ECUADOR: Calls for Mahuad to quit By Richard Lapper in London and Nicholas Moss in Quito
At the end of last year it was difficult to imagine how things could get much tougher for Ecuador's troubled president Jamil Mahuad. This week, they have.
Already facing a severe recession and the spectre of triple digit inflation, Ecuador has suffered a renewed attack on its currency, the sucre.
Yesterday's fall of 17 per cent in early trading took the sucre to a new low of 29,000 to the dollar, compared with an expected level of about 20,000 when the government announced its revised budget targets in December.
And Mr Mahuad, who took office in 1998 amid high hopes that he could stabilise the economy and push through much-needed structural reforms, is again under fire from critics on all sides of the political spectrum. Yesterday he declared a state of emergency in a bid to head off protests calling for his resignation.
At the root of Mr Mahuad's problems is a combination of recession and inflation unparalleled in Latin America in recent years.
In 1999, gross domestic product is expected to have contracted 7 per cent - the worst performance since central bank records began in 1927. Only rising prices for oil, the biggest export earner, have provided a glimmer of hope in a shrinking production sector, with the banana and shrimp industries hit, respectively, by falling prices and disease. Ecuador's financial system is virtually bust and government efforts to help it have contributed to an increase in money supply and rising inflation.
Many bank accounts have been frozen since March. Confidence in the banking sector is low; people have switched their savings into dollars. Since the autumn the government has been providing funds to the banks by printing money.
During 1999, consumer prices rose 60.7 per cent, despite the economic contraction. Producer prices jumped 120 per cent in the year to October and analysts are talking about a return to the kind of hyperinflation not seen in Latin America for more than five years.
"In the long term, unless there is an event that spurs a decrease in money supply, inflation will reach (similar) levels of 140 or 150 per cent," says Santiago Millan, Latin American economist at HSBC in New York.
Over the past two weeks, the outlook has deteriorated further. On Christmas Eve, a court ruled the government was constitutionally obliged to unblock all bank deposits. Some $900m is needed to cover deposits administered since last year by a government agency. This month the government must spell out how it intends to find the money to pay off a further $1.5bn-$1.7bn in blocked long-term deposits.
Confusion about the direction of government policy has further undermined confidence in the currency. Government officials have made contradictory statements about the possibility of adopting a currency board.
This system, under which the central bank would hold dollars in reserve for the equivalent of local currency in circulation, has helped Argentina defeat hyperinflation and is touted by some economists as a way of securing monetary stability across the region. But there are doubts in some quarters whether Ecuador can amass sufficient funds to put such as a system in place.
Help could come from the International Monetary Fund. But a $400m standby loan, which would help unlock other loans from multilateral agencies and permit a recapitalisation of the banking system, has been scaled back to $250m. Even the reduced amount has still not been approved.
The immediate outlook is bleak. Many Ecuadoreans - 45 per cent according to recent opinion polls - see Mr Mahuad's resignation as an essential part of the solution to their country's problems but, in a country where political wrangling has become endemic, no one can agree on an alternative. "There is a lot of social unrest but there is no consensus as to who should replace Mahuad," says Alessandra Alecci, analyst with IDEA in New York.
Crucially, the Ecuadorean army is still backing Mr Mahuad and has little time for trade union calls for a complete revamp of the political system.