Facing the US, Colombia and Iran
Ever since the beginning of this year, Ecuador's external sector has been the epicenter of both good news and difficult news. In the good news, as of March 13 the government has a TRA (Trade Reconciliation Agreement) with the United States that could bring new revenues of approximately $1200 million to the export sector. It might also open international financing sources and could facilitate the arrival of private direct investment, particularly to the oil sector and specifically to Camp Sacha—the most important crude oil camp in the Amazon region.
The agreement could come into effect in August this year, subject to the approval of the Constitutional Court. As with all bilateral agreements between a small and a large economy, this one, too, has asymmetrical effects. The elimination of tariffs on certain products could affect small and non-competitive industries in Ecuador. The government should look for measures to help these industries save income and jobs. We hope that these asymmetries and the "touchy" issues related to investment changes in strategic sectors, as well as in the labor sector regarding the creation of unions, do not supply the Court with arguments to stop this valuable tool of economic policy.
The increase in crude oil prices derived from the war in Iran has awakened the appetite of rent-seeking groups that are already demanding more expenditure from the government in the social sector. However, the net effect of the price rise is not as large as people may think. When oil prices rise, the price of derivatives rises as well, and this impacts Ecuador, especially when a fire in the Esmeraldas refinery is currently reducing production to 45% of capacity. Thus, the government will be importing more derivatives and paying higher prices for them. The price for the Ecuadorian oil basket as of March 13 reached $85.9/b despite a higher discount, so derivatives could cost around $125/b, and domestic prices could rise, as well. Since the elimination of the subsidies, the price of eco and extra gasoline should fall within a band that places a 5% ceiling on the increase and a 10% decrease from the previous month’s price. Prices have gone up more than the 5%, so the Ecuadorian government will have to pay for the difference.
Finally, in January, President Noboa started a trade war with Colombia, imposing a 30% tariff on all imports from that country and raising it to 50% from the beginning of March. He based his decision on the lack of cooperation from President Petro in protecting Ecuador's northern border from the attack and infiltration of groups related to organized crime. Petro responded accordingly on Ecuadorian exports. This trade war will have an important impact on the $2,000 million bilateral exchange. In addition, Petro suspended the sale of electricity supply to Ecuador, which depending on domestic supply conditions, represents between 6% to 8% of demand. We believe the political claim by President Noboa is valid and we support any initiative from the government to combat what is currently a violent situation, similar to an internal armed conflict. However, we disagree with the decision to use an instrument of economic policy to try to fix a political problem.
At the same time, as Ecuadorian citizens, we note with despair the recent observations of UN officers, writing from Switzerland on human rights in Ecuador. Their report questioned the measures taken by the government to control insecurity, violence and organized crime, and demanded explanations and changes based on their assessment of human rights violations. We think these officers do not understand the serious insecurity situation that is endangering Ecuadorians’ lives every day, costing millions of tax-payer dollars to combat.
Now read on...
Register to sample a report