The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Saturday, April 07, 2007

Ecuador Plans Spending to Reverse Dollar's `Failure'

By Matthew Walter

April 3 (Bloomberg) -- Ecuadorean President Rafael Correa pledged to almost double social spending in the next four years, saying the outlay is needed to repair damage caused by country's adoption of the U.S. dollar.

Ecuador converted to the dollar as its official currency a year after defaulting on $6.5 billion in debt in 1999. The move sparked a surge in demand for imports and caused the trade deficit, excluding oil exports, to balloon to $4 billion last year from $730 million in 2000, Correa said while presenting his administration's economic plan last night.

``The dollar has been a complete failure,'' Correa, 43, said in a convention hall speech in Guayaquil, the country's largest city. ``Since we don't have monetary policy, we have to rely on a combination of other measures.''

Correa, who took office in January, said he will abide by an earlier promise to keep the dollar as the country's currency during his four-year term. Still, he said, in order free up funds for education and health care spending, he won't make payments on debt he considers illegitimate, including loans from the central bank and some from the World Bank.

The president has roiled international bond markets in recent months and strained relations with the United States as he works to implement Hugo Chavez-style socialism in the South American country of 13.6 million.

The government's new goal for economic growth this year is 4.4 percent, compared with the Finance Ministry's forecast of between 3.3 percent and 3.5 percent, a pace that would generate enough taxes to fund higher spending on the needs of the poor while meeting debt obligations, Correa said.

Oil Investment

Ecuador spends more on debt than on social programs, he said, adding he will seek to extend debt maturities. He provided no details.

Correa plans to boost social spending to 38 percent of the budget by the time he leaves office in 2010, up from a current 22 percent, according to a statement on the government's Web site. Debt payments will fall to 11.8 percent of the budget, down from 28 percent this year.

Ecuador, South America's fifth-biggest oil producer, will invest $2.8 billion in oil exploration and production through 2010, Correa said. The country will cut sales taxes, increase lending to offer cheaper credit to small businesses and seek trade agreements to lower the trade deficit, he said. The government will also raise luxury taxes, among other measures announced.

Not Desirable

While dollarization helped slash inflation to 2.9 percent last year from 108 percent in 2000 and revived the banking system, it also hurt the country's non-oil export sector and slowed job growth, Correa said. He was elected last year without the backing of any political party on promises to create more equality through socialist policies.

``We have to come to agreement that it's going to be necessary to redistribute some income,'' he said.

Correa is moving ahead with a political campaign aimed at winning support for a referendum this month on whether to hold a constituent assembly to draft a new constitution.

The president is trying to strike a balance between attracting investment to boost oil production and keep the economy growing, and implementing policies to benefit the poor, Jorge Cherrez, president of Quito brokerage IB Corp said in a telephone interview.

``Dollarization was a failure in the sense that it widened the gap between the rich and the poor,'' Emilio Pfister, 64, an economics professor at the Universidad Estatal de Guayaquil, said after listening to Correa's speech. ``Still, the cost of leaving behind the dollar as the local currency would be very high.''

`Very Focused'

Correa has alienated some foreign investors since taking office in January, threatening to default on the country's $10 billion in foreign debt and to renegotiate contracts with foreign oil companies to help boost social spending.

Ecuador's bonds have rallied since Finance Minister Ricardo Patino backed off from comments that he considered some of the country's foreign debt illegitimate and didn't intend to pay it.

The government's 10 percent dollar bonds due in 2030, Ecuador's most-traded securities, rose 0.5 cent on the dollar today to 89 cents at 12:20 p.m. New York time. The yield, which moves inversely to the price, fell to 11.35 percent. The bonds are up from a 2 1/2-year low of 67 cents on Jan. 23.

``Correa is very focused in on maintaining his political capital, his popularity with the people to be able to implement the version of the constitution he wants,'' said Carola Sandy, an economist with Credit Suisse in a phone interview from New York.

Ecuador's top electoral court in March suspended 57 lawmakers for voting to oust its chief justice after the court backed plans for Correa's referendum. Replacements were sworn in March 20, giving the legislature a new quorum to continue its session.

To contact the reporter on this story: Matthew Walter at in Guayaquil at

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