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Recession, Austerity Hits Ecuador

March 19, 1999

QUITO, Ecuador (AP) _ The row of single mothers straggled out of the small Quito garment factory. They had come to sew shirts, but there were no orders to fill. Rows of aging sewing machines on chipped school desks sat idle.

Since President Jamil Mahuad socked Ecuadoreans with a harsh austerity package last week, the number of orders Martha Vallejos’ small garment factory receives has fallen from 400 a week to zero.

``Demand has died. Nobody has money. I no longer dream of profit, only surviving the crisis,″ said Vallejos, who employs 30 women, all single mothers.

From small businesses to large textile factories, Ecuadorean industry is being choked by harsh austerity measures, partially frozen bank accounts and a collapsing currency, the sucre.

Most damaging to businesses was the government’s decision to freeze all dollar checking accounts over $500 for one year, and most sucre accounts for six months to a year to protect a run on deposits in Ecuador’s shaky banks.

The government also doubled gas prices, setting off a strike by bus and taxi drivers who paralyzed the country for three days, blocking roads with taxis and burning tires. Factories could not distribute their goods.

The protests diminished Thursday after Mahuad revoked the gas price increase in exchange for promises from leftist and center-left legislators to pass tax increases needed to ease a massive budget shortfall.

Vallejo had $10,000 frozen by the measure for a year _ money earmarked for workers’ wages and to pay a button supplier. She is now trying to negotiate a solution with her bank.

Texsa S.A. on Quito’s southern outskirts employs 150 workers to make acrylic yarn. Texsa president Monica Sevilla said 50 percent of her company’s working capital has been frozen for a year. All Ecuador’s textile companies are in the same boat, she said.

``We will have to cut our costs to a minimum. Forget buying new machinery, investing or upgrading. This has been a brutal blow to the industry,″ she said. ``We have enough money to pay workers their 15-day salaries but suppliers will have to wait.″

Almost all of Texsa’s buyers also had money frozen, and have canceled orders, causing the company’s yarn sales to fall by half in the past week, Sevilla said.

The austerity measures, which also promise to bring higher taxes, come on top of a deep recession in Ecuador sparked by $2.6 billion in damage by El Nino’s floods last year and falling world prices for oil, its major export.

The sucre has lost more than 40 percent of its value this year and importing costs have soared. Economic growth fell to 0.7 percent last year.

In September, Mahuad ended fuel subsidies, causing the price of electricity to rise by 400 percent which has hurt Ecuadoreans’ pocketbooks.

As a result of all this, Ecuadoreans have little money with which to buy products.

``We are on the verge of a quasi-collapse of the small business sector due to these measures,″ said Raul Mendizabal, director of Quito’s Small Business Association.

The banks will pay 40 percent interest on frozen sucre bank accounts, but with inflation at 50 percent and expected to rise, businesses fear that the freeze on bank accounts will decimate their savings.

``In a year, we could receive a fraction what we started out with,″ Sevilla said.

Business leaders recognize that the crisis is a product of years of mismanagement by governments that has left Ecuador with a bloated bureaucracy, protected, inefficient industries and a massive budget deficit.

``I hope this helps us dig ourselves out of this whole, ″ Sevilla said. ``Because we are suffering a lot of pain.″

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