Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

482. Letter From the Ambassador in Ecuador (Ravndal) to the Acting Assistant Secretary of State for Inter-American Affairs (Rubottom)¹

Quito, November 30, 1956.

Dear Dick: The Minister² and Subsecretary of the Treasury asked me to meet with them on the afternoon of November 28 in order that they might inform me as to Ecuador’s economic and fiscal situation and the country’s need for financial assistance. They also had Fishburne, Corson, and Jasper Costa³ at the meeting, since these three along with Wieland had been following the situation closely the last few months. (In this connection, please see Wieland’s Despatch No. 259, of November 9, 1956.⁴)

The Minister told me that the budget deficit for this year is around 300 million sucres, that they are getting between 100 and 150 million from the Central Bank, and that they really need to obtain about 150 million sucres from some external source. He added that the loan funds would be put into essential development projects such as highways and irrigation, explaining that this use of loan funds would take the place of expenditures now planned and thus release funds to meet the deficit which has been accumulating over the last few years.

The Subsecretary (who, like the Minister, seems to be a very intelligent and competent man) then went into more detail on the proposed loan request. He said that Ecuador hoped to be able to obtain external assistance, and that if foreign assistance were not forthcoming, the country would have no other recourse than to call on internal sources of credit regardless of the adverse economic and possibly political effects of such a move. He stated that there is some inflationary pressure in Ecuador now because of the rise in the amount of money in circulation. The Subsecretary said that a foreign loan would be particularly beneficial because it would increase the country’s international reserves; which in turn would permit a relaxation of import restrictions and result in greater imports, thus absorbing the inflationary pressure of an increased money supply and at the same time bring about a growth in Government revenue, since about 30 percent of the value of imports now goes to the Government through import taxes. Because of this increment in Government revenue, the amount of money needed as a foreign loan might be cut to about two-thirds of the actual deficit to be financed by this method.

The Subsecretary pointed out that the Velasco Government was running a deficit of about 31 million sucres per month in the last part of its administration. He said that the Ponce Government, through austerity measures and through increased order and efficiency in tax collection and administration, has managed to cut this deficit to about 14.2 million sucres per month for the period September-December, 1956. He said that the budget for the year 1957 is lower than the present one, thus reversing the trend of ever-increasing Government expenditures in the last six years. This is being effected, he pointed out, through reduction of expenditures and through imposition of new taxes, both of which measures are extremely unpopular. He observed that if a large percentage of the Government revenues in 1957 have to go into the payment of back debts, the Ponce Government will not be able to carry on any developmental project and the people of the country will accuse the Government of being inefficient and unable to improve the welfare of the country. The Subsecretary remarked that the resulting wave of criticism and antagonism to the Ponce Government might cause its overthrow, and the beneficial effects of 12 years of constitutional Government would be wiped out. He stated that the overthrow of the Ponce Government would probably bring “caudillismo” back to Ecuador and he mentioned specifically the danger of the advent to power of Guevara Moreno and his CFP followers.

The Subsecretary then stated that they were requesting me informally to consult with Washington to see if there are legal means for the United States to make a loan to Ecuador to help extricate this country from its fiscal difficulties. He said that if we found that there is an existing channel for extending the desired aid, then Ecuador could make a formal petition for assistance. He pointed out that Ecuador is a small country and that for political and economic reasons and for reasons of national pride, the Ponce Government cannot take the risk of a formal refusal of a request for a foreign loan. He said that if, after exploring the possibilities, we find there is no way in which the loan assistance can be given to Ecuador, the country will then just have to do what it can with its own resources regardless of possible untoward consequences. Both the Minister and the Subsecretary stated that they would appreciate our looking into this matter and letting them know what the situation is so far as the possibility of a loan from the United States is concerned.

During the subsequent discussion, it was brought out that Ecuador cannot legally borrow, either from internal or foreign sources, for the direct purpose of meeting a budget deficit in the Operations Budget. What Ecuador desires, therefore, is a loan to be used on development projects such as those in Ecuador’s Capital Budget. Government receipts now earmarked for the Capital Budget could then be carried back to the Operations Budget, thus permitting the Government to meet its essential obligations. The Subsecretary said that the Government’s idea on the proposed foreign loan is to spread it over several budget years, beginning if possible with the end of the present year, using some of the funds in fiscal 1957 (which coincides with the calendar year) and some in fiscal 1958.

The Minister and the Subsecretary stated that a short-term loan such as they might be able to obtain from commercial banks would not meet Ecuador’s needs, since the same problem would be bound to arise again in attempting to meet the necessarily large payments for interest and amortization. On the other hand, they believe it would be comparatively easy to finance the services of a long-term loan due to the expected development in Ecuador’s economy. They pointed out that Ecuador’s general economic situation is good, that prospects for the future are bright, and that it is only the Government fiscal situation that is a matter of concern at the present time.

In essence, the idea of the Minister and the Subsecretary is to obtain a dollar loan from the United States, to use the funds to buy United States goods through regular commercial channels, and to use the resultant sucre funds (which would accrue to the Government when the dollars are made available to importers) in development projects such as highways and irrigation. In the process, the Government would find its deficit relieved, partly by increased income from import duties, partly from increased tax revenue due to the generally heightened level of business, and partly by being able to decrease the amount of money it would otherwise be forced to spend on development projects. The advantages to the United States are obvious: (1) United States business would benefit from increased sales to Ecuador and from increased investment opportunities due to greater political and economic stability in Ecuador; (2) the United States Government would benefit from increased stability in this region and from the maintenance and strengthening of a friendly Government in a friendly country.

I was favorably impressed with the earnestness and the evident capability of the Minister and his Subsecretary, just as I am favorably impressed with the Ponce Government as a whole. I am convinced that this administration is sincere, competent, and hardworking and that it has Ecuador’s best interests at heart. In view of the good qualities of the present administration, especially in comparison with what might arise in Ecuador if this Government came to grief, I think we should do everything possible to help them get on their feet. It seems to me it would not be in our interest to let this Government and Ecuador come to grief through a policy of “too little and too late”. I believe it is time for Washington to do some earnest thinking on this matter and give every consideration to devising a means of extending assistance now while it can make an effective contribution to stability in Ecuador and to the furtherance of United States policies and objectives in this area.

With warmest personal regards and best wishes,

Yours ever,

Chris

1. Source: Department of State, ARA Deputy Assistant Secretary’s Files: Lot 58 D 691, Ecuador. Confidential; Official–Informal.
2. Fausto Cordovez Chiriboga.
3. John I. Fishburne, Economic Counselor of the Embassy; Harland J. Corson, Director, International Cooperation Administration (ICA) in Ecuador; Jasper S. Costa, ICA tax adviser in Costa Rica.
4. Not printed. (Department of State, Central Files, 822.10/11–956)