IMPACT OF THE DROUGHT IN ECUADOR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010030-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 30
• Publication Date: July 1, 1968
• Content Type: IM

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Confidential
:1)0q5ck
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Impact of the Drought in Ecuador
Confidential
ER IM 68-80
July 1968
copy N2 60
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amenJed.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Excluded from aulomelle
dornfradlnp and
dulouifitallon
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
July 19 6 8
INTELLIGENCE D:EMORANDUM
Impact of the Drought in Ecuador
Summary
Ecuador's newly elected president, Velasco Ibarra,
faces serious economic problems as a result of a
prolonged drought. Agriculture, the country's domi-
nant economic activity and chief source of foreign
exchange, has suffered production losses in rice,
cotton, corn, oil seeds, coffee, and bananas. The
government is belatedly attempting to ease the impact
of bad weather through emergency imports of food and
irrigation equipment, distribution of food supplies,
and easy credit terms for agricultural loans.
At a minimum the drought will slow the economy's
rate of growth in 1968, and it could well result in low-
er levels of production, investment, and consumption
than in 1967. It also will aggravate existing budget
and balance-of-payments problems. The budget deficit
will surpass original estimates because of reduced tax
revenues and increased relief expenditures, and the
foreign trade surplus will be smaller because of lower
export earnings and emergency imports. At the same
time, the business community is apprehensive over the
prospect of Velasco in the presidency because of his
past record in this office. His candidacy and recent
election have led some businessmen to cancel or delay
plans for new investments, caused some capital flight,
and heightened import demand in anticipation of de-
valuation or new import taxes. The latter actions,
in turn, have reduced foreign exchange reserves and
weakened the currency.
Note: This morandum was produced s o Ze Zy by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
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Introduction
1. When he begins his fifth term of office in
September, Ecuador's former President Jose Maria
Velasco Ibarra will immediately be faced by economic
problems arising from the recent bad weather. A
prolonged drought is seriously affecting Ecuador's
agriculture, which accounts for one-third of gross
domestic product and employs about 55 percent of
the labor force. Some localities had no rain from
March 1967 through February 1968 and have had little
since then. The drought-stricken area embraces much
of the coastal lowlands and inland valleys in south-
western Ecuador (as well as in northern Peru) and
includes most of Loja Province and parts of the
provinces of Guayas, Manabi, and El Oro (see the
map) . An estimated 75,000 Ecuadoreans -- or about
5 percent of the rural inhabitants in these prov-
inces -- reportedly have left their homes, and many
others are suffering in some degree from the drought.
In isolated localities, food shortages are reported
to have resulted in some deaths, particularly among
young children already weakened by endemic disease.
Impact o.n Agriculture
2. Rice, cotton, corn, and oil seeds are the
principal crops affected by the drought, but there
also has been some damage to coffee and banana crops.
In addition, there has been considerable damage to
pastures, which is likely to result in inadequate
forage for cattle in the coming months. As yet, how-
ever, there has been no large-scale slaughter of
herds. Cattle that can still be driven are being
moved to other areas to graze.
3. Estimates by Ecuadorean officials as to the
extent of crop damage are still incomplete and
tentative. The Ministry of Agriculture and Live-
stock estimates that the winter rice crop will be
about 45,000 metric tons, or 40 percent less than
the 1967 winter harvest. Total rice production in
1958, including the summer harvest which usually be-
gins in mid-August, is estimated at some 65,000
metric tons, a drop of 35 percent from production
of 100,000 metric tons in 1967. The cotton harvest,
which normally totals about 21,000 to 27,000 bales,
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14
may b' reduced by as much as 50 percent. T.:sador
usually imports some 6,000 bales of cottcn 'nually
from Peru and Colombia to meet domestic r-quirem'nts,
but total import requirements in 1968 are likely to
be 16,000 bales or more. Production of oil seeds
probably will be about 25 percent below the 20,000
retric tons produced in 1967. The extent of losses
to corn, coffee, and banan-7ts is not known but may be
substantial.
4. Some inhabitants of the stricken provinces
realize that they will have no harvest this year and
are beginning to move out of the area in search of
work. It has been reported that both national and
provincial authorities oppose any mass migration, from
the area and that the army has been issued instructions
to prevent such a movement. The army is, however,
providing food and shelter to victims of the drought
who have made their way to provincial capitals.
Direct Effects on Industry
5. The drought is also having some direct
effects on industrial activity in the stricken area.
Output of hydroelectric powerplants -- which serve
mainly agricultural processors, commercial establish-
ments, and households -- has declined because of
lowered reservoir levels. The failure of grain and
oi.l seed crops has depressed agricultural processing
and presumably caused unemployment. Many local
plants that process oil seeds are idle or have only
small sLpplies on hand. Moreover, the shortage of
waste from processing oil seeds has reduced production
of cattle feed.
Government Reaction
6. Although the drought has continued for some
time, the government only recently initiated measures
to ease its effects. President Arosemena declared
a state of emergency in April and appropriated about
$1 million for emergency relief. Government agencies
as well as private organizations are making emergency
distributions of food. To help relieve the rice
shortage until the summer crop is harvested, the
government canceled an authorized export of 10,000
metric tons of rice to Peru and Western Europe and
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has taken steps to import 10,000 metric tons of rice.
In an effort to control speculative pricing practices
by rice millers and traders, government authorities
sequestered 20 percent of the millers' rice stocks
and offered them for sale at reasonable prices.
Ecuadorean authorities are also inquiring about the
possibility of negotiating a new P.L. 480 sales
agreement with the United States to cover imports on
credit of wheat, rice, cotton, and tobacco. In
recent years, Ecuador has received P.L. 480 commodi-
ties -- chiefly wheat, tobacco, and tallow -- valued
at about $1 million annually.
7. Other steps are being taken in an effort to
limit or compensate for losses in agricultural out-
put. The Ministry of Agriculture and Livestock is
importing 10 metric tons of cotton seed and 8 metric
tons of sesame seed for distribution to farmers in
areas where replanting is feasible. In addition,
the government is drilling wells for irrigation of
those cotton and rice crops that possibly could sill
be saved. The National Development Bank has announced
that it will extend existing agricultural loans and
make easier credit available for the purchase of new
seed and agricultural equipment, particularly irri-
gation pumps. The Bank has already arranged to
purchase some 300 irrigation pumps from Czechoslovakia.
The purchase amounts to about $1 million, payable over
five years, and probably falls under the credit of
$5 million extended to Ecuador in 1967.
Economic Implications
8. The drought will at least reduce the economy's
rate of growth in 1968 below the average rate of 5.3
percent registered in 1963-67, and it may well result
in lower levels of production, investment, and con-
sumption than in 1967. Agricultural output will
drop sharply, and the rate of industrial growth
will slacken. The government could be forced to
cut investment outlays for infrastructure projects,
particularly roads, to obtain funds for drought re-
lief. Investment in the private sector also could
decline if the government finds it necessary to
limit imports of capital equipment because of foreign
exchange constraints. Personal consumption probably
will suffer because available foreign exchange will
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not permit crop losses to be made up fully through
imports. The per capita income of many peasant
families in the drought-stricken area will decline,
at least temporarily, from the current low level,
which averages well under $200 annually.
9. The drought also will intensify the govern-
m'nt's chronic financial problems. The budget def-
icit in 1968 originally was estimated at about 811
million sucres (some $45 million) -- an amount equal
to about one-fourth of scheduled expenditures. It
now appears, however, that the deficit will exceed
that figure because of emergency expenses and re-
duced taxes from agriculture and other economic
activities. Government borrowing from the Central
Bank thus may increase this year, aggravating the
problem of inflation. The cost of living in Ecuador
has risen about 5 percent annually in recent years.
10. Reduced export earnings from coffee and rice
and emergency imports of foodstuffs and cotton proba-
bly will make this year's trade surplus much smaller
than the $23 million achieved in 1967. This adverse
prospect ariseas at a time when the sucre is already
under pressure. The candidacy and subsequent elec-
tion on 2 June 1968 of the unpredictable Velasco
led to some flight of capital and has accelerated
the demand for imports out of fear of devaluation or
imposition of new import taxes. Import demand
probably will remain strong for these same reasons,
especially in view of the prospective large budget
deficit. Ecuadorean businessmen recall that the
last devaluation (from 15 to 18 sucres per US dol-
lar) occurred in 1961, when Ecuador experienced a
sharp decline in foreign reserves because of Velasco's
expansionist monetary and fiscal policies. Recent
pressures on the sucre are reflected in the decline
of the rate of exchange in the free market from 21.80
sucres to the US dollar on 31 May to 23.50 sucres
to the US dollar on 6 June, while the government
maintained the official selling rate at 18.18 sucres.
11. Although psychological factors may provoke a
devaluation, there do not appear to be any pressing
economic reasons for it. Foreign exchange reserves
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have declined only moderately -- from $69 million
at the end of 1967 to $58 million at the end of may
1968 -- and still are sufficient to cover three months'
imports. Moreover, devaluation would do little to
boost the value of Ecuador's exports because foreign
demand for bananas, coffee, and cocoa (which account
for 80 to 90 percent of total export earnings) is
not very responsive to price changes.
12. The drought and related budget and balance-
of-payments problems have occurred at an unfortunate
time, in view of the election of Velasco. In the
past, he has shown a tendency to surround himself
with officials who were corrupt or showed poor judg-
ment in economic matters. His attempts to promote
public works and educational reform produced large
budget deficits. In three of his terms, political
battles with recalci..rant Congresses and subsequent
resort to dictatorial methods led to the overthrow
of his government. His election thus has created
considerable apprehension among many Ecuadorean
businessmen. Some business interests fear that
their influence over economic policies will decline
and their access to government favors will diminish.
Uncertainty about Velasco's economic program already
has caused some businessmen to cancel or delay plans
for new investments. Because of the drought and this
atmosphere of distrust of the new administration,
the short-term prospects for economic progress in
Ecuador are dim.
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PROVINCES MAINLY AFFECTED BY THE DROUGHT
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