Exports, FOB (Current and Constant 1975 Prices).......*. *........ 8 2.2 Trade Weighted Official Real Exchange Rates, 1970-1983 11 2.3 Effective Exchange Rates Faced by Importers, 1970-1983 18  OfAIfN DATA - A MFA aPIIRATI 0 ITT ald-1963 Total: 203.600 km2 S.2 =III lon (I-d-1963) 34.6 Per b2 Ret of growth: 2.55 t1974-198D " CIRISTICS