Ecuador: Economy

President Correa's economic priorities include higher social spending, increased government control over strategic sectors, and ensuring a greater share of natural resource revenues for the state. However, after 4 years in office, the government’s economic policies continue to evolve, creating some uncertainty for the business community. The World Economic Forum's Global Competitiveness Index rated Ecuador 105th out of 139 countries for 2010-11.

The Ecuadorian economy is based on petroleum production, manufacturing primarily for the domestic market, commerce, and agricultural production for domestic consumption and export. Principal exports are petroleum, bananas, shrimp, flowers, and other primary agricultural products. In 2010, crude and refined petroleum products accounted for 56% of total export earnings. Ecuador is the world's largest exporter of bananas and plantains (about $2 billion) and a major exporter of shrimp ($828 million) and cacao ($402 million). Exports of nontraditional products such as flowers ($598 million), canned fish ($601 million), and automobiles ($375 million) have become more important in recent years.

The oil sector typically accounts for 50%-60% of the country’s export earnings, 15%-20% of GDP, and 30%-40% of government revenues. Oil production is primarily carried out by the government, as well as by small domestic and several large foreign companies. Oil production declined between 2006 and 2009 due to insufficient investment, before leveling out in 2010. In late 2010 and early 2011, the government renegotiated all oil concession contracts, moving from a production-sharing arrangement to service (fee) contracts. Several oil companies declined to renegotiate; those operations were devolved to the state oil company, increasing the state’s share of national oil production from 62% in 2010 to roughly 71% in 2011. With oil contract renegotiations complete, public and private investment in the sector is expected to increase, along with production levels. Additional oil concessions for certain marginal fields and new large tracts in the southern part of the country are expected to be offered in mid-2011. The mineral sector has been developing slowly. However, in early 2011, government negotiations commenced with mining companies interested in moving from an exploratory phase into production. To foster diversification of Ecuador’s economy, the Ecuadorian Government enacted a Production, Trade, and Investment Code in late 2010. The code is intended to promote production of higher value-added products, in particular by small and medium-sized businesses located in regions outside the major business centers of Quito and Guayaquil.

Ecuador adopted the dollar as its national currency in 2000, following a major banking crisis and recession in 1999. Dollarization led to stability, which helped Ecuador achieve solid economic performance through 2006. From 2000 to 2006, growth averaged 4.9% per year, supported by high oil prices, strong domestic consumer demand, increased non-traditional exports, and growing remittances (about $3 billion in 2006) from Ecuadorians living abroad. In 2007, economic growth slowed, constrained by declining petroleum production and reduced private sector investment. In 2008, the economy recovered, posting a 7.2% real annual growth rate due to higher oil prices, increased government spending and strong domestic demand. By the end of 2008, the global financial crisis and economic downturn led to falling remittances and declining oil revenue for Ecuador. In December 2008 the government defaulted on certain debt issuances (its 2012 and 2030 Global bonds, with a total face value of approximately U.S. $3.2 billion). In June 2009, the government repurchased 91% of these bonds at a 65%-70% discount in a modified Dutch auction. Although oil prices rebounded in 2009, economic growth slowed due to a fall in internal demand resulting from the international financial crisis and reduced domestic investment. Remittances from foreign workers, Ecuador’s second-largest source of external revenues, after petroleum, declined 12% due to the worsening economic conditions in the United States and Spain, the two most important origins for remittances. According to official statistics, the real annual growth rate for Ecuador’s economy in 2009 was 0.36%.

As the global economy began to recover in 2010, Ecuador’s economy rebounded with a 3.6% growth rate. However, limited access to international financing, following the 2008 sovereign default, forced the government to reduce expenditure levels and cover a budgetary financing gap with loans from international financial institutions, funds from Ecuador’s Social Security Institute, and financing from China. Ecuador has received almost $3 billion in direct financing from China since 2009. This financing has usually taken the form of contracts with the Ecuadorian Government for forward sales of oil, and often carry interest rates above those generally charged by international financial institutions, such as the World Bank. Remittances from workers abroad continued to decline in 2010, falling 7% from the 2009 level. Between 2000 and 2010, per capita income increased from $1,324 to an estimated $4,013, while the poverty rate fell from 51% to 33%.

The Ecuadorian Government’s official forecast for GDP growth in 2011 is 5.1%. The Ecuadorian Government’s budget for 2011 totals $23.95 billion, with a $3.7 billion budget deficit and $4.95 billion financing gap. The 2011 budget is premised on an average price per barrel of Ecuadorian crude of $73.30. Higher export oil prices stemming from unrest in the Middle East are expected to provide Ecuador with substantial extra-budgetary revenue in 2011. Additional financing is expected to be in the form of loans from international financial institutions and disbursements from China for the forward sale of oil.

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