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Ecuador’s business climate deteriorated in the first quarter of 2022

Published on April 26, 2022

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The war in Ukraine, the lockdowns in China and the power struggle between the Government of Guillermo Lasso and the Assembly have had an impact on the business climate in Ecuador.

After a spike due to expectations of a change in government, the business climate in Ecuador deteriorated in the first quarter of 2022.

This from the latest report of the Economic Climate Index (ICE), prepared by the Brazilian center for economic studies of the prestigious Getulio Vargas Foundation (FGV).

Ecuador’s indicator went from 117.5 points in the last quarter of 2021 to 93.7 in the first quarter of 2022; a fall of 23.8 points.

The ICE is measured every three months, based on the analysis of economic and business experts from Latin America.

A less optimistic 2022

The deterioration of the business climate in Ecuador, as in other Latin American countries, is due to the reduction in growth projections for its economy.

In the case of Ecuador, its Gross Domestic Product will register an increase of 2.9% in 2022, according to the latest report from the International Monetary Fund (IMF).

That is equivalent to a decrease of 0.6 percentage points compared to the forecast made by the agency in October 2021.

The world’s economic prospects have been seriously damaged by:

  • Russia’s invasion of Ukraine, which has complicated trade with the countries of the Eurasian zone, to which Ecuador sends 25% of its banana cargo.
  • Sanctions by the United States and countries of the European Union against Russia, which have reduced financing and raised the price of important raw materials, including oil and natural gas.
  • Slowdown in the Chinese economy and new bottlenecks in supply chains due to confinements in cities like Shanghai and to outbreaks of Covid-19.

Political instability

Among the other factors that have caused the Economic Climate Index to deteriorate in Ecuador is that “the political environment has worsened.”

The reason lies in the power struggle between the Government of President Guillermo Lasso and the National Assembly, which led to the denial and filing of the Investment Law.

President Lasso aspired to attract capital—one of the goals of his administration—with these regulations.

In this scenario, the process of other reforms, such as the labor reform, has been complicated, taking into account that only three out of 10 Ecuadorians of working age have full employment.

And, in the midst of the power struggle between two powers of the State, there was the threat of ‘cross death’ that the Executive can apply.

Political instability, which can be expensive for Ecuador, has made the Legislature and the Executive seek dialogue.

An example of the efforts to break the logjam was the meeting of the Minister of the Government, Francisco Jiménez, with five heads of legislative caucuses. The meeting was held on April 21, 2022, and addressed the Government’s legislative agenda, which includes a new Investment Law.

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