Ecuador: Selected Issues and Statistical Annex

The crisis in the banking sector was one of the major contributing factors that led Ecuador to abandon its own currency and introduce the U.S. dollar as legal tender. However, to illustrate the weak growth performance of the country, it is necessary to examine the structural weaknesses in the labor market, the tax system, and the trade system. These weaknesses resulted in the increase in poverty and inequality. This paper provides a brief summary of recent economic developments and statistical data on economic indices of Ecuador.

Abstract

The crisis in the banking sector was one of the major contributing factors that led Ecuador to abandon its own currency and introduce the U.S. dollar as legal tender. However, to illustrate the weak growth performance of the country, it is necessary to examine the structural weaknesses in the labor market, the tax system, and the trade system. These weaknesses resulted in the increase in poverty and inequality. This paper provides a brief summary of recent economic developments and statistical data on economic indices of Ecuador.

IX. External Trade Issues77

134. Ecuador has taken some important steps over the past few years toward liberalizing its trade regime, in particular with its accession to WTO in 1996. Still, the trade regime remains fairly restrictive, with significant elements of protection of domestic industries, and lacking in transparency. Ecuador has also met with limited success in diversifying its export base away from primary products. Although nontraditional exports have developed at high rates over the years 1990-97, most of the nontraditional goods were still primary products, or processed primary products.78 This has resulted in a combined dependence on strongly fluctuating world market prices and unstable weather conditions for production.

A. International Commitments on Trade

135. Ecuador joined the World Trade Organization (WTO) on January 21, 1996 and has accepted all the relevant obligations. As a result of multilateral and bilateral negotiations prior to accession, Ecuador had already consolidated its global tariff system for a total of around 7,000 product items according to the Harmonized System. The tariff rate binding with WTO is at a general ceiling which is about 10 percentage points higher than the Common External Tariff (CET) applied by the countries of the Andean Community.79 The GET was determined by the Andean Community as part of the renewed Cartagena Agreement and is part of Ecuadoran law. The national tariff of Ecuador, as effectively applied, is somewhat lower than the CET, whereas the ceiling for tariff rates agreed under the WTO thus lies higher than the CET. This has provided Ecuador with a substantial margin of maneuver to impose tariff measures, such as higher tariffs or tariff surcharges, when deemed necessary.

136. Ecuador has also ratified the General Agreement on Trade in Services, largely putting into law the status quo of liberalization of market access for services. The only point which initially was subject to some discussion was a request by Ecuador for a moratorium on foreign banks to freely engage in banking activities in the Ecuadoran market and, in particular, to establish new banks. This request was in line with a general ban on the establishment of new banks for prudential reasons. However, foreign banks were allowed at all times to buy shares of existing banks. In November 1998, the Junta Bancaria decided to lift the moratorium, thus completely liberalizing access to the financial market, effective March 1, 1999.

137. With the accession to the WTO, Ecuador accepted the level of agreed protection of intellectual property rights under the Trade Regulations on Intellectual Property (TRIP). Ecuadoran law was already in conformity with the common regime of the Andean Community and to some extent provided greater protection than was required under the TRIPs. However, a number of adjustments had to be undertaken to make it conform to WTO requirements. These adjustments were incorporated in the Intellectual Property Rights Law, approved by the Ecuadoran congress in 1998, which improved the basis for protection of intellectual property rights. The United States Trade Representative recognized the improvement by removing Ecuador from the “priority watch list” in 1999.

138. Ecuador has, in parallel with the Andean Community, also made a number of adjustments to its anti-dumping rules.

B. Trade Regime and Restrictions

139. The National Tariff of Ecuador currently employs a two-tier system:

  • A set of 5 tariff bands for most commodities (Box IX. 1);

  • The Andean price band system for 130 sensitive agricultural items.

Main Tariff Bands

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The import tariffs for these agricultural commodities are variable and subject to the price band system as the reference.80 The ad valorem CET rates are adjusted according to the relations between market commodity reference prices and the established floor and ceiling prices of the products. WTO tariff ceilings have been established at between 35 and 95 percent above the level of the CET. A schedule to reduce and eventually eliminate the quantitative and tariff restrictions on these products over a four to seven year period was devised, according to the degree of sensitivity of individual products.81 The first year in which a reduction should have been implemented under the scheme was 1998. However, no action was taken on reducing the tariff rates for the first 29 products scheduled for that year.

140. Ecuador has also made extensive use of the import surcharge, particularly since the onset of the recent crisis, for fiscal reasons. In March 1998, Ecuador introduced an ad valorem import surcharge under the transitional safeguard clause (“tarifa salvaguardia”). This measure was justified under the July 1997 state of economic emergency, and was limited to December 31, 1998. However, in February 1999, this surcharge was replaced with a new, higher surcharge, and with no explicit time limit.82 The import surcharge is applied in a non-uniform manner and subject to constant change. Many products have had the import surcharge eliminated during the first half of 2000.

141. Ecuador maintains a number of trade restrictions; principally import bans on used automobiles, clothes, shoes, and tires.83 In the process of WTO accession, it was determined that these restrictions are not covered by GATT Articles XX and XXI (i.e., general exceptions for health and sanitary, and security reasons). Consequently, they would have to be eliminated in accordance with the abolition of all quantitative trade restrictions (GATT Article XI). In recognition of the difficulties this would present to the country, a transition period until July 31, 1996 was granted to adjust the trade regime to full GATT-compatibility. However, there has been little progress so far in addressing the issue by either abolishing the import bans or replacing them with a set of regulations to address the potential health and security hazards of imports of used goods.

142. Other controls on imports presently in effect include:

  • Sanitary registration is required on imported foods, cosmetics, pharmaceuticals, and on some other consumption goods, in formal conformity with GATT Articles XX and XXI. However, some complaints persist that sanitary standards are being applied mainly for protectionist reasons.

  • Prior authorizations are required for imports of 1,300 goods. There have been complaints that requirements of two or more approvals from different ministries for certain goods constitute a nontariff barrier.

C. Ecuador’s Rating on the Fund’s Trade Restrictiveness Index84

143. Ecuador is rated 6 on the Fund’s 10-point trade restrictiveness index. This index is a composite rating based on a simple average of tariff rates and an assessment on the extent of non-tariff barriers to trade (NTBs). The latter includes a judgement on the effectiveness of customs administration, in addition to an assessment of a wide variety of restrictions on imports and exports, such as quotas, licensing, and bank monopolies. In the case of Ecuador, the average tariff rate, calculated on the basis of over 6,500 tariff positions, originally amounted to 11.6 percent, or “relatively open.”85 However, as a result of imposition of the 1998 import tariff surcharge (which still persist today), the average import tariff level has increased to between 15 to 20 percent, which implies a shift to the “moderate” import tariff range.

Statistical Appendix

Table 1a.

Ecuador: Consumer Prices, 1995-97

(12-month percentage changes)

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Source: Central Bank of Ecuador.

Simple average.

Table 1b.

Ecuador: Consumer Prices, 1998-2000

(12-month percentage changes)

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Source: Central Bank of Ecuador

Simple average.

Table 2.

Ecuador: Indicators of Employment 1/

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Sources: National Institute of Statistics and Census; and Central Bank of Ecuador.

Covers Quito, Guayaguil, and Cuenca.

Includes electricity, gas, water, and transport.

Includes personal, social, and community services.

Persons in the labor force working less than 40 hours per week or earning less than the minimum wage and complementary earnings.

Able-bodied persons aged 12 or more.

Table 3.

Ecuador: Nominal and Real Minimum Monthly Wage Indices, 1990-Q1 2000 1/

(Average 1990 = 100)

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Sources: Central Bank of Ecuador; National Statistical Bureau (INEC); and Fund Staff estimates.

Minimum wage and mandatory complementary payments earned by a private sector worker.

Monthly average.

Deflated by monthly average CPI index.

Estimated as the ratio of nominal average monthly wage to annual average exchange rate.

Table 4.

Ecuador: National Accounts at Current Prices

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Source: Central Bank of Ecuador.
Table 5.

Ecuador: National Accounts at Current Prices

(In billions of sucres)

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Source: Central Bank of Ecuador.
Table 6.

Ecuador: Savings and Investment

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Sources: Central Bank of Ecuador; and Fund staff estimates.
Table 7.

Ecuador: Sectoral Origin of Gross Domestic Product

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Source: Central Bank of Ecuador

Includes real estate services, business, community, social and personal services.

Table 8.

Ecuador: Sectoral Origin of Gross Domestic Product at Constant 1975 Prices

(In millions of sucres)

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Source: Central Bank of Ecuador

Includes real estate services, business, community, social and personal services.

Table 9.

Ecuador: Sectoral Origin of Gross Domestic Product at Current Prices

(In billions of sucres)

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Source: Central Bank of Ecuador.

Includes real estate services, business, community, social, and personal services.

Table 10.

Ecuador: Value Added in Agriculture and Related Sectors

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Source: Central Bank of Ecuador.
Table 11.

Ecuador: Production of Selected Agricultural Crops

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Source: Central Bank of Ecuador.
Table 12.

Ecuador: Average Annual Producer Prices

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Sources: Central Bank of Ecuador and Fund staff estimates.

Producer price index deflated by the consumer price index.

Weighthed by output volume.

Table 13.

Ecuador. Value Added in the Manufacturing Sector 1/

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Source: Central Bank of Ecuador.

Excludes petroleum refining.

Table 14.

Ecuador: Oil Production and Trade

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Sources: Central Bank of Ecuador; Ministry of Energy; and Fund staff estimates.

Includes refining activities.

Includes exports of crude and derivatives.

Total petroleum revenue (including domestic derivative sales) to central government, PETROECUADOR, other public agencies of general government, and other public enterprises.

Table 15.

Ecuador: Summary of Public Sector Operations 1/

(In percent of GDP)

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Sources: Ecuadoran authorities and Fund staff estimates.

Consolidated nonfinancial public sector, including the central government, the social security institute, major public enterprises, local governments, and universities; and the quasi-fiscal operations of the central bank.

The financial transaction tax was introduced in 1999.

In 1995, includes a statistical discrepancy between “above” and “below the line” of 1.4 percent of GDP.

Table 16.

Ecuador: Domestic Prices of Petroleum Derivatives

(Retail prices per U.S. gallon)

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Sources: Central Bank of Ecuador; and Ministry of Energy.

Production discontinued.

Deflated by CPI index.

Table 17.

Ecuador: Central Government Operations

(In percent of GDP)

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Sources: Tables 23, 24, and 25.

Central government operations include the consolidated operation of central administration and FODESEC.