South-Western College Publishing - Economics  

Ecuador's Economy Heads South
Subject International Trade and Finance: South America
Topic(s) Economic Growth and Development; International Trade and Finance; Privatization
Key Words Devaluation, Ecuador, Foreign Reserves, Foreign Debt, Foreign Currency Devaluation, GDP, Economic Growth
News Story

Ecuador's economy is showing signs of distress. Enough distress to cause two of Ecuador's top financial officials to resign. In late March, Ecuador's central bank allow the sucre, the national currency of Ecuador, to be devalued by 6%. The devaluation added to the decline in the sucre which has lost 21% of its value since the end of 1996. Foreign reserves have been shrinking, which may put added pressure on the sucre.

Ecuador's devaluation was brought on by a multitude of problems. The country's budget deficit is estimated to be about 2% of its 1997 gross domestic product (GDP) and is projected to almost double in 1998. The projected increase in the budget deficit follows the Congress of Ecuador's recent veto of an increase in the value-added tax, its delay in privatizing the state's assets, and its reluctance to curtail spending.

Total foreign debt is a significant problem. Foreign debt is 73% of GDP and Ecuador has a substantial dollar-denominated debt load. Servicing foreign debt will be more costly now that the sucre has been devalued. Added economic problems result from decreased oil prices, a drop in banana and shrimp production, and reduced demand for Ecuador's exports.

Ecuador's economic problems have caused analysts to decrease their estimate of economic growth. Ecuador's economy grew 3.3% last year. Growth had been projected to be 3.4%, but that estimate has been lowered to 2.5%. (Updated May 19, 1998)

  1. How does a decrease in a country's exports affect its GDP? Does it have any effect on its budget deficit?
  2. What is likely to happen to Ecaudor's trade balance and bidget deficit if Ecuador goes into a recession?
  3. What are the implications of the decline in the value of the sucre on the country's trade balance?
Source Thomas T. Vogael Jr., "Top Finance Officials in Ecuador Resign," The Wall Street Journal, March 27, 1998.

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