Ecuador

Executive Summary

The Government of Ecuador under President Moreno has taken a distinct path from the policies of his predecessor, focusing on reducing the size of the public sector and its influence on the economy and seeking instead private sector investment to drive economic growth. Facing serious budget deficits, the Moreno Administration is rationalizing the size of government, merging ministries, and planning a reduction in the number of state-owned enterprises. Other cost cutting measures include reducing fuel subsidies and mandatory reductions in the number of public employees. Still, Ecuador is saddled with a very large public sector, and Moreno has committed to continue government spending on social welfare programs. To fund these programs and continue reforms, the Ecuadorian government reached in March 2019 an agreement with the International Monetary Fund (IMF) and international financial institutions for financial assistance totaling USD 10.2 billion over three years. The IMF program is in line with the government’s efforts to correct fiscal imbalances and to improve transparency and efficiency in public finance. While the March 2019 IMF program has been cancelled, the Moreno administration has opened negotiations with the IMF for a new agreement, expected to be reached in August 2020.

To increase private sector engagement in the economy and attract Foreign Direct Investment (FDI), the Ecuadorian government passed a Productive Development Law in 2018 to spur investment, has in recent years changed tax and regulatory policies for mining, and seeks to develop a Public-Private Partnership law to increase private investment in infrastructure projects. Ecuador is a dollarized economy that has few limits on foreign investment or repatriation of profits, with the exception of a five percent capital exit tax, and is actively seeking foreign investors. It has a population that views the United States positively, and the Moreno Administration has expanded bilateral ties and significantly increased cooperation with the United States on a broad range of economic, security, political, and cultural issues.

Despite these efforts, FDI inflow to Ecuador has remained very low compared to other countries in the region, due to a number of problems, most notably corruption. Ecuador is ranked in the bottom third of countries surveyed for Transparency International’s Corruption Perceptions Index. Two high-profile cases of official corruption involving the state-owned petroleum company PetroEcuador and Brazilian construction firm Odebrecht exemplify challenges that confront investors. Numerous officials have been charged for corruption related offenses, and several have been convicted, including former Vice President Jorge Glas, who was sentenced to six years in prison in December 2017. In addition, economic, commercial, and investment policies are subject to frequent changes and can increase the risks and costs of doing business in Ecuador.

Sectors of Interest to Foreign Investors

Petroleum: Per the 2008 Constitution, all subsurface resources belong to the state, and the petroleum sector is controlled by two state-owned enterprises (SOEs) that cannot be privatized. To improve efficiencies, the government may offer concessions of its refineries and is seeking ways to better target fuel subsidies. An effort to eliminate subsidies in October 2019 sparked violent civil unrest that forced the government to walk back the measure. The Ecuadorian government held a successful public tender for oil production sharing contracts (Intracampos I) in 2019 and reportedly plans to move to production sharing contracts as the standard for future tenders.

Mining: The Ecuadorian government has reduced taxes in the mining sector to attract FDI. Presidential Decree 475, published in October 2014, made minor reductions to the windfall tax and sovereign adjustment calculations. The Organic Law for Production Incentives and Tax Fraud Prevention, passed in December 2014, included provisions to improve tax stability and lower the income tax rate in the mining sector. The previous Correa administration also developed mining sector incentives such as fiscal stability agreements, limited VAT reimbursements, remittance tax exceptions, and mechanisms for companies to recover their investments before certain taxes are applied.

Electricity: The government is seeking to offer concessions to develop wind, solar, hydro and gas fired electrical generation plants to further diversify the energy matrix, as well as improve the electrical transmission connection with Peru. Non-hydro renewable energy projects in Ecuador are eligible for U.S. International Development Finance Corporation (DFC) financing.

Telecommunications: The government seeks to increase national coverage of the 4G network, as well as eventually introduce 5G into Ecuador. It plans to offer a concession of the state-owned telecommunications company CNT, as well as diversify its hardware away from Chinese vendors.

ECommerce: ECommerce sales comprise approximately one percent of Ecuadorian GDP but are a fast growing market. While many Ecuadorians are interested in purchasing online, they are limited in their ability to receive international shipments due to logistics and customs problems upon arrival in Ecuador.