A summary statement of Ecuador's creditworthiness

 No. E-93 CONFIDENTIAL I 67001 This report is restricted to those members of the staff to whose work it directly rela~ INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT A SUMMARY STATEMENT OF ECUADOR'S CREDITWORTHINESS July 10. 1950 ". Economic Department Prepared by: Albert Waterston from studies by Vittorio Marrama  ECUADOR ESSENTIAL STATISTICS 150,000 square miles Popula ti on: 3.5 million Currency: - Unit: P arity: sucre (symbol: ¢) 1).50 sucres; u.S. $1 Fordgn Trade: Imports (1949): $44.6 million Exports (1949): $27.7 million ?stimated Official Exchange Transactions on account of: Imports (1949): $43.9 million (c.i.f.) Exports (1949); $)2.8 million National Income in 1948: Estimated roughly equivalent to U.S. $125-150 million (about U.S. $40 per capita) BudRet: Deficits: 1949: ¢15.9 million (U.S. $1.2 million) 1950: (first quarter ordinary) ¢16 million (U.S. $1.2 million) Internal Debt: ¢112 million (U.S. $8.3 million) External Debt: ~24.3 millio,n Principal in Default: 12 .. 5 million Other: 11.8 million Wholesale Prices: 1919: 100 Average 1945: 266 Deoember, 1949: )73 Net Exchan~e Reserves: December 31. 1948; $25.6 million December 3I, 1949: $1).6 million Undisbursed Ex-1m Bank ~oans! December 31, 1949: $13.2 million  A SUMMARY STATEMENT OF ECUADOR'S CREDITWORTHINESS CONCLUSIONS Studies made in the Economic Department yield the following conclusions: 1. For the next five or six years, the Ecuadorian balance of payments is likely to einlbit considerable strir~ency. Foreign mar~ kets for rice, the most important eAPort commodity, are becoming cir- cumscribed and ,,,111 probably continue to shrink. 2. The high propensity to import is aggravated by earthquake reconstruction needs of considerable magnitude. Ho,,,ever, the 1m" level of available foreign reserves precludes the financing of further trade deficits. 3. If, as now appears probable, sizeable reductions take place in foreign capital investments, as well as in non-monetary gold exports, the balance of payments will be placed under increased pres- sure. 4. Assuming settlement of Ecuador's defaulted debt along lines of the Chilean agreement, and interest and amortization on the recent Eximbank loan of $7 million. service requirements amount to about 6% of estimated exports in 1950. This is a moderate proportion, and should not constitute an especially burdensome charge on Ecuador's balance of payments. S. After 1955, the balance of payments outlook appears more -1-  - 2 - promising. By then, the effects of current development programs should begin to be seen in increased exports and smaller imports. It is also to be expected that most of the extraordinary reconstruc- tion needs will have been met. 6. Since internal economic conditions in Ecuador depend in large measure upon foreign trade, the deterioration of the balance of payments position 1s reflected in domestic finances. A grm'ring con- flict for priority bet,'!een earthquake reconstruction and development is also adding to the difficulty. The Government budget, "'hich shoued sUbstantial surpluses in the three years ending 1948, registered defi- cits in 1949 and in the first quarter of 1950. 3an!,:: credit to the pri- vate sector. stimulated by Central Bank operations, has been increasing steadily and prices have risen. Present prospects are that ne",! money \1ill be created in order to finance reconstruction. 7. Analysis of Ecuador's internal financial position confirms the conclusion reached after a study of the country's external finan- cial position: Ecuador can ill-afford to increase its debt 'burden during the next five years. ~lhile this conclusion does not foreclose the possibility of a small loan~ directly linked to improvin~ the con- dition of the balance of payments, it does imply that interest pa.y- ments on any nell! loan must be 10t1 and amortization payments must be deferred until Ecuador I s development programs. most of uhich deuend on foreign credits, have had an opportunity to improve domestic prO- duction for export and for replacement of imports. 8. Ecuador's present difficulties (the collapse of the rice export market and the Ambato earthqurute) are largely due to uncon- trollable factors, and there is little that can be done in the short  - :3 - run to remedy the situation. Ecuador's position is difficult, but it is not 1,,!ithout hope; careful formulation and effective execution of a practical development program, \<J'hich l;!ould also limit reconstruction expenditures in favor of economic development, could greatly imJJrove its credit1rtorthiness. The program "lould probably call for technical assistance over e. period of some years. ':lith technical assistance, sup- plemented by financial aid for development \'lh1ch fits into the frameHork of a '-lell conceived program nromising continuous and effective effort to\'rart completion, much could be done to improve Ecuador t s long-term ba18nce of payments position; '.1Uhout such a program, i t is difficult to see ho':! Ecu;,d"r cnn halt domestic inflation a.."ld improve its credit- \1orthiness. 9. The Bank is not now in pc;sltion'to deternine the essential characteristics of an investment program for Ecuador which would im- prove its credit\·rorthiness. Information is lacking concerning the magnitudes ,·Thich "fould be involved, the period over 1.'.'hich assistance \"ould be required, or even the extent to 1,'Ihich the nrogram ,'!ould be aided by foreign financial credits. It is clea1'. hO'lt!ever, that the Banl{ls attitude must be governed by the s.ns"rers to such questions as these. It is not inconceivable that investigation might show that the needs are sufficiently moderate to justify a series of small loans, the combined effect of \olhich 1I10U,ld be to a110lll repayment and addi tional safe borrowing. BALAlI!CE m' PAYNEl'JTS 10. Like other Latin American countries during the \'lar. Ecuador \'las able to build up its gold and foreign exchange holdines substantially  -4- (from $4 million at the end of 1939 to $36 million at the end of 1944) .• These reserves '''ere still intact at the end of 1946 t'lhen relaxation of controls on an extensive list of import items led to a sharp rise of imports in 1947 over 1946 ($46 million as comuared to $31 million). Exports also increased (from $39 million to $45 million), but the rise was insufficient to compensate for the acceleration in imports which "JaS largely responsible for raising the bal~\.nce of :payments deficit on current account from $1.4 million in 1946 to $11.3 million in 1947. The deficit "las only slightly offset by capital inflo\·" find foreign reserves declined by about $10 million to $26.6 million. Hare effective import controls, achieved after consulte,tion vIi th the 1Ml!', and continued ex- pansion of exports, improved the situation in 1948, and the deficit on current account dropped to $5.8 million, being more than offset by capital transactions. 11. Continuation of controls in 1949 failed to reduce imports, \'lhich remained at $44 million as in the previous year. HO\'lever, the deterioration of the 1949 balance of payments \'laS due chiefly to a serious decline in the value of Ecuador's principal eA~OTts, rice and cacao, \,lh1ch reduced estimated receipts from exports to only $2~.4 million. The 1949 current accounts deficit, estimated at $12.2 mil- lion. was met chiefly by the pledging of gold holdings for short-term loans from the Federal Reserve Bank of Ne1.'l York. As a consequence of the deficit, net international reserves declined by 47%, from $25.6 million at the end of 1948 to $13.6 million at the end of 1949. The decrease would have been greater had it not been for grants of $1.7 million from various countries to help cope \·rith the effects of the devastating earthquake suffered in August 1949.  ~ 5 .- 12. By December 31, 194-9, net gold and foreign exchange hold- ings amounted to only 26% cf ..ne total money supply. compared \1ith 53% one year before. Since under Ecuador's monetary law. corrective mea- sures are obligatory ",hen reserves fall below 40% of the circulating medium, the Government intervened. To meet the emergency. further restrictions on imports were imposed and the multiple exchange system was modified by increasing the sucre return to exporters in order to stimulate exports (particularly rice), and by raising the value of the dollar in relation to the sucre in order to curb imports. 13. The Ecuadorian exchange bueget for 1950, formulated on the basis of these changes in the foreign trade regulations, forecasts a con- siderable improvement in this yearts balance of payments on current ac- count, which is expected to show a surplus of $2 million for the year, due mainly to the disposal in 1950 of part of last year 1 s rice crop. Exports are budgeted at $38.9 million (an increase of $10.5 million over 1949) and imports at $)7.2 million (down $7,1 million from last year), with miscellaneous revenues adding $0.) million to the trade surplus of $1~7 million. 14. Even though the export price 0 f rice is more likely to approximate 5 cents per pound instead of the 6~5 cent price included in the exchange budget, the budget appears to underestimate export re- ceipts some\vhat because coffee revenues tiere computed \,;1 th an average urice of only 3). cents per pound instead of the )8 cents \'lhich now seems likely. If adjustments are made on the basis of the lOi'ler rice and high coffee prices (using latest data on the size of these crops), it appears that receipts from exports may amount to $39.4 million in- stead of the $38.9 million officially estimated.  -6- 15. On the other hand, it seems doubtful whether the planned reduction of $7.1 million in imports from $44.3 million in 1949 to $:37.2 million can be realized in vie" of the exceptional reconstruc- tion needs generated by the Ambato earthquake. The cost of recon- structing the Ambato earthquake damage has been estimated at $80 mil- lion, of \<)'hich $36 million \-Till be needed to pa.y for imports. These figures may be somet-That excessive, but they give an order of mae;ni- tude of the financial problem ':!ith which Ecuador is faced. If the estimate is accurate and imports for reconstruction are divided equally for the next six years, imports in 1950 \-Tould total $43 million instead of $37 million. Against these expenditures l~ould be applied the $2.6 million to be d.isbursed this year from the 3ximbank loan and $39.4 mil- lion in exports, leaving a surplus of $1.0 million. It is clear, therefore, that ,·,hile the import situation need not be as stringent as official estimates indicate, the Ecuadorian balance of pa;Y1l1ents ,-,ill undoubtedly remain tight in 1950. Thus, for this year (until ivlay 25. 1950), purchases of exchange have been $2.2 million hiGher than sales, largely due to the influx of funds from the sele of last year1s rice stocks. 16. Ecuador's balance of ~ayments prospects largely depend on: a. The maintenance of ey,port values in the face of increasing 1:1orld supplies of, and lOHer prices for, the country I s principal exports (especially rice, \·,hich \1i th cacao made up 807; of Ecuador's 1948 exports, excluding non-monetary gold). b. Improvement of the competitive positions of Ecuador's export commodities and the production of new commodities (for export as ,.,eD as replacement of others nm-! imported) through appropriate  - 7 - development measures. c. The extent to ,-,hieh imports, inflated by extraordinary re- quirements for reconstruction from the effects of last yearls earthquake, can be kept in line \'!i th exports. d. The ability to attract foreign capital. e. The size of the external debt service, taking account of the $7 million recently loaned by the Export-Import Bank for earthqurure reconstruction and the possibility of a settlement of the debt nO\v in default. EXPORTS 17. If Ecuadorts balance of payments, unlike those of some other South American lands, has not been threatened by convertibility problems (about 80% of Ecuador's export-import trade moves Fithin the dollar area). its vulnerability to changing market conditions for the country1s exports '"as amply demonstrated last year. After enjoying a high level of exports in recent years, the value of rice exports dropped from $13.7 million in 1948 to $4.7 million in 1949. and cacao exports fell from $14 million to $8.9 million. 18. The discontinuation of international rice allocations. the shift of Latin America from a deficit-import to a surplus-export area for rice and the gro'"ing availability of surpluses for export from the Far East, all contributed to\vard reducing Ecuador's proceeds from rice exports i in 1949. The fall in e:xport values Nas accompanied by a 50)~ decline in the volume of rice shipped abroad by Ecuador, as '-Jell as a steady lO':lering of unit prices. To stimUlate the liquidation of the 1,500 million pounds of rice \vhioh had accumulated by the end of last  -8- year, the Government subsidized the e~rt of rice in December 1949 by temporarily raising the exchange rate returnable to rice e~~orters from 13.13 sucres to 17 sucres to the dollar. Through this device, Ecuador had succeeded in liquidating four-fifths of its rice stoclt:s by the end of April of this year •. 19. Ecuador's future as a rice exporter does not appear promis- ing. Costs of production are relatively high and qualities are inferior. The program of the Ecuadorian Corporacion de Fomento, assisted by the IBEC, to improve quality and lO"Ter costs (which no\v seems assured as a consequence of a recent Eximbank loan) may ma.ke i t possible for Ecuador to retain some of its markets, but competition from other Droducers, . particularly Siam. can be expected to intensify. The pospect is for prices to continue to decline, lvith the possible level of stnbilization at about 2.5 cents prr pound. Under these circumstances. Ecuador may not be able to realize as much as $3 million a year from rice exports in the not too distant future, although income from sales of rice in 1950 should be close to $6.4 million through the liquidation of the carry-over from last year. 20. Hm.,ever, marketing prospects for Ecuador's cacao, once the leading co~~erclal crop, but now reduced to lesser importance by tree diseaseq, are more favorable •. \'lhile this year I s crop may not be as large as last year's, prices are expected to be higher. yielding in- come in 1950 in the neighborhood. of $8.7 million, about the same as last year1s exports. In the longer run, earnings from cacao exports ,,,ill depend on the success of current efforts by the Corporacion de Fomento to conteract the falling production trend by the planting of  -9- disease-resistant strains. If these activities are taken into account, present indications are that Ecuador could anticipate earnings of about $7 to $8 million annually from its cacao exports in the next five yea.rs. 21. The outlook for other Ecuadorian exports are also satis- factory. The prospects for coffee and bananas are especially good this year, i t now being expected that coffee \'lill yield $11.4 million at an average price of 38 cents per pound and bananas and fruits, $6.5 mil- lion. Although present coffee prices may not last for five years, the increasing importance of "washed" coffee e~orts from Ecuador should be reflected in high income and annual proceeds of about $8 to $9 million per annum from this source are a reasonable expectation. Exports of bananas and fruits can be expected to follow a rising trend, averaging about $7 to $8 million annually in the next fet" years. Hot-lever, ex- ports of panama hats and miscellaneous items are expected to remain at approximately current levels ($3.9 million and $2.5 million, respec- tively) • 22. Summarizing the foregoing estimates. Ecuador 1 s avere.ge annual export trade receipts during the next five years may turn out as follO\-1s com-cared \1i th estimated export proceeds in 1950 and actual receipts in 1949. in millions of dollars: Annual Average Commodity 1949 1950 1951 - 1955'i I Rice $ 4.7 $ 6.4 $ 3.0 Cacao 8.9 8.7 7.5 Coffee 5.0 11.4 8.5 Bananas and fruit 3.8 6.5 7.5 Panama hats 4.0 3.9 4.0 Other 2.0 2·5 6.0 Total $28.4 $.39.4 $36.5  23. While an annual level of exports in the neighborhood of $36.5 million during the next five years is ,,!thin the expected order of magnitude, higher exports should be possible to a country \'lhose natural resources, although not strikingly rich, are nevertheless a!l- preciable. Although no thoroughgoing investigations have been completed, suggestions have been made that potentialities for development exist in forest products, fishing and canning and animal husbandry. Hm-rever, regardless of the vigor ,"1 th which developmen t proceeds, projects in these areas Crol hardly be expected to add appreciably to Ecuadorts ex- ports before 1955. INPORTS 24. Of more immediate significance to Ecuador's balance of payments are the attempts of the Corporacion de Fomento to stimulate and improve domestic production of wheat and cotton as well as the Government's plan to reorganize and modernize the textile in1ustry. Should these programs achieve a measure of success, SUbstantial cuts in imports \'Tould be possible, shlCe textiles and cereals const! tute a sizeable proportion of Ecuadorls inports (30% of 1948 imports). 25. Without stimulating internal production of commodities to substitute for imports, however, no appreciable decline in imports is foreseeable in the next fe\-] years. The bulk of Ecuador' s im~)orts con- sist of commodities which are not produced domestically (55% of the imports are capi tal goods and 15% fo('.dstuffs) and the need for them has intensified as a consequence of the earthquake and the inception of the development programs. 26. Some decline in world import prices is to be expected.  - 11 - This factor~ and the possibility of substituting domestic production for imports, may bring some reduction in imports. There is also the possi- bility that the sucre eventually ,·,ill be devalued. Em-lever, the effect devaluation might have had on increasing exports and diminishing the de- mand for imports has been anticipated to a considerable extent by the series of special deviations from the official rate decreed from time to time and computed to be already equivalent to an effective devaluation of over 20%. TakiDg all probabilities into account, it is conceivable that annual imports can be maintained at about $40 million during the next five years. Imports of capital goods could be cut by curtailing some development programs, but this '''auld only result in the delay or elimination of projects intended to relieve pressure on Ecuador's b8lance of payments. EXCEA£TGE SYSTElVI AND THE UiF 27. Under an Emergency La\1 for International Transfers enacted in Ecuador in June 1947, the Fund ap-"roved the application of taxes and surcharges on the sale of exchange \1hieh raised the effective rates above the par value of 13.50 sucres to the U.S. dollar to 15.04 sucres for es- sential imports and 23.54 for luxury imports. ~ithout the Fund's con- sent, Ecuador thereafter modified its exchange system in December 1949 to provide a subsidy of 3.87 sucres to the dollar for rice exports and 1.87 su.cres for general exports, raising the effective rates for these exports to 17 and 15 sucres, respectively. The higher rate for rice ex- ports Has considered temporary until April JO, 1950, bu.t 1,'/as extended for a month because the 1949 rice stocks had not been fully exported by the end of AprH. It has just been extended ag2l.1n until November 19.50.  - 12 - New buying rates '.-.rere also established for 25 minor exports, and on the import side, commodities ",ere shifted to more restrictive cate- gories and higher rates were imposed on luxury imports. 28. The Government t s interest in maintaining revenues "I11ich flo\-, from its nro.ltiple currency pra.ctices has Germinated some resis- tance to proposals for the termination of these practices. At Ecuador's request, the Fund recently approved the extension of the courltry l s multiple currency practices until l~ovember 30, 1950. The Ecuadorians have been reported as very well satisfied with the results obtained from the revisions in the exchange system made last December. On the other hand, 1MF officials vieN the modifications in the exchange rates as complicating the Ecuadorian exchange system and as represent- ing a partial de facto depreCiation under which the par value of the sucre has lost its meaning. The Fund officials also feel tl~t the present system, although encouraging exports and curtailing imports, is not an adequate solution of Ecuador 1 s payments problem. FOREIGN INVESTMENTS 29. In the four years lJet\·reen 1946 and 1949. foreign private direct investment in Ecuador ,.,as substantial. totalling about $25 mil- lion. HO\1ever. it has been declining steadily from a high of $8 million in 1946 and is believed to have amounted to only $4 million in 1949, 50% of the total originally expected. l'Iith the termination of operations by the Royal Dutch Shell Group and the Standard Oil Company of 11e\1 Jersey this year (vnlich have invested some $40 million in petroleum explorations in Ecuador since 1937) and the expected closin{.; down of the country's largest foreign-operated gold mine this year (vlhich '''ill  -1:3 - mean the end of annual dollar income ,,,hich. in 1949. i'1aS $800,000). the prospects for attracting foreign capital do not a.ppear to be favorable at this time. Moreover, plans for early development of a f ish cannery i'!i th foreif,n capital nO':l seem to have been de la~red. If, as seems probable, sizeable reductions occur in foreign capital in:t'101tl over recent years, as 'ltlell as in non-monetar" gold exports (i,!hich amounted to $2.6 million in 1948). Ecuadorf s balance of payments 1'lill, of course, be placed under increased pressure. FOnE! GN DEBT 30. At the end of December 1949. Ecuador's outstanding exter- nal debt totalled some $24.3 million. This amount is expected to in- crease to $37., million as undisbursed Export-Import Baruc credits are utilized in full. In addition, nearly $20 million in interest arrears has accumulated on a portion of the debt. totalling $12., million, in default since 1929. The def8.ulted debt, largely held in Great :Britain, is part of an old loan to finance the Guayaquil e.nd Q,ui to Rai1tvay in the late 1890·s; the rema.ining indebtedness, "'hieh is being serviced regu- larly, consists of inter-governwental credits extended to Ecuador since the beginning of ''forld r;!ar II. primarily loans from the Eximbank. 31. Discussions have taken place bet\1een the Ecuadorian Govern- ment and the British Council of Foreign Bondholders concerning a settle- ment of the defaulted debt. but no agreement has been reached to date. Di:ferences between the Ecuadorian offer and the Councilts requests do not seem insurmountable and a settlement should therefore be possible. If it is assumed that the terms of the 1948 Chilean debt settlement (which presents a recent pertinent e::::aml)le) are follo,,,ed in settling the  - 14- Ecuadorian debt, that all Eximban.1{ credits are utilized by their clos- ing dates, and that about one-thircl of the def8.ulted debt is 11.eld in Ecuador (as there is reason to believe), annual service charges on Ecuador's entire debt '·,ould amount to some ~2.2 million in 1950, rise to a maximum of $3.0 million in 1951, and decline gradually thereafter. Service requirements for 1950 amount to about 6;;) of estimated exports. Normally, this proportion ,,,ould not be considered particularly hiGh for a country in Ecuador's position, but an added annual burden of about $1.0 million to cover service charges on the defaulted debt and the new $7 million Export-Import Bank loan '."ould add to the rigidity of Ecuador's burdened balance of payments. 32. Moreover, it appears that further increases in Ecuador's debt burden for reconstruction and development activities are almost certcdn since the 10i., level of international reserves excludes fur- ther financing of import deficits. In view of the unfavorable pros- pects for the Ecuadorian balance of payments in the next five years, however, any substantial increase in external indebtedness does not appear manageable. After 1955. the outlook ,.,ould seem to be more promising. By that time, the effects of present development programs should begin to be felt in the balance of payments. It is also to be expected that most of the extraordinary reconstruction needs \'rill luwe been met by 1956 and that a margin beti'leen export receipts and imports "Jill appear from ,.,hich funds for serVicing adciitional loans can be al- located. INTERl~AL DEVELOP~JTS 33. Internal economic cO!ldi tions in Ecuador are largely  - 15 - dependent upon foreign trade. exports accounting for an estimated 23% of the national income (estimated for 1949 at 3.868 million sucres or $287 million at the official rate of exchange). Until the latter part of 1948, the relatively satisfactory position of Ecuador's balance of payments induced an expansion of domestic economic activity expressed itself in considerable part in pressure for consumption Boods imports and in non-productive investment. 34. Evidence of latent inflation appeared in Ecuador soon after the end of the Vlar, but the Government's fiscal policy does not seem to have been responsible for this development. Disclosed figures on the ordinary and extraordinary budget and special accounts from 19Li6 to 1948 sho\" net surpluses totalling 28.2 million sucres ($2.1 million). Al thour;h not all of the Government's operations \'!ere inclue.ed in the disclosed accounts, evidence of the basic soundness of the Government's fiscal position is furnished by the decrease of Central Bank credits to the Government from 155 million sucres ($11.5 million) at the end of 1946 to 52 million ($4.2 million)at the end of 1948. 35. Throughout the period, however, ban': credits to the pri- vate sector ,.,ere expanding, such credits (excludinG rediscounts by the Central Bank) increasing from 494 million sucres ($36.6 million) at the end of 1945 to 694 million ($51.4 million) at the end of 1948. The in- flationary impact of credit expansion in the private sector of the economy \faS partially offset by a reduction in the Government's obli- gations to the Central Bank and liquidation of international reserves. 36. Consequently, money supply increased only moderately. from 634 million sucres ($46.9 million) at the end of 1945 to 653 mil- lion ($48.3 million) at the end of 1948. In spite of the small increase  - 16 - in money in circulation, the relative defie iency of consumer goods "las reflected in the movement of uho1esa1e prices of home-consumed goods, the index for \1h1ch rose from 266 (January/June 1939 = 100) at the t'.::.;d of 19L' S. to 388 at the end of 1948. 37. On the "1hole, however, internal economic conditions in Ecuador were not unsatisfactory before the end of 1948. Such. at least. \-1aS the belief of the Government, ~}fhich initiated a rather 1'lrnbi- tioua development program tOvlard the middle of that year. Funds for the Corporacion de Fomento, established in 1947, \'lere provided by diversion of the surcharge of .5 sucres (37 cents) per dollar on the sale of ex- change for certain categories of imports '.'Thich had orif~inally been used to repay the Government I s debt to the Central Bank an,i the creation of a Security Stabilization Fund. A Development Ba!':'k. lrhich heads 15 pro- vinciHl banks. ',las also created and the operation of the system '.',fas financed by a tax and surcharge on the sale of foreign exchange, loans from the Central Bank and private deposits. 38. The combined impact of the Ar:Jbato earthquake and the de- terioration of the Ecuartorian balance of ~Jayments have resulted in the diversion of substantial resources of the netv development entities from the original purposes of these organizations. About 15 million sucres ($1.1 million) has been expended by the Corporacion de Fomento alone on t-JOrks and assistance in the regions damaged by the earthquake. Moreover. since last December, the receipts from tl:e exchange surcharge 'ltlhich were to be allocated to the Corporacion. have been used to finance the subsidy on rice exports through the multiple exchange system. Unless other means of financing are found (no easy matter in the present cir- cumstances), or production is increased, future activities of the  - 17 - Corporacion appear dependent upon increased budget allocations or direct aid from the Central Bank, either of ':lh1ch methods of financ- ing is likely to have inflationary effects. 39.' Manifestations of increasi.."lg inflatlonnry pressures ''lere clearly apparent in 1949. According to the latest reliable data, the ordinary and extraordinary budgets closed with a combined deficit of ':11.9 sucres $2.4 million), althoW';h sur:r,>luses in speci~.l accounts ap- pear to have reduced the overall opere.ting deficit of the Goverm-;;ent to 15.9 million sucres ($1.2 million). Baru~ credit. aided by Central Bank discounting, continued to expand, rising 20~ during the year to 747 million sucres ($.5.5.3 million). Heavy Central Esnk: cliscounting operations 150 million sucres ($3.7 million) in 1948 and 150 million sucres ($11.1 million) in 19427 originally were started to offset the do\·mt'1ard trend of business activity, but more recently these operations are explained by the necessity for financing the Government's rice support program. Responding to the inflationary effects of the fiscal defiei t and credit expansion, the ".'holes13.1e price index of home con- sumed goods (January/June 1939 =100) increased from 390 in December 1948 to 442 in March 1949. Hovreyer. the defla.tionary counteraction of the balance of payments deficit of $13.6 million (180 million su- cres), \,lhich kept the increase in money supply dotm to only 9;..1 dUIing the year, also was responsible for a recession in the ~rice index to 373 by December, 1949. 40. Partly because of the difficulties inherent in the balance of payments and partly because of the burdens imposed by earthquake reconstruction, Eouador's internal financial position pro- mi ses to remain strained in the immediate future atld for the next fet"  - 18 - years. It is ironic that the greater the Government's success in curb- 1ng imports, the greater 1."1111 be the danger of inflation, unless output can be increased correspondingly. The financial cost of reconstruction is estimated at some 60 million sucres ($4.4 million) per ann~~ in 1951-55; in 1950. planned expenditures for this purpose came to 80 mil- lion sucres ($5.9 million). It is difficult to see hON Ecuad.or can finance expenditures of these magnitudes in a noninflationary manner \'rithout COntiluing to divert resources from development. This s1tuntion presents Ecuador's officialdom ''lith the unhappy dilemma of choosin~ be- t'-leen reconstruction and development. It is safe to assume that poli ti- cal expediency and economic necessity i-rill make the choice difficult and that increasing inflation \·lill be the Drobable result. 41. The extraordinary budget for 1950, ','Thich is largely de- voted to earthquake reconstruction, illustrates tee difficulty. Out of total estimated eX1Jendi tures of 138 million sucres ($10.2 million), 55 million sucres ($4.1 million) vr111 come from the Central :Bank and the state Security Stabilization Fund. An expansion of the money supply to the e'.tent of such financing is therefore foreseeable. Late reports also indicate that the ordinary budget for 1950, \'lhich vias balan~ed at 388 million ($28.7 million), has registered a deficit in the first quarter of the year to the extent of 16 million sucres ($1.2 m1l1:i.on). POLITICAL SrruATION 42. \'lhen he assumed pm1er on August 31, 1948. President Galo P12za endeavored to initiate a vigorous development program, resorting free~ to foreign technical aid. Besides assistance received from IBEC and the Export-Import :Bank, missions ,vere invited from and sent by the  - 19 - Uni ted Nations, Mexico, and the FAD. In spite of these efforts, the President's hopes have largely been disappointed, partly because of the deterioration in Ecuador's export position, pl",rtly because of the Ambato earthquake. and in ~art because the IBRD has not found it possi- ble to support his ideas financially \'fith the speed or on the scale the President evidently expected. These developments have endangered his O1Jm tenv.re of office (\l1hich expires on Aw:;"tlst 31. 1952) and diverted his attention from economic to ~olitical problems. 43. Congressional elections t'lere held in June 1950.. The Novimiento Civioo Democratico l1ac ional; Plaza I s party, fs,iled to carry the three largest cities in the c0 1xntry. ~uitot Guayaquil and Cuenca, and lost its majority position in the legislature. Evidence is not ,..ranting that Galo Plaza feels the grOlving insecurity of his ]losition (t~·tO abortive attemuts to overthr0\1 him have been reported). Even much- needed development has had to give T:TaY as a cO::lseque::lce of the uncertain political climate, a notet'lOrthy exam~r)le being the paving of the Q.uevedo- Manta HighT:lay which ~.1ould help economic progress of the Sierra and stimulate development of .i'Jlanta as a first-rate :port. A loan of $3.2 million for this purpose Has a~:r:roved by the Export-Irm)ort J3a,!Ll{. but the Plaza Administration has not dared to allo", construction to pro- ceed because of bitter op1)osi tion from Guayaquil, \':11ioh fears com'1)eti- tion from Hanta. CONCLUSIONS 44. An analysis of Ecuador's dOr:lestic financial 'j)rospects con- firms the conclusion reached on the basis of the country1s external financial position: Ecuador can ill afford to increase its debt burden  - 20 - during the next five years. ~'lhile this conclusion does not foreclose the possibility of a small loan, directly linked to improving the con- dition of the balance of payments, it does im~ly that interest payments on any ne':l loan must be 10t·, and amortization payments must be deferred until Ecuador's development programs, mOst of which depend on foreign credits, have had an opportunity to improve do~estic production of cOTllJ!lodit ies for export and for repl8.cement of im,.,orts. 45. Ecuador's present difficulties (the collapse of the rice export market and the Ambato earthctuake) are largely due to uncon- trollable factors. and there is little that C8.n be done in the short run to remedy the situation. Ecu2.dor t s position is difficult. but i t is not 'irithout hope; careful formulation and effective execution of a practical development program. \'lhich "lould also limit reconstruction exyenditures in favor of economic development. could greatly improve its credi t\'!orthiness. The ,.,rogram ':lould probably call for technical assistance over a period of some years. With teclmical assistance, supplemen ted by financ lal aid for development 1·[hich fits in to the frame~:lork of a '"ell conceived T)rogram promising continuous and effec- tive effort t01:1ard completion, l'n".1ch could be done to improve Ecuador's lon{-;-term balDnce of payments position; Hithout such a program, it is dUficul t to see h01.1 ~cuador can halt domes t ic inflation and improve its creditworthiness. 46. The Bank is not nO\'l in posi tion to determine the essen- tial characteristics of an investment program for Ecuador \'Jh1ch l"rould improve its credi t~·!orthiness. Information is laoldng concerning the magnitudes \"hic11 ,'!culd be involved, the period over uhioh assistance ,"lould be rectuired. or even the extent to ';lhioh the.)rogre.m ''lould be  - 21 - aicieci by foreign financial credits. It is clear. houever. that the Bank's attituo.e must be governed by the arewers to such questions as these. It is not inconceivable that investigation might show that the needs are sufficiently moderate to justify a series of small loansr the combined effect of ,'!hieh 110uld be to alloi'T repayment and acid.i tional safe borrm'ling. -000-