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In 2000, Ecuador officially adopted the US dollar as its legal tender in the wake of a severe economic and banking crisis in an effort to improve transparency, and banking performance and competitiveness. However, as the dollar has appreciated, prices of domestic goods and exports have skyrocketed, influencing a crippling imbalance in exports and imports. This combined with the drop in oil prices has weakened the domestic commercial and productive sector, and shined a spotlight on the country's dependency on oil, which represents 55% of Ecuador's exports, and finances 15% of the state's budget.
On March 12th, President Rafael Correa's government applied safeguards of up to 45% on its imports. The safeguards will be implemented for 15 months to 2,961 items, affecting 32% of Ecuador's imports and a total of 138 types of products. It mainly affects consumer goods and it does not affect essential raw materials and capital goods or medicines. Fully-manufactured products, including TVs and cars, were are affected with the maximum 45% levy, totaling 1,392 imported goods; 25% was applied to tires, ceramics, and television and automotive parts, totaling 392; medium sensitivity goods with 15%, totaling 452; and non-essential capital and raw materials with a 5% tax, totaling 725 goods. Both the World Trade Organization (WTO) and the Andean Community Secretary General (CAN) have authorized the measure, and some of these products may see a reduction in the percentage of the tax as a way of giving more flexibility to importers.
Between March and June, imports were reduced by $874 million, a 13% decrease compared to the same period in 2014. Out of all imports, more than $576.70 million correspond to the products affected by the safeguards, while $297.57 million come from the non-affected goods. The government's goal is to reduce imports by $2.2 billion during the 15-month period.
Many in the industrial and banking sectors have had to adjust their operations as a result of the new legislation. General Manager of Banco Del Bank Javier Delgado told TBY, “We have experienced a decrease in credits for vehicles due to this, that is why we are focusing on the industry sector.” Also, the restrictions have created a situation where larger banks with more infrastructure and capital have a growing advantage over smaller banks without enough assets to stay competitive, and it is expected many banks—as well as manufacturers—will have to close.
According to Diego Aulestia, the Minister of International Trade, the safeguard tariffs are a “temporal decision aimed at taking action in a context in which Ecuador has the inability to make a correction of the value of its national currency.” Some industry figures would beg to differ, however, as the impact of the safeguards has had dire consequences in some sectors. “From a macro economic point of view, the safeguards will be detrimental,” says Pablo Arosemena Marriott, President of the Chamber of Commerce of Guayaquil. “Without safeguards, the economy has its own ways of regulating itself. Safeguards are not necessary. Not only are safeguards not necessary, they are also harmful.”
Others still counter that while the regulations may be too punitive in their current incarnation, the higher level of formality is putting the country on the right track, and the government needs to focus on nurturing the private sector and opening the country to FDI. “Strategies to change the production matrix must be accompanied by increased efforts to open our markets to the world,” said Fernando Hidrobo Estrada, CEO of Hidrobo Group.
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TABLE OF CONTENTS
Guest Speaker
Maxine McClean, Minister of Foreign Affairs and Foreign Trade , Barbados
TBY talks to Maxine McClean, former Minister of Foreign Affairs and Foreign Trade of Barbados, on the significance of regional integration, the importance of people-to-people exchanges, and the building of Barbados-Ecuador relations.
read articleInterview
María Soledad Barrera A, Chairwoman of the Board of Directors, Corporación Financiera Nacional (CFN)
TBY talks to María Soledad Barrera A., Chairwoman of the Board of Corporación Financiera Nacional (CFN) on recent successes, turning a profit as a development bank, and supporting key sectors of the economy.
read articleReview: Construction
Look East
Despite budgetary constraints as a consequence of the enduring low oil price, construction remains a safe and attractive investment sector, and one that is drawing investor interest from far and wide. Regardless of hydrocarbons, the medium-term outlook seems sound.
read articleReview: Legal
Lay of the Land
Ecuador is an attractive market for foreign investment and is looking to position itself within Latin-American countries. Various legal reforms enacted in 2015 are geared at contributing to Ecuador's development by setting a suitable and efficient legal framework.
read articleReview: Accountancy
Crunching Numbers
Since the 2008 global financial crisis, the world's economy has shown important signs of recovery. However, Latin America now faces challenges including the fall of global oil prices and other commodities, as well as challenging domestic business climates.
read article
