Economy of Ecuador - Economy 1998-2006

Economy 1998-2006

Deteriorating economic performance in 1997-98 culminated in a severe financial crisis in 1999. The crisis was precipitated by a number of external shocks, including the El Niño weather phenomenon in 1997, a sharp drop in global oil prices in 1997-98, and international emerging market instability in 1997-98. These factors highlighted the Government of Ecuador's unsustainable economic policy mix of large fiscal deficits and expansionary money policy and resulted in an 7.3% contraction of GDP, annual year-on-year inflation of 52.2%, and a 65% devaluation of the national currency in 1999.

On January 9, 2000, the administration of President Jamil Mahuad announced its intention to adopt the U.S. dollar as the official currency of Ecuador to address the ongoing economic crisis. Subsequent protest led to the 2000 Ecuadorean coup d'état which saw Mahuad's removal from office and the elevation of Vice President Gustavo Noboa to the presidency.

The Noboa government confirmed its commitment to convert to the dollar as the centerpiece of its economic recovery strategy, successfully completing the transition from sucres to dollars in 2001. Following the completion of a one-year stand-by program with the International Monetary Fund (IMF) in December 2001, Ecuador successfully negotiated a new $205 million stand-by agreement with the IMF in March 2003.

Buoyed by higher oil prices, the Ecuadorian economy experienced a modest recovery in 2000-01, with GDP rising 2.3% in 2000 and 5.4% in 2001. GDP growth leveled off to 3.3% in 2002. Although final figures are not yet available, it is expected to fall further, to about 1.7%, for 2003. GDP growth is estimated to recover to over 4% in 2004, due largely to expanded oil exports. Inflation fell from an annual rate of 96.1% in 2000 to an annual rate of 22.4% in 2001; although final figures are not yet available, it is expected to drop below 7% for 2003. Despite recent gains, 40% of the population lives below the poverty line, more than double the rate five years ago.

The completion of the second Transandean Oil Pipeline (OCP in Spanish) in 2003 will enable Ecuador to expand oil exports. The OCP will double Ecuador's oil transport capacity, but Ecuador will need to attract additional foreign investment to realize the full economic potential of the added capacity.