USAID CBJ FY 2002: Ecuador

Summary: Poverty is becoming an increasingly serious problem in Ecuador. While Ecuador's per capita income in 2000 was approximately the same as it was in 1991, the percentage of Ecuadorians living in poverty has more than doubled between 1995 and 2000. In the past, Ecuador's approach to combating poverty has been through paternalistic government programs that have not been effective. An economy in recession, poor investment environment, and unstable Government institutions do not bode well for general economic improvement in the near term. As a result of the reduction in formal sector employment, tens of thousands of poor Ecuadorians have started microenterprises to earn adequate income for their households. Ecuador's microfinance sector is affected by profound deficiencies in the service providers and poorly developed products and services, small loan portfolios and few clients served. In contrast to other countries in the region, Ecuador's microfinance institutions are far behind. They have not reached similar levels of innovation and creativity, nor have they been able to respond adequately to the significant credit needs of a growing informal microenterprise sector. An in-depth study in 2000 by the German firm IPC International Project Consult GmbH revealed that of an estimated 800,000 urban microenterprise firms in the country, only about 20% had access to formal credit at one time or another, including credit provided by state banks. Even assuming that the 20% still have access to adequate credit services, this leaves approximately 634,000 microenterprises without access to formal credit. Throughout the developing world, microfinance development has been one of USAID's most effective tools to address poverty. USAID's proposed strategic objective "Increased economic opportunities for the poor" will focus on providing microenterprises with market led, sustainable financial services designed to raise incomes and living standards. Customers will be microenterprise owners and operators, with the program having a strong focus on women clientele.

Key Results: It is expected that at the completion of USAID assistance, the number of microentrepreneurs with access to financial services, especially credit, will have increased by 300% and the number of microfinance service points will have increased by 100%. The program will have several sub-goals. The first is the creation of a facilitative financial policy and regulatory environment. Through policy reforms, the Government of Ecuador's (GOE) capability and commitment to develop and solidify a liberalized and more transparent financial policy framework will be strengthened. It is expected that a legal and regulatory framework will be developed for the microfinance sector, supervisory practices developed and implemented for microfinance service providers, and private credit reference systems will be developed. USAID envisions the possibility of a broader engagement in macroeconomic policy, subject to further analyses. This effort would be contingent on: 1) an assessment of the likelihood for effective policy reform; 2) an assessment of the extent to which these issues are not now being effectively addressed by other donors; and 3) ESF availability for supporting the program in FY 2002 and beyond. Given appropriate conditions, the program could play an important role in improving Ecuador's macroeconomic policy environment to better support a reduction in urban and rural poverty and enhance equity. Another sub-goal, the development of strong microfinance institutions, will serve to provide expanded quality services to a greater number of microenterprises. It is expected that these institutions will achieve 80% of financial sustainability, 110% of operational self-sufficiency, and a 30-day portfolio risk level below 5%. A third sub-goal is to expand the availability of debt and equity financing for microfinance institutions. Program assistance is expected to result in equity capital increases by at least 100% in at least three microfinance institutions; the establishment of at least two funding mechanisms; and a strong and diversified governance structure of selected microfinance institutions.

Performance and Prospects: Economic and financial sector stability are important to healthy microfinance sector development. Despite the difficult economic and financial situation in Ecuador, future prospects in these areas are encouraging. First, the recent financial crisis has resulted in efforts to stabilize the economy and there are signs that future financial policies will restore greater stability. The dollarization of the economy has eliminated the threat of devaluation and could bring down inflation to single figures by the end of 2001. Second, there are diverse institutional types, including NGOs, banks and credit unions, that plan to expand their microfinance services. Third, the potential market of microfinance clients is enormous.

FY 2001 funding is expected to consist of $1,700,000 of DA and $1,981,000 of ESF. Of these, $2,181,000 will be used to promote the efficient expansion of microfinance institution operations, including a facilitative policy and regulatory environment in combination with strengthened qualified microfinance service providers; and $1,500,000 will be used for a loan and guarantee program to provide guarantees for access by microfinance institutions to private sector funds.

FY 2002 funding is expected to consist of $1,380,00 of DA and $8,000,000 of ESF. FY 2002 funds will be used to continue the activities initiated in FY 2001, with $ 1,500,000 for institutional strengthening, and $1,500,000 for the guarantee and equity strengthening program. In addition, activities related to macroeconomic policy will be considered.

Possible Adjustments to Plans: As noted above, based on an analysis of opportunities, needs, and ESF availability, elements such as broader macroeconomic policy reform in addition to microfinance sector development would be integrated into the program.

Other Donor Programs: The World Council of Credit Unions (WOCCU) is indirectly serving the microfinance sector, providing technical assistance of $500,000 annually to 23 credit unions whose members include microentrepreneurs. Other institutions like the IDB, the World Bank, GTZ, and COSUDE are also potentially interested in implementing microenterprise programs. The GOE expects to initiate a pilot microenterprise loan program oriented to the country's poorest women, and USAID and other donors will need to stay engaged in this effort to achieve overall program coherency. USAID's efforts will be critical, as it will likely be the leading donor for both technical expertise and financial resources for microfinance development.

Principal Contractors, Grantees or Agencies: Implementation is expected to be through the mechanism of an Indefinite Quantity Contract (IQC), for example with USAID's Financial Services (FS) component of the Support for Economic Growth and Institutional Reform (SEGIR).

U.S. Financing

(In thousands of dollars)

	Obligations		Expenditures		Unliquidated
Through September 30, 1999	0	DA	0	DA	0	DA
	4,000	CSD	4,000	CSD	0	CSD
	0	ESF	0	ESF	0	ESF
	0	SEED	0	SEED	0	SEED
	0	FSA	0	FSA	0	FSA
	0	DFA	0	DFA	0	DFA
Fiscal Year 2000	0	DA	0	DA
	2,000	CSD	2,000	CSD
	0	ESF	0	ESF
	0	SEED	0	SEED
	0	FSA	0	FSA
	0	DFA	0	DFA
Through September 30, 2000	0	DA	0	DA	0	DA
	6,000	CSD	6,000	CSD	0	CSD
	0	ESF	0	ESF	0	ESF
	0	SEED	0	SEED	0	SEED
	0	FSA	0	FSA	0	FSA
	0	DFA	0	DFA	0	DFA
Prior Year Unobligated Funds	0	DA
	0	CSD
	0	ESF
	0	SEED
	0	FSA
	0	DFA
Planned Fiscal Year 2001 NOA	0	DA
	6,486	CSD
	0	ESF
	0	SEED
	0	FSA
	0	DFA
Total Planned Fiscal Year 2001	0	DA
	6,486	CSD
	0	ESF
	0	SEED
	0	FSA
	0	DFA
			Future Obligations		Est. Total Cost
Proposed Fiscal Year 2002 NOA	0	DA	0	DA	0	DA
	6,750	CSD	0	CSD	19,236	CSD
	0	ESF	0	ESF	0	ESF
	0	SEED	0	SEED	0	SEED
	0	FSA	0	FSA	0	FSA
	0	DFA	0	DFA	0	DFA

Ecuador

Activity Data Sheet

U.S. Financing