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of interest due in June 1989, then halted partial interest payments in September 1992. Settlement of the debt issue has been a major priority for the Duran Ballen administration. Resolution of the debt problem should improve Ecuador's creditworthiness and attractiveness to investors.

In May 1994, Ecuador and its commercial creditors agreed on a comprehensive restructuring of its external commercial bank debt. Under the agreement, creditors can exchange existing instruments for new bonds carrying a 45 percent discount or for par bonds with fixed interest rates varying from 3 to 5 percent. Given the mix of instruments chosen by the creditors under the agreement signed in October 1994, Ecuador received a net reduction of 26 percent in principal owed, while 57 percent of the remaining debt_stock of $3.32 billion will carry a fixed interest rate of no more than 5 percent. The government will have to spend about $540 million to pur. chase collateral for debt principal and interest. Multilateral bank financing, made possible by the 1994 agreement with the IMF, will help Ecuador meet the upfront costs of the debt settlement. Service on the commercial debt should average some $275 million over the next 6 years and rise thereafter unless the government takes steps to retire some of its debt stock.

In June 1994 Ecuador reached an agreement with the Paris Club to reschedule $304 million in official bilateral debt service on pre-1983 obligations that fell due in 1993 and 1994. Ecuador is currently negotiating a bilateral rescheduling agreement with the United States. The Ecuadorian government is also negotiating a major structural adjustment loan with the World Bank. 5. Significant Barriers to U.S. Exports

In the early 1990's, the Borja administration initiated a major trade liberalization program, reducing tariffs, and tariff dispersion, eliminating most non-tariff surcharges, and enacting an in-bond processing industry (maquila) law. As part of the Andean Pact integration effort, the Duran Ballen administration concluded bilateral free trade agreements with its Andean Pact partners Colombia, Bolivia, Peru, and Venezuela. Ecuador applied to join GATT in September 1992 and is currently en. gaged in negotiations with GATT contracting parties over the terms of its accession to both GATT and the WTO. As part of its accession, Ecuador will commit to ensure its trade regime is GATT-consistent.

Ecuador's tariff schedule is based on the GATT's Harmonized System of Nomenclature. In 1991, the Borja administration overhauled a highly protectionist tariff system, reducing duties and fees for most imports to the 5 to 20 percent range. Ecuador is in the process of establishing a common external tariff system with other members of the Andean Pact. In September 1993, Ecuador reached an agreement with Colombia and Venezuela to introduce a common tariff of 35 percent for cars and light trucks.

Customs procedures can be difficult, and have occasionally been used to discriminate against U.S. products. The government is implementing a new customs reform law to reduce corruption and improve efficiency in the customs service, thereby eliminating a major constraint on trade. Sanitary requirements for imported foods, as well as some other consumption goods have had the effect of blocking the entry of some imports from the United States. The government is phasing out its policy of setting minimum prices for assessing customs duties on textiles and some other imports. Import bans are in effect for used clothing, cars, and tires. Price bands have resulted in high effective tariffs for a variety of agricultural products.

All importers must obtain a prior import license from the Central Bank. Licenses are usually made available for all goods, although importers sometime encounter bureaucratic delays. 1976 law prevents U.S. and other foreign suppliers from terminating existing exclusive distributorship arrangements without paying compensation. Foreigners may invest in most sectors, other than public services, without prior government approval. There are no controls or limits on transfers of profits or capital and foreign exchange is readily available.

Government procurement practices do not usually discriminate against U.S. or other foreign suppliers. However, bidding for government contracts can be cumbersome and time-consuming. Many bidders object to the requirement for a bankissued guarantee to ensure execution of the contract. 6. Export Subsidies Policies

Eciador does not have any export subsidy programs. 7. Protection of U.S. Intellectual Property

Ecuador's protection of patent and trademark rights is based on Andean Pact Decisions 344 and 345, while copyrights are covered by Decision 351. The new decisions provide 20-year patent terms (except for some pharmaceuticals), protection for plant varieties. Ecuador's implementing regulations provide pipeline protection for patents, and control of parallel imports.

In a major breakthrough, Ecuador and the U.S. signed a bilateral Intellectual Property Rights Agreement in October 1993 that guarantees full protection for copyrights, trademarks, patents, satellite signals, computer software, integrated circuit layout designs, and trade secrets. While the government implemented some provisions by executive order and legislation, the Ecuadorian Congress has not yet ratified the agreement; nor has the government introduced legislation to harmonize local law with the agreement's requirements. Ecuador is committed to adopting legislation implementing the Trade-Related Intellectual Property (TRIPS) Agreement of the Uruguay Round, as part of its GATT/WTO accession.

Enforcement of intellectual property rights remains a problem for Ecuador. Copyright infringement occurs and there is some local trade in pirated audio and video recordings, as well as computer software. Local registration of unauthorized copies of well-known trademarks is a problem since the government lacks the resources to monitor and control such registrations. Some local pharmaceutical companies produce or import patented drugs without licenses. 8. Worker Rights

a. Right of Association.--Under the Ecuadorian constitution and labor code, most workers in the private and parastatal sectors enjoy the right to form trade unions. The revised labor code of November 1991 raised the number of workers required for an establishment to be unionized to 30. Less than 10 percent of the labor force, mostly skilled workers in parastatal or medium to large sized industries, is orga. nized. Except for public servants and workers in some parastatals, workers by law have the right to strike. Sitdown strikes are allowed, but restrictions on solidarity strikes were imposed in 1991. Ecuador does not have a high level of labor unrest. Most strike activity involves public sector employees.

b. Right to Organize and Bargain Collectively:--Private employers with more than 30 workers belonging to a union_are required to engage in collective bargaining when requested by the union. The labor code prohibits discrimination against unions and requires that employers provide space for union activities. The labor code provides for resolution of conficts through a tripartite arbitration and conciliation board process. Employers are not permitted to dismiss permanent workers without the express permission of the Ministry of Labor. The in-bond (maquila) law permits the hiring of temporary workers in maquila industries, effectively limiting unionization in the sector. Despite reforms in 1991, employers consider the labor code to be highly unfavorable to their interests and a disincentive to hiring union members and to employment in general.

c. Prohibition of Forced or Compulsory Labor.--Compulsory labor is prohibited by both the constitution and the labor code and is not practiced.

d. Minimum Age of Employment of Children.- Persons less than 14 years old are prohibited by law from working except in special circumstances such as apprenticeships. Those between the ages of 14 and 18 are required to have the permission of their parent or guardian to work. In practice, many rural children begin working as farm laborers at about 10 years of age, while poor urban children under age 14 often work for their families in the informal sector.

e. Acceptable Conditions of Work.—The labor code provides for a 40 hour work week, a 15 day annual vacation, a minimum wage, and other variable employerprovided benefits such as uniforms and training opportunities. The minimum wage is set by the Ministry of Labor every si: months and can be adjusted by Congress. Mandated bonuses bring total monthly compensation to about $123. The Ministry of Labor also sets specific minimum wages by job and industry so that the vast majority of organized workers in state industries and large private enterprises earn substantially more than the general minimum wage. The Duran Ballen administration has proposed a simplification of the complex wage and bonus system. The labor code also provides for general protection of workers' health and safety on the job. Occupational health and safety is not a major problem in the formal sector. There are no enforced safety rules in the agriculture sector and informal mining.

f. Worker Rights in Sectors with U.S. Investment. The economic sectors with U.S. investment include petroleum, chemicals and related products, and food and related products. U.S. investors in these sectors are primarily large, multinational companies which abide by the generous Ecuadorian labor code. In 1994 there were no strikes or serious labor problems in any U.S. subsidiary. U.S. companies are subject to the same rules and regulations on labor and employment practices governing basic worker rights as Ecuadorian companies.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

(Millions of U.S. dollars)

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Income, Production and Employment:

Real GDP (millions of 1962 colones)?
Real GDP Growth (pct.)
GDP (at current prices)
By Sector:


Financial Services
Other Services

Public Administration
Net Exports of Goods & Services
Nominal Per Capita GDP
Urban Labor Force (000s) 3

Unemployment Rate (pct.)3
Money and Prices:

Money Supply (M2 annual pct. growth)
Base Interest Rate 4
Personal Saving Rate (on deposits)
GDP Deflator (pct. change)
Consumer Price Index

Exchange Rate (colon/USD)
Balance of Payments and Trade:
Total Exports (FOB)

Exports to U.S. Total Imports (CIF)




31.4 16–18 12-14

8.9 19.9 8.37

35.7 16-19 11-15

14.9 12.0 8.73

21.4 16-19 11-14

8.8 10.0 8.75

597 257.3 1,698.5

731 219.0 1,912.0

823 173.0 2,142.0



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Key Economic Indicators Continued
(Millions of current U.S. dollars unless otherwise noted]

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1 1994 figures are July Central Bank estimates.
GDP at market cost; 1962 base currently being revised by Central Bank to 1988; no dollar figures avail-
• Ministry of Planning household survey.
* Loan rate.
5 Excludes military aid.
1. General Policy Framework

The Salvadoran economy continues to reap the benefits of sound economic programs, a commitment to a free economy, and careful fiscal management. Real GDP growth in 1994 reached an estimated 5.8 percent, led by a strong performance in the service and construction sectors, while inflation was held to 10 percent. Exports, particularly to the reconstituted Central American Common market, expanded notably during the year. The new president, Armando Calderon Sol, who took office in June 1994, has stated clearly his intention to pursue the trade liberalization and economic reform programs begun by his predecessor. However, the post-war economic recovery is fragile, heavily dependent on a favorable balance of payments position

maintained by large amounts of remittances from Salvadorans abroad. El Salvador turned decisively toward market-oriented economics in the four years under President Alfredo Cristiani (1989–1994). The Cristiani government rejected the import-substitution model and pursued trade liberalization and export-led growth. From a structure with tariffs as high as 240 percent, the government established a system in which most duties fall in a range of 5–20 percent. Nontariff barriers and import licensing were almost totally abolished. The Central American Common Market has been reactivated, with most commerce duty-free. Government agricultural monopolies were dismantled, as were internal price controls on 240 consumer goods. Trade has grown 12 percent (higher than real economic growth) from 1993 to 1994; although the absolute value of merchandise exports is still less than half the value of imports.

The government's drive to liberalize trade has been matched by reforms in the financial markets.Parallel exchange rates were abolished, and the foreign exchange market was opened to both banks and dealers. The colon, currently valued at about 8.7 to the dollar, has traded in a narrow range for the past two years, maintained to a certain extent by modest interventions on the part of the Central Bank and remittances. The banking system has been reprivatized. Controls on interest rates have been removed, allowing rates to return to real positive levels. A generally disciplined monetary policy has reduced inflation from 12 percent in 1993 to an estimated 10 percent in 1994.

Fiscal policy has been the biggest challenge for the Salvadoran government. The peace accords signed between the government and the Faribundo Marti Liberation Movement (FMLN) in December 1991 committed the government to heavy expenditures for transition programs and social services. International aid has not been as generous as expected. The government has focussed on improving the collection of its current revenues, relying more on its own resources than on foreign aid. Government revenues, half of them generated by the new Value Added Tax (IVA), have increased substantially during 1993 and 1994. The share of domestic taxes in GDP is expected to grow from 9.4 percent in 1993, to 10.6 in 1994. Efforts now are underway to improve tax collection. Government planners estimate that the IVA is presently contributing only 60 percent of its potential revenue. Overall, enhanced revenues—including IVA and income tax and improved collection of import duties-and some expenditure reduction are expected to sharply reduce the need for domestic financing of the deficit.

The government completed implementation of an Integrated Accounting System in the public sector in June 1994. It has also taken steps to improve its financial

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control over public enterprises and is pursuing

privatization of key institutions the National Telecommunications Enterprise (ANTEL), parts of the Hydroelectric Production Agency (CEL), and the Social Security Institute (ISSS). Other important fiscal reforms include the repeal of the wealth tax in April 1994, approval of a new Customs Law in May 1994, and elimination of all import duty exemptions in July 1994, including exemptions to public enterprises. 2. Exchange Rate Policy

A multiple exchange rate regime that had been used to conserve foreign exchange was phased out during 1990 and replaced by a free-floating rate. The colon depreciated from five to the dollar in 1989 to eight in 1991 but has remained relatively stable since. Large inflows of dollars in the form of family remittances from Salvadorans working in the U.S. offset a substantial trade deficit. The monthly average of remittances reported by the Central Bank is slightly less than $80 million, representing more than $900 million for 1994. In addition, the Central Bank intervenes periodically in the exchange market to moderate speculative pressures and smooth out rate fluctuations. 3. Structural Policies

U.S. exports to El Salvador have increased over 60 percent since 1991, accounting for some 40 percent of El Salvador's total imports. The key policy change driving this trend was the government's decision to radically lower tariff barriers. El Sal. vador's open trade policies are not likely to be reversed. Although the country has run up huge trade deficits in recent years, they have been more than offset by remittances, short-term capital inflows, official transfers and loans. In fact, El Sal. vador's net international reserves are estimated at $780 million as of December 1994, up 20 percent over 1993. Also contributing to the surge in imports is the rebust rate of economic growth and a post-war construction boom. Over 73 percent of imports in 1994 were in the categories of capital and intermediate goods.

Prices, with the exception of bus fares and utility rates, are set by the market. The 10 percent value-added tax is applied equally to all goods and services, im. ported and domestic, with a few limited exceptions (dairy products, fresh fruits and vegetables, and medicines). It has not proven to be an impediment to import sales. In October 1994, the government suspended a price band mechanism, introduced in 1990 to regulate tariffs on basic grains, and imposed a fixed tariff of 20 percent ad valorem. However, Salvadoran officials have indicated that they plan to reinstitute price bands sometime in 1995, probably on a regional basis. 4. Debt Management Policies

El Salvador's external debt decreased sharply in 1993, chiefly as a result of an agreement under which the United States forgave about $461 million of official debt. As a result, total debt service decreased by 16 percent over 1992. In 1994, El Sal. vador received $265 million in external aid, from multilateral institutions, bilateral sources, and private sources. External debt crept up from $1.924 billion in 1993 to $2.142 billion in 1994 and debt service rose correspondingly to $365 million. However, El Salvador has eliminated all payment arrears, and its debt burden is considered moderate.

The government of El Salvador has been successful in obtaining significant new credits from the international financial institutions. Among the most recent loans are a second structural adjustment loan from the World Bank, for $52.5 million, an. other World Bank loan of $40 million for agricultural reform, a $20 million loan from the Central American Bank for Economic Integration to be used to repair roads and a $60 million Interamerican Development Bank loan for poverty allevi. ation projects. 5. Significant Barriers to U.S. Exports

There are no legal barriers to U.S. exports of manufactured goods or bulk, nonagricultural commodities to El Salvador. Virtually all import licenses and prohibitive tariffs were removed by the Cristiani administration. U.S. goods face tariffs from 5 to 20 percent with higher duties only applied to automobiles, alcoholic beverages, textiles and some luxury items. As of January 1, 1995 the tariff on textiles wilt decrease from 35 to 25 percent.

Generally, standards have not been a barrier to the importation of U.S. consumerready food products. The Ministry of Health requires a Certificate of Free Sale showing that the product has been approved by U.S. health authorities for public sale. Importers also may be required to deliver samples for laboratory testing, but this requirement has not been enforced. All fresh foods, agricultural commodities and live animals must be accompanied by a sanitary certificate. Basic grains and

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