World Bank Ecuador Strategy Projects $1 Billion Over Four Years

WASHINGTON, May 27, 2003 — The World Bank Group’s Board of Directors today discussed a new Country Assistance Strategy (CAS) for Ecuador that projects lending of $1.05 billion over four years to 2007 to support the Government of Ecuador’s development strategy. Two loans, of $50 million each, for human development, and fiscal consolidation and competitive growth respectively, were approved at the same meeting.

“This strategy comes at a critical moment of opportunity for Ecuador,” said Marcelo Giugale, World Bank Country Director for Ecuador, Peru, Bolivia and Venezuela.   “The Government led by President Gutiérrez has a profound commitment to reducing poverty, combined with a strong indigenous presence, and a recognition of the need for transparency and macroeconomic balance.  This calls for a deepened collaboration with Ecuador that is evident in this CAS.”

This first Ecuador CAS since 1993 has three broad objectives.  They are to consolidate the macroeconomic framework and lay the foundations for diversified and sustainable economic growth; increase opportunities and access to economic resources, while protecting the poor from the impacts of structural reform; and to help the authorities build an accountable and efficient government.

The new strategy comes at a time of fragile recovery after prolonged economic stagnation in Ecuador.  Real economic growth per capita was negative in the 1980s, and zero during 1990-99, while inequality has increased.  The proportion of the country’s population living in poverty rose from 34 percent in 1995 to 56 percent in 1999, with poverty reaching 77 percent among the rural population.  The country fell into an economic crisis in 1999, followed by a rebound in GDP growth over the past two years.  But the recovery is vulnerable on several fronts, including price volatility in petroleum and bananas, Ecuador’s two leading exports.

President Gutiérrez was elected in November 2002 with support from indigenous people, farm workers and labor organizations.  He immediately launched a National Dialogue to build consensus around a medium-term development strategy that focuses on promoting economic growth through competitiveness, reducing poverty and exclusion, and fighting corruption.  In addition, he immediately implemented measures to consolidate the Government’s fiscal position and launched a program to reform customs, tax and labor laws so as to improve the economy’s ability to withstand shocks.  The Government is also developing plans to improve coverage and quality of health and education services, and sharpen the targeting of social assistance, to ensure that the benefits of additional social expenditures reach the poor.  Specific Government targets for 2007 include reducing the proportion of the population living in poverty by 25 percent, and increasing spending on social programs from 7.7 to 12.5 percent of GDP.

The World Bank Group, including the World Bank Institute, International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA), plans to support the Government of Ecuador’s efforts to meet these goals by providing technical assistance and capacity building from specialists as well as an expanded lending program. 

While the key goal is to reduce poverty by promoting economic opportunities, the CAS notes that anti-poverty efforts in cities require a different approach from programs aimed at the countryside. In urban settings, where 60 percent of the population lives, poor families face overcrowded neighborhoods, crime and unemployment.  In rural Ecuador, the major problems center on unmet basic needs.  One-third of rural households, for example, do not have access to safe water or electricity.

The solutions therefore need to be tailored accordingly.  For example, the Bank proposes to develop an urban project to assist with key needs of low income urban neighborhoods so as to directly reduce urban poverty.  At the same time, in rural areas, where agriculture is the economic mainstay, the sector suffers from problems including low productivity, limited diversification, high vulnerability to natural disasters, insufficient quality control and irregular land titling. The CAS envisions a rural productivity and sustainable development project to address these and other problems in the rural sector.

Even though the Bank will continue to support projects addressed directly at poorer communities, achieving overall economic growth and employment generation will also require measures to ensure a favorable environment that encourages substantial investment by Ecuadorian and foreign entrepreneurs.    Therefore the Bank’s strategy calls for support for Ecuador’s strategy of fiscal discipline and macroeconomic consolidation.  This will include support for tax reform, to improve tax collection and administration, and more equitably balance the burden carried by lower and middle-income taxpayers with that of high-income earners, while ensuring revenue flows that enable the government to reduce the size of the public debt.

In addition, the CAS notes that it will be important to strengthen transparency and accountability of public finances, increase efficiency in the provision of public services, and invest in people through better education, health and training.  This will be important to ensure that competitive enterprises are encouraged and jobs are created not only in the important oil sector but across a wide range of productive areas in which Ecuador can compete successfully in the global marketplace.    

In developing the CAS, Bank staff relied on program discussions with the Government, as well as perspectives obtained from consultations in January and February with over 300 civil society representatives in nine cities across the country.  The participants included mayors, other local government officials, and representatives of indigenous and Afro-Ecuadorian peoples’ organizations, rural and urban communities, labor unions, women’s groups, academics, NGO workers, clergy from Catholic and Evangelical churches, and business people working in trade, agriculture, fisheries, tourism and small industry. 

“The CAS emphasizes several areas identified as priorities in the consultations, including education, health, rural production, urban poverty reduction, financial services for the poor, and natural resources management,” said McDonald Benjamin, Manager of the Bank’s program in Ecuador.  “This consultation allowed us to hear directly from a broad range of Ecuadorian society, including from frequently marginalized communities, so as to better understand their reality and, we hope, support them as they build opportunities for a better future.”

The IFC will support efforts to strengthen Ecuador’s private sector through investments and advisory services, as well as promotion of foreign investment, strengthening of the export sector, and support for micro, small and medium-sized businesses.  In all its programs, IFC’s emphasis will be on employment and better access to credit and technical training.

In addition to its discussion of the CAS, the Bank’s Board approved two loans for Ecuador that reflect the assistance strategy’s parallel emphases on poverty reduction and economic growth.

The first $50 million Programmatic Human Development Reform Loan I will support the Government’s program to deliver health care services to more than 750,000 mothers, nutrition supplements for about 76 percent of the country’s primary school children, and income security for some 4.5 million poor and elderly people.

This loan will cover the first phase of this human development program.  In the second and third phases, World Bank staff will assist in devising procedures to accurately target aid to populations in need, and in developing standards for assessing the efficiency of aid projects.

The accompanying Fiscal Consolidation and Competitive Growth Adjustment Loan, also worth $50 million, supports the government’s overall effort to reduce poverty.  It will facilitate tax reform, budget transparency, development of a government-wide civil service system, and measures to make Ecuador’s public debt obligations sustainable, thereby promoting growth and freeing resources for anti-poverty projects.

Each of the new lending programs is based on a fixed-spread loan in U.S. dollars with 22 years maturity, including a six-year grace period.

For more information on the World Bank’s work in the Latin America and Caribbean region, please visit: http://www.worldbank.org/lac 

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Ecuador Country Assistance Strategy