Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-5032-EC

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$50.0 MILLION

TO

THE REPUBLIC OF ECUADOR

FOR A

FOURTH SMALL SCALE ENTERPRISE PROJECT

JANUARY 9, 1990

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY AND EQUIVALENT UNITS

Country: EcuadorCurrency Unit: Sucre (SI.) = 100 cents.

US$1.00 (at appraisal - Jan. 1989) = S/. 461.29 (Official Rate)- SI. 520.00 (Free Market Rate)

WETGHTS AND MEASURES

Metric

ABBREVIATIONS

BCE Banco Central del Ecuador (Central Bank of Ecuador)BEDE Banco Ecuatorianc de Desarrollo (Ecuadorian Development Bank)BEV Banco Ecuatoriano de la Vivienda (Ecuadorian Housing Bank)BNF Banco Nacional de Fomento (National Development Bank)CD Certificate of DepositCCT Comite de Cooperacion Tecnica

(Technical Cooperation Committee)CEFE Centro de Formaci6n Empresarial (Center for Entrepreneurial

Development)CENAPIA Centro Nacional para la Promocion de la Pequefa Industria y la

Artesanla Nacional (National Center for Promotion of SSEs andArtisans)

CENDES Centro de Desarrollo Industrial (Tndustrial Development Center)CFN Corporacion Financiera Nacional (National Finance Corporation)CONADE Consejo Nacional de Desarrollo (National Development Council)FENAPI Federaci6n Nacional de CAmaras de Pequeffos Industriales

(National Chamber of Small Scale Industrialists)DFC Development Finance CompanyFOPINAR Fondo de Fomento para la Pequefia Industria y la Artesania

(Development Furd for SSEs and Artisans)INEC Instituto Nacional de Estadistica (National Institute of

Statistics)IESS Instituto Ecuatoriano de Seguridad Social (Social Security

Institute)INSOTEC Instituto de Investigaciones Socio-Econdmicas y Tecnol6gicas

(Institute for Socio-Economic and Technological Research)MICIP Ministerio de Industrias, Comercio, Integraci6n y Pesca (Ministry

of Industry, Commerce, Integration and Fisheries)SECAP Servicio Ecuatoriano de Capacitaci6n Profesional (Ecuadorian

Professional Training Service)SSEs Small Scale EnterprisesTA Technical Assistance

FISCAL YEAR

January 1 to December 31

FOR OFFICUL USE ONLY

ECUADOR

FOURTH SMALL SCALE ENTERPRISE PROJECT

Loan and Proiect Summarv

Borrower: Government of Ecuador

Beneficiarys Private Small Scale Enterprises (SSEs) involvedin manufacturing (including agro-industry),industry-related services, fisheries, andtourism.

Amount: US$50 million equivalent

Terms: Seventeen years, including five-year graceperiod, at the Bank's standard variable interestrate and charges.

Finhrncint Plan: CFN (through FOPINAR) US$ 9.0 millionFinancial Intermediaries US$ 7.0 millionSSE Beneficiaries US$ 17.0 millionBank US$ 50.0 million

TOTAL USS 83.0 million

Economic Rateof Returnt Not applicable

Staff Appraisal Report: Report No. 7691-EC

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without-World Bank authorizaton.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE REPUBLIC OF ECUADORFOR A FOURTH SMALL SCALE ENTERPRISE PROJECT

1. The following memorandum, and recommendation on a proposed loan to theRepublic of Ecuador for US$50.0 million equivalent, is submitted for approval. Theproposed loan would be repaid over 17 years, including 5 years of grace, at the

a Bank's standard variable interest rate and charges. It would help finance a FourthSmall Scale Enterprise Project.

Background

2. Macro Performance. Ecuador has enjoyed average GDP growth of about 5? ayear over the past twenty-five years, a record exceeded only by Brazil among theLatin American countries. This growth, more dyi.amic in the 1970s than ir. the 1980s,was mainly associated with the rapid development of the petroleum sector during1973-82. High oil revenues and external credit financed both the expansion ofdomestic demand for manufactures and production capacity, while the expansion of theAndean market provided the basis for growth in industrial exports from less thanUS$50 million in 1975 to US$250 million in 1981. As a result, the manufacturingsector increased its share of GDP from 16.22 in 1972 to a peak of 19.42 in 1983.The expansion, however, could not be sustained when oil revenues dwindled, externalcredit dried up and various other shocks (the 1983 floods, the 1987 earthquake, thecollapse of the Andean Market) hit the economy. As a result, GDP grew by an averageof only 0.6? p.a. from 1982-87.

3. Ecuador's economic performance has been hampered by the country's misguideddevelopment strategy during the 1973-82 oil boom phase. Oil export revenues andlarge scale external borrowing led to an appreciation of the real exchange rate,which undermined the development of agriculture and export-oriented manufacturing.The stock of external debt expanded without a commensurate strengthening ofEcuador's non-oil export capacity. Similarly, public sector finances were allowedto become excessively dependent on petroleum revenues while tax concessions andsubsidies expanded. Under these conditions, adjuastment to reduced external creditand oil price shocks of the 1980s has been particularly difficult.

4. Sector Characteristics. During the 1982-87 period, the average growth rateof manufacturing output dropped to 0.3? p.a. compared to 8.42 p.a. over thepreceding five years. Consequently, Ecuador's level of industrialization fell froma 19.3? share of GDP in 1983 to 16.8? in 1988. The share of small scale enterprises(SSEs) in total industry value added increased, however, from about 36? in 1980 to42? in 1987. SSEs' production is largely concentrated in labor-intensive goods,which comprise much of the country's comparative advantage. SSEs, defined asestablishments with less than 50 employees, account for 742 of manufacturingemployment. Available statistics indicate that SSEs create employment at only asixth to a quarter of the costs in large firms of similar industries. Thus, becausethe cost of SSE employment creation is low, SSEs have generated virtually all of theadditional manufacturing employment during the eighties. SSEs' larger share inemployment than in value added is due to the SSEs larger average labor intensity.

5. Limited funding, coupled with t'.- high cost of credit delivery, highperceived risk, inadequate collateral ana accounting information are the mainconstraints in lendirg to SSEs; this situation has been aggravated by an ownershipstructure of the financial sector which has shown a close relationship betweenbanks, development finance companies (DFCs), and large industrial/commercial groups.

- 2 -

The SSE share of the banking credit system has been declining from 7.72 in 1981 to4.52 in 1987. The other sources of financing include the entrepreneurs' ownresources plus loans from suppliers and street-lenders. All these constraints haveresulted in a higher cost of credit for SSEs than for large industr;.

6. Policy Framework. The industrial policy framework has been characterized bya high level of import protection and by policies that subsidize the cost of capitaland raise the cost of labor. The tariff code and the industrial promotion law(which grants tariff exemptions from import duties for industrial inputs and capitalgoods, and gives income tax deductions for investment purposes), have resulted inmajor deviations in the rates of effective protection among sectors. Subsidizedinterest rates significantly lowered the cost of capital to business enterprisesand, coupled with high taxation of dixridends, encouraged these enterprises to becomehighly leveraged. Labor costs have been raised by legislation that sets minimumwages above market clearing levels ana that increases the cost of labor mobility,thus exacerbating the factor price distortions implicit in financial and tradepolicies.

7. Ecuador traditionally has pursued strong protectionist policies. However,the various market distortions have a much greater impact on the larger industriesoperating in the formal sector than on most SSEs which benefit less from protection,are subject to a less restrictive labor market, and have less access to subsidizedcredit. An Industrial Sector Study, currently under preparation by the Bank, hasconcluded that key sectors with a high percentage of SSEs (food processing, textileand leather products, wood and furniture, metal products) have relatively lowaverage rates of effective protection (between 202 and 302). The analysis alsoindicates that SSEs do not obtain major benefits from the industrial promotion lawthat exempts imports from tariffs because the majority of SSEs use few if anyimported inputs. SSEs avoid labor stability regulations through temporary contractsor outright neglect that the Government is unable to counteract and which theemployee is often unwilling to denounce. Minimum wages are lower for SSEs than forlarge industry.

8. The purformance of the financial sector in Ecuador from the point of viewof resource allocation, institutional strength, and mobilization of domesticresources for long-term lending reveals several weaknesses. These date back to the1970s, when the financial system grew rapidly, mainly because of the availability ofexternal financing which domestic banks intermediated charging high margins forproviding exchange rate guarantees for foreign loans to the private sector.Additionally, negative real intereet rates charged to final borrowers and attractivemargins and commissions provided to intermediaries stimulated lending growth. Thisenvironment provided little incentive for financial institutions to mobilizedomestic resources on their own, who became increasingly dependent on the CentralBank (BCE) credits and foreign borrowings for resources. The ensuing structuralweaknesses of the financial system were compounded by easy granting of banklicenses, which in turn led to the establishment of many small, undercapitalizedbanks.

9. In the mid-1980s, the Government initiated a far-reaching program offinancial reform to spur domestic resource mobilization and to strengthen financialinstitutions by allowing them to intermediate a larger volume of financial resourcesefficiently. Among the most important measures taken were: (i) creating aCertificate of Deposit with a freely determined interest rate; (ii) introducingadjustable rates on loans with resources from the BCE or internatio-al institutions;(iii) subsequent freeing of the interest rate on all deposit instruments, andfreeing of interest rates on all lending instruments except BCE lines of credit andadjustable rate lending; and (iv) increasing the interest rates on BCZ credit toalign them more closely with market interest rates.

10. During the past two years. the Bank has supported a strengthening of thebanking system and a rationalization of the interest rate regime through theFinancial Sector Adjustment Loan (2897-EC, FSAL). The Bank approved theUS$100 million FSAL in December 1987, released the first tranche (US$50 million) inJanuary 1988, and the second tranche in (US$50 million) in September 1989. Thepresent Administration has demonstrated a strong commitment to the objectives of theFSAL program, which is focussing on: (i) strengthening financial institutions (Fls)through improvements in the regulatory framework, upgrading the performance of theSuperintendency of Banxs (EB) and gradually restoring the capital adequacy of theseinstitutions; (ii) more efficient intermediation by restraining the growth of BCErediscounts to FIs and by linking the interest rate on BCE funded credit to rv.rket-determined rates; and (iii) development of the capital market by improving t :conditions for variable interest rate lending, for the establishment of sho _-termand long-term market-determined interest rates, and for promoting the issuirig ofequity finance by companies.

11. Issues and Reform. Facing an expected fiscal deficit of 102 of GDP in 1988and inflation running at an annual rate of 80 to 902, the Government (which tookoffice in August 1988) acted quickly to introduce fiscal measures and restrictmonetary growth. These policy measures, aided by a rise in international oil pricesin late 1988, allowed the Government to cut the 1988 fiscal deficit to about 5.1Z ofGDP, about half of what had been projected at mid-year. Further measures oninterest rates and exchange rates have been taken during 1989; gasoline prices havebeen raised monthly during the year. Indications are that the stabilization issucceeding. Preliminary figures for 1989 show that the consolidated non-financialpublic sector deficit was contained to about 32 of GDP in 1989. As a result ofstabilization, GDP growth slowed down to between 0 and 12 and inflation was reducedto 541 in 1989 from 892 in 1988. Ot'ner performance criteria under the IMF standbywere also met in December. For l99u, the targets are a fiscal deficit equivalent toabout 22 of GDP, growth of 3 to 3.52 of GDP p.a., and inflation at 40? p.a. or less.

12. Ecuador's medium-term strategy calls for a more diversified structure ofproduction and exports to protect the country against fluctuations in theinternational prices of oil and other traded commodities, and to establish a basefor the post-oil era. At the core of Ecuador's structural problems is the need toshift resources from the production of non-tradeables, including public sectoractivities, into the efficient production of exports and competitive importsubstitutes. A step in this direction has already been taken with the substantialincrease in the real exchange rate of the last two years. By late 1989, the gapbetween the official and free market rates had closed to within 5 percent. IfEcuador's potential in the medium-term is to be achieved, a strong and permanenttrade reform, including basic industrial and labor policy changes, would be needed.

* 13. To this end, the Government, after having addressed first fiscal andfinancial issues, is now implementing an income tax reform (which would align thecost of equity capital and the cost of debt capital) and preparing a trade andindustrial policy strategy. The Bank is assisting the Government in the design ofthese reforms. The forthcoming Industrial Sector Study will provide the basis forthe policy dialogue.

14. The changes in the interest rate regime, which the Government hadintroduced in the context of the second tranche release of the PSAL, have resultedin positive deposit and lending rates. The interest rates for certificates ofdeposit (CD) have been positive since April 1989, when interest rate reforms wereintroduced which increased the flexibility of the system and made it more responsiveto market forces. Real interest rates for CDs are 4? at present. Also, ceilings oninternationally funded loans to large scale industry have been removed--a measure

that goes beyond the requirements of the FSAL program. Furthermore, the Governmenthas committed itself in a letter to the Bank to move the various sector specificinterest rates, in uniform steps every six months, to the level of the market basedcommercial bank lending rate within less thaa three years. These adjustments arethe result of a dialogue on financial matters between the Government of Ecuador andthe Bank which started in the early 1980s. The Government's commitment to raise theinterest rates for small scale industrial and agricultural lending to levelsdetermined by the market goes significantly beyond the understanding reached underthe FSAL.

Rationale for Bank Involvement

15. The Bank is responding with this loan to the priority the Government isattaching to the development of the SSE sector because of its contribution to themedium-term strategy of diversification into non-traditional tradeable goods,efficient industrial development and socio-economic objectives: entrepreneurialdevelopment, upgrading of labor skills, and employment creation. Lending to SSEssupports enterpri3es that absorb the less skilled segments of the manufacturinglabor force, a key source of the country's comparative advantage. The loan has beendesigned, in the context of a broader adjustment program and complementary to theinterest rate progress, to further the productivity and competitiveness of smallindustrial firms. It would build upon the success of three previous projects inmaintaining a Bank association with Ecuador's smll scale enterprise sector throughthe Development Fund for SSEs and Artisans (FOPINAR) which has been ranked among thevery best apex institutions of its kind by a recent Bank study of seventy small andmedium industry (SMI) projects. An analysis of SSE financing suggests that withoutFOPINAR, SSEs' access to term financing would have been virtually non-existent.SSEs have performed very well under three previous Bank loans. Lending has growr.rapidly in FOPINAR's eight years of operation, reaching nearly 5,000 SSEbeneficiaries and maintaining a high repayment record, with only 3? in arrears atthe end of 1988, compare, with 10? for large industry. Continued Bank involvementthrough this project, buttressed by a novel technical assistance program, would helpto provide the support the small entrepreneurs need to diversify and expandproduction, while addressing the main constraints on the growth and development ofSSEs, namely a lack of term finance and the paucity of appropriate technicalassistance. The loan would have a catalytic function in demonstrating to the bankingsector and its clientele the profitability of lending to SSEs at market-determinedinterest rates.

Project Objectives

16. The proposed operation would help enhance the contribution of SSEs toindustrial development. Specifically, the loan would help modernize and expandproduction by: (a) facilitating the access of SSEs to formal credit; (b) promotinglending to SSEs by participating financial intermediaries (PFIs); (c) providing morefocused and integrated technical snd managerial assistance support to increase theproductivity of eligible SSEs and reinforce coordination among organizations thatprovide technical and financial assistance to the small firms; and (d) furtherstrengthening the management and technical skills of participating financialinstitutions that provide credit to SSEs. Efforts will also be made to prometeactions toward improving the environment and enhancing the role of women in businessactivities. Environmental safeguards will be built into FOPINAR's Statement ofPolicy and Operating Procedures. Specifically, approval of subprojects related towood processing with potentially damaging effects from deforestation would require asatisfactory environmental assessment. With regard to the rcle of women, the Bankwill, during execution of the project, pay particular attention to identifyingbarriers to women's opportunities to participate more fully in SSE activities, andto developing action plans to improve their access to credit and to technicalassistance.

Prolect Description

17. To achiLeve these objectives, the proposed project would comprise: (a) acredit component of US$50 million to finance SSE fixed assets. permanent workingcapital (both associated and free-standing), and subproject related technical andmanagerial expenditures; and (b) a technical assistance program of US$1.6 millionequivalent, of which US$1 million would be financed by the Corporacion FinancieraNacional (CFN) and by a grant from the Inter-American Development Bank (IADB). andUS$600,000 by local counterpart funds. Enterprises involved in manufacturing(including agro-industry), industry-related services, fisheries, and tourism wouldbe eligible. The total project cost, estimated at about US$83 million equivalent,with a foreign exchange component of US$50 million (602), would be financed asfollows: SSEs 201, the PFIs 8?, Bank resources 602, and CFN--through FOPINAR--theremaining 122. The Bank and CFN resources (FOPINAR loan) should finance a maximumof 72? of total project cost. Of the FOPINAR loan, 85? would be financed by theBank and 15? by CFN. An amount not exceeding US$5 million (10? of the loan) wouldbe available retroactively for financing expenditures made after December 13, 1989.A breakdown of costs ard the financing plan are shown in Schedule A. Amounts andmethods of procurement and of disbursements, and the disbursement schedule, areshown in Schedule B. A timetable of key processing events and the status of BankGroup Operations in Ecuador are shown in Schedules C and D, respectively. The StaffAppraisal Report No. 7691-EC, dated January 9, is also attached.

Onlending and Disbursement Procedures

18. The Republic of Ecuador, using the Central Bai.k (BCE) as its agent, wouldonlend the proposed loan resources in Sucres to CFN, on the same maturity as theBank's loan (17 year repayment period, including 5 years of grace). CFN, usingFOPINAR as a second-tier mechanism, would rediscount all subloans made by financialintermediaries to eligible SSEs. The onlending rate has been set initially at the90-day certificate of deposit rate. Beginning on July 1, 1990, it would be adjustedin uniform steps every six months to reach the market-determined commercial banklending rate by June 30, 1992. The onlending rate would include a maximum spread of6? p.a., for financial intermediaries, depending on the size of the subloans, and aspread of 2.5?, for FOPINAR to cover its operating costs and part of the technicalassistance activities. CFN would pay in turn a service fee of .125? p.a. to BCE.The spread is to remain fixed during the life of the subloan.

19. While the onlending rate t, final beneficiaries of the loan would bepositive, there would initially be a difference of 11 percentage points compared tothe commercial bank lending rate for large industries. This difference will bereduced in line with the schedule of adjustments towards the market-determinedcommercial bank lending rate; it will be eliminated at the latest by June 30, 1992and considerably earlier if the present trend of declining inflation, and consequentdecline in nominal interest rates, continue.1 The Central Bank would cover theexchange risk; this is justified because the small scale entrepreneurs do not haverevenues in foreign exchange and because of the movement towards market orientedinterest rates under the loan in the context of a freely floating exchange rate.

1/ Lending at the CD rate will, under current circumstances, imply asubsidy by the Central Bank if measured against its cost of funding andthe intermediation spreads. This subsidy cannot be calculated withprecision in view of uncertainties about future exchange rateadjustments (inflationary expectations apparently are below presentrates of inflation). The subsidy will eventually be eliminated in linewith the adjustments towards a market-determined lending role.

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Agreed Actions

20. Agreement has been reached on the following: (a) beginning on July 1, 1990,the onlending rate on all long term loans to small scale industry iv to be adjustedin uniform steps every six months to reach the market-determined con.nercial banklending rate by June 30, 1992; (b) CFN is to oversee the implementation, by allfinancial intermediaries, of an interest capitalization scheme acceptable to theBank that would be offered as an option to final beneficiaries. CFN's Board ofDirectors will have approved the scheme by loan effectiveness. It will beimplemented by July 1, 1990; and (c) appropriate procedures and administrativestructures are to be established and a core team to be employed by loaneffectiveness for the strengthening of FOPINAR's Technical Cooperation Committee toensure efficient execution of the Technical Assistance Program.

Benefits

21. The proposed project would help integrate the SSEs more effectively intoindustrial development by increasing their productivity and competitiveness. Thecoordinated package of financing and technical assistance would stimulate productionand provide the needed term financing. On the basis of experience under theprevious three SSE loans, the proposed project is expected to finance some 4,500investment subprojects, costing about 11$83 million and generating about 14,500 newjobs. It is also ;expected that about 402 of subprojects financed would be in theindustrial centers of Pichincha and Guayas, which contain a high concentration ofthe urban poor in Ecuador. Better services to SSEs, as well as efficient subloanand subproject implementation, would result from the institutional support providedto FOPINAR. More than 1,000 enterprises would receive direct tecthnical andmanagerial assistance. A further 1,500 firms would benefit from training andextension activities.

Risks

22. One main risk can be identified: that high inflation and continuedrecession, coupled with the introduction of market-determined interest rates onsubloans, could reduce loan demand and cause a slower pace of commitments anddisbursements under the proposed operation than in the previous three SSE loans.The Goverment's comriitment to stabilizing the economy and its success in reducingthe fiscal deficit and inflation augurs favorably for a resumption of economicgrowth with relative price stability in the medium-term. The expected strengtheningof the economy combined with the favorable outlook for SSE development shouldsustain strong demand for financing under the loan.

Recommendaticn

23. I am satisfied that the proposed loan would ccmply with the Articles ofAgreement of the Bank and recommend that the Executive Directors approve theproposed loan.

Barber B. ConablePresident

AttachmentsWashington, D.C.January 9, 1990

Schedule A

ECUADOR

FOURTH SMALL SCALE ENTERPRISE PROJECT

ESTIMATED COSTS AND FINANCING PLANI'

Estimated Costs: Local Foreign Total------CUSS million)------

I. Investment Projects 3?.0 50.0 83.0Total Project Cost 33.0 50.0 83.0

II. Technical Assistance Program 0.6 1.0 1.6Total Program Cost 0.6 1.0 1.6

Financing Plan: Local Foreign Total…___-- (US$ million)-------

I. Investment Proiects

Bank - 50.0 50.0

CFN (through FOPINAR) 9.0 - 9.0

Financial Intermediaries 7.0 - 7.0

Subloan to Borrower 16.0 50.0 66.0

SSE Beneficiaries 17.0 - 17.0

Total 33.0 50.0 83.0

II. The Technical Assistance Program

The US$1 million foreign exchange component will be financed byCFN's own resources and by a grant from the Inter-AmericanDevelopment Bank. The US$600,000 component will be financed bylocal counterpart funds.

Schedule B

ECUADOR

FOURTH SMALL SCALE ENTERPRISE PROJECT

PROCUREMENT METHOD AND DISBURSENENTS

Project Element Procurement MethodTotal

ICB LCB Other Cost

------------ (US$ million) …---------------

Investment Projects 83.0 a/ 83.0(50.0)- (50.0)

Technical Assistance 1.6 bI 1.6

TOTAL 83.0 83.0(50.0) (50.0)

at Normal commercial practice acceptable to the Bank consisting of threequotations for contracts above US$60,000 equivalent.

b/ The Bank's procurement practices will not be applicable to thetechnical assistance program.

Note: Figures in parenthesis are the respective amounts financed by theBank.

Disbursements

Category Amount X(US$ million)

Subloans 50.0 85% of the amounts disbursedby CFN to a financial intermediaryunder a FOPINAR loan (which includesBank and CFN resources).

Estimated IBRD Disbursements Bank Fiscal Year

89 90 91 92 93 94 95-- (US$ million)-----------------

Annual - 0.5 6.0 13.5 12.5 11.5 6.0Cumulative - 0.5 6.5 20.0 32.5 44.0 50.0

Schedulo C

ECUADOR

FOURTH SMALL SCALE ENTERPRISE PROJECT

Timetable of Key Proiect Processint Events

(a) Time taken to prepare: Eighteen months

(b) Prepared by: Government with IBRD assistance

(c) First IBRD mission: January 1988

(d) Appraisal mission departure: January 1989

(e) Negotiations: September 11-15, 1989

(f) Planned Date of Effectiveness: March 31, 1990

(g) List of Relevant PCRs and rPARs: PCR for First and Second Small ScaleProjects (Lns. 1879-EC and 2221-EC),dated June 29, 1988.

PPAR for First and Second SmallScale Projects, dated June 29,1989.

Schedule D

ZCUADOR

THE STATUS OF BANK CROUP OPREATIONS

A. Statement of Bank Loans and IDA Credits(as of September 30, 1989)

Loan or Amount (leos cancellations)Credit Fiscal -------(in US$ million-----Number Year Borrower Purpose Bank IDA Undisbursed

Twenty-nine loans and six credits fully disbursed 512.13 37.5 -

1991 1981 Ecuador Rural Development 16.9 - 7.02044 1982 Ecuador Rural Development 16.1 - 9.32171 1982 Ecuador Education 16.0 - 6.02516 1985 Ecuador Public Sector Management 6.0 - 3.62626 1986 Ecuador Agriculture Sector 100.0 - 1.42672 1986 Ecuador Industrial Finance 115.0 - 10.02673 1986 Ecuador Third Small-Scale Enterprise

Credit 30.0 - 0.92713 1986 INECEL Power Sector Improvement 8.5 - 8.02752 1987 Ecuador Agriculture Credit 48.0 - 37.02774 1987 EMAP-G Guayaquil Water Supply II 31.0 - 28.02803 1987 Ecuador Petroleum Reconstruction 80.0 - 3.42987 1987 Ecuador Financial Sector Adjustment 100.0 - 2.02898 1988 Ecuador Housing 60.0 - 59.93052 1/ 1989 IETEL Telecommunications 45.0 - 45.0

Total 1184.6 37.5 -of which has been repaid 291.9 4.1

Total now outstanding 892.7 33.4 -

Amount sold 3.2 - -

of which has been repaid 3.2 -

Total now held by Bank and IDA 889.5 33.4 -

Total Undisbursed 221.6

1/ Not yet effective.

Schedule D

ECUhDOI

TEM STATVS Of WMNK GROUP OPRUTIONS

D. Statement of INC Investmets(as of September 30, 1989)

Typ of mount (US$ million)Years Coipany/Oraanization Business Loan Equity Total

1966 & 1972 La Internacional, S. A. Textiles 3.7 0.2 3.9

1969, 1973, Compania Finaciera Ecuatoriana DCF 4.0 0.6 4.61975, 1977, de Desarrollo, S. A. (COFIEC)1981, 1982,& 1988

1976 Sociedad Agricola e Industrial Sugar Hill 5.0 - 5.0San Carlos, S. A.

1978, 1980 Cemento Nacional (CEM) Cement 12.0 1.0 13.01982, 1983,& 1984

1980 Adamas Andina, S. A. Pulp and 3.3 1.0 4.3Paper

1981 Compania Minera Toachi, S. A. Mining 1.0 0.3 1.3

1987 Minera, Kolla Mining 9.0 4.4 13.4

1988 Facturinsa Money/CapitalMarkets . .1 .1

Total Gross Comnltments 38.0 7.6 45.6

Less Cancellations, Termination, Repayments and Sales 28.5 4.1 32.6

Total Commitments now held by IFC 9.5 3.5 13.0

Total Undisbursed 9.5 3.1 12.6