The Ecuadorian economy is based on petroleum production and exports of bananas, shrimp, and other primary agricultural products. In 2002, oil accounted for about 1/3 of public sector revenue and 40% of export earnings. Ecuador is the world's largest exporter of bananas ($936.5 million in 2002) and a major exporter of shrimp ($251 million in 2002). Exports of nontraditional products such as flowers ($291 million in 2002) and canned fish ($333 million in 2002) have grown in recent years. Industry is largely oriented to servicing the domestic market.

Deteriorating economic performance in 1997-98 culminated in a severe economic and financial crisis in 1999. The crisis was precipitated by a number of external shocks, including the El Nino weather phenomenon in 1997, a sharp drop in global oil prices in 1997-98, and international emerging market instability in 1997-98. These factors highlighted the Government of Ecuador's unsustainable economic policy mix of large fiscal deficits and expansionary money policy and resulted in an 7.3% contraction of GDP, annual year-on-year inflation of 52.2%, and a 65% devaluation of the national currency in 1999.

On January 9, 2000, the administration of President Jamil Mahuad announced its intention to adopt the U.S. dollar as the official currency of Ecuador to address the ongoing economic crisis. Subsequent protest led to the removal of Mahuad from office and the elevation of Vice President Gustavo Noboa to the presidency.

The Noboa government confirmed its commitment to dollarize as the centerpiece of its economic recovery strategy, successfully completing the transition from sucres to dollars in 2001. Following the completion of a one-year stand-by program with the International Monetary Fund (IMF) in December 2001, Ecuador successfully negotiated a new $205 million stand-by agreement with the IMF in March 2003.

Buoyed by higher oil prices, the Ecuadorian economy experienced a modest recovery in 2000-01, with GDP rising 2.3% in 2000 and 5.4% in 2001. GDP growth leveled off to 3.3% in 2002 and will fall further, to about 1.7% in 2003, but is estimated to recover to over 4% in 2004, due largely to expanded oil exports. Inflation fell from an annual rate of 96.1% in 2000 to an annual rate of 22.4% in 2001, and should drop below 7% in 2003. Despite recent gains, 70% of the population lives below the poverty line, more than double the rate of 5 years ago.

The completion of the second Transandean Oil Pipeline (OCP in Spanish) in 2003 will enable Ecuador to expand oil exports. The OCP will double Ecuador's oil transport capacity, but Ecuador will need to attract additional foreign investment to realize the full economic potential of the added capacity.