Unlike many finance ministers in industrialised countries, Patricio Rivera does not believe in orthodox market economy policies. In the more than five years since Ecuador’s president, Rafael Correa, was elected, the country "has pursued unconventional economic policies, and they have worked”, he says. Thus far, the figures appear to back up these claims.
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For example, Ecuador’s oil exports, which represent half of the country’s total export earnings and remittances, collapsed during the recent global economic recession. The government’s capacity to respond to this was limited as, following the adoption of the US dollar as the national currency in 2000, Ecuador’s central bank can no longer print money or be a lender of last resort. Yet, rather than experience a deep, protracted recession, Ecuador's gross domestic product (GDP) fell by just 1.3% in the final three quarters of 2009.
The country has since recovered. According to its central bank, Ecuador's GDP stood at $67bn in 2011, having enjoyed 7.8% growth in the year, one of the highest growth rates in Latin America. GDP is expected to grow a hearty 5% in 2012, according to the finance minister.
Mr Rivera – a former economist at the state planning office who was sworn in as Ecuador’s finance minister in August 2010 – says the government has acted creatively, working around the challenges of spurring growth in a dollar economy by expanding social sector welfare and social sector government spending as well as increasing public investment in infrastructure.
"Ecuador has one of the highest ratios in the region of capital investment as a share of GDP. It is now 11.3% of GDP while the average in Latin America is 5.6%,” he says. “For us, for this government, high economic growth alone is not enough. [We require] growth [coupled] with social investment and redistribution. This is what guarantees political stability. This is what guarantees the continuation of public policies.”
Energy equation
The benefits of such a rounded approach are already evident. After government spending on social welfare and education programmes doubled between December 2007 and June 2012, and the minimum wage and public sector salaries increased, national poverty declined from 36.7% to 25.3%, and extreme poverty fell from 16.5% to 9.6% and inequality from 0.57% to 0.47%. On top of that, reflecting increased job creation in both the public and private sectors, in June 2012 Ecuador posted the lowest unemployment rate in Latin America of 4.1%, according to official figures.
Alongside this, the government invested about $7bn repaving and extending the country’s road network, which created jobs, brought improvements to agriculture and industry, lowered transport costs and boosted tourism. Travel agents say that Ecuador is set to continue growing on the international ecological tourism map.
The government is not only developing infrastructure in order to open new areas and draw private investment, it also wants to fundamentally change the country’s energy matrix to benefit Ecuador’s external accounts in the medium term and make the cost of electricity cheaper. Two projects are already under way to this end.
The first is a $12.5bn joint venture between the state-run oil company Petroecuador and Venezuela’s PDVSA Pacific Refinery, which is expected to eliminate Ecuador’s reliance on expensive imported oil derivatives, and has the capacity to produce 300,000 barrels of oil per day. The second is the construction of the country’s largest hydroelectric plant, the 1500-megawatt Coca Coda Sinclair plant, by China’s Sinohydro Corporation. The country expects that 75% of its future energy needs will be supplied by hydroelectric sources. This will lead to a large reduction in energy prices, with hydroelectric power costing about $0.03 per kilowatt per hour compared with the current price of $0.12 to $0.15 cents per kilowatt per hour using thermal sources.
Showing preference
Although a recent surge in international oil prices has benefited Ecuador’s current account, the country struggled with a deficit in 2010, mainly due to a negative trade balance. Once again, the country resorted to unconventional economic policies to reduce the deficit. Starting in 2011, Ecuador increased its tariffs and added red tape to discourage selected imports – including 'luxuries' such as Mercedes Benz cars and Black Label Johnnie Walker whisky. This import substitution policy reversed a negative trade balance of $133m in 2011 to a $390m trade surplus at the end of June 2012, but it also angered wealthy Ecuadorians.
Conversely, to sustain economic growth and the government’s programme of investments in infrastructure, priority is being given to imports of raw materials and capital goods, which amounted to a huge 11% of GDP and 8.9% of GDP, respectively, in 2011, and were easily Ecuador's biggest imports.
Maintaining such high levels of imports and having the capital on hand to finance the government’s expenditure has been possible because of highly significant financing from bilateral sources. Mr Rivera names China, Russia and Brazil but, he says, China, “from the point of view of Ecuador’s external debt is the biggest lender”. Total Chinese loans, including loans made against future sales of oil and others for hydroelectric projects, amounted to $7.25bn at the end of August 2012.
China’s financing is not included in Ecuador’s foreign debt, however, which stood at $9bn at the end of June 2012, according to the central bank. Ecuador’s total public debt-to-GDP ratio is 22.1%, which is low compared to many other Latin American countries. Moreover, although Ecuador defaulted on about one-third of its foreign debt, or $3.2bn, in 2008, it succeeded in renegotiating the rest of it on more favourable terms, central bank officials said. And in 2011, foreign direct investment amounted to $568m, up from just $157m in 2010, according to the country's finance ministry.
Simultaneously, in terms of its domestic debt, the government has found ways to boost revenues. As a result of a re-negotiation of oil contracts with seven companies, replacing production and profit sharing contracts with new fees for services contracts, the government “obtained an additional $1bn in oil income between the time when these negotiations ended half way through 2011 and August 2012, which for a small economy such as Ecuador’s is a very significant amount,” Mr Rivera says.
Pushing ahead
Additionally, Ecuador’s Social Security Institute (IESS), with more than $9bn in reserves under its management, all of which is invested in Ecuador, has become a major source of support. For instance, IESS has issued about $1.5bn in concessional mortgage loans to affiliated workers since 2009, helping to spur a private sector construction boom and now accounting for more than half of all housing credit. It has also made arrangements with the government to buy between $500m and $1.25bn of government paper, annually, according to Mr Rivera. It is also investing directly in government hydroelectric and oil development projects as well as in municipal and local government infrastructure.
More conventionally, government revenues have also increased because of a doubling in tax revenue, which is mainly due to improved tax collection and reduced tax evasion. All told, government revenues from 2007 to the end of 2011 increased by 103%, led by a 238% increase in oil revenues and a 106% increase in tax revenues, according to the finance ministry.
The government still wants to generate more hard currency. This would allow it to increase the development of its oil sector, as well as allowing it to start taking advantage of its extensive mineral resources. With gold as well as large-scale copper and silver reserves estimated to be worth about $230bn at current international prices, it seems likely that Ecuador’s economy will keep on going from strength to strength.
