Ecuador bans to cost it billions in lost export revenue

César Guato, an 88-year-old who has panned for gold in Ecuador’s north for six decades, remembers when informal miners would trade flecks of gold for bottled beer at the local shop.

“So many of us live from [mining] and now will now struggle,” Guato said. “Maybe the environmentalists that took our jobs could give us work.”

Ecuadoreans last month voted to ban mining in the northern Chocó Andino region, a Unesco-designated biosphere reserve that is rich in largely untapped reserves of gold, silver and copper, alongside another vote to halt oil drilling in a section of the Amazon rainforest. Campaigners have hailed the moves to protect the environment and indigenous groups.

But they have cast a shadow over Ecuador’s nascent mining industry, its oil sector, the budget and the employment outlook in the affected regions as it now faces losing out on billions of dollars of export revenue.

As voters prepare for an October run-off vote in a country plagued by violence, the country’s next president will need to raise taxes and cut fuel subsidies to fill that gap, economists said, while industry leaders worry that the referendums could hurt foreign investment.

While the Chocó Andino is unexplored by major miners, the Yasuní oilfield in the Amazon, where oil drilling is to be banned, is a major source of government revenue. A block known as 43-ITT produces 55,000 barrels a day of oil — around 12 per cent of the country’s total of 480,000 b/d — according to national oil company Petroecuador.

Some 59 per cent of voters supported banning extraction in the Yasuní 43-ITT oil block, which is a biodiversity hotspot home to two isolated tribes.

In the referendum on the Chocó Andino, constituents — who include residents of the capital Quito — were decidedly in favour of mining prohibitions, which received around 68 per cent support.

Alberto Acosta-Burneo, economist at consultancy Spurrier Group, said the election winner may need to reform taxes to “compensate for part of the fiscal hole” left by the bans and cut fuel subsidies.

Energy minister Fernando Santos said the vote set “a terrible precedent”, adding that crude production in the Yasuní field would continue while the facility is being dismantled.

“It’s not a case of turning off the light from one day to the next,” Santos said.

Petroecuador estimates that revenue lost to the ban will amount to $13.8bn over the next two decades; the government estimates the annual net loss of oil-related revenues at about $1.2bn. The central bank forecasts a cumulative reduction in gross domestic product of 1.9 percentage points in 2023-26 as a result of the ban.

The outcome of the votes marks a sharp shift from the strategy of outgoing investor-friendly president Guillermo Lasso, who had hoped oil revenues would help to meet debt servicing costs and narrow the fiscal deficit — which is expected to widen to 2.2 per cent of GDP this year, up from 1.2 per cent in 2022.

Rating agencies have warned that the referendum results have added to uncertainty caused by Ecuador’s election, whose first-round vote was held at the same time. Leftist former lawmaker Luisa González will face centrist businessman Daniel Noboa in the second round on October 15, following a campaign marred by drug-related violence that claimed the life of a centre-right candidate.

The snap election was triggered by Lasso in May when he dissolved congress to avoid impeachment charges. The new congress and president will serve the remainder of the current term, until 2025.

The extraction bans won support from environmental groups such as Amazon Watch and Wildlife Conservation Society after a campaign backed by Hollywood actors Leonardo DiCaprio and Mark Ruffalo.

But there is gloom in the country’s nascent mining industry.

“Ecuador doesn’t have the luxury of overlooking mining; we have a bunch of needs and it’s not like all other industries are booming,” said María Eulalia Silva, head of Ecuador’s chamber of mining.

In the Chocó Andino, 12 concessions have been awarded to mine gold, silver and copper, and remain valid despite the referendum outcome, but are all in early phases of development. Across the country there are only two large-scale mines in operation, the Fruta del Norte gold mine owned by Canada’s Lundin and the Mirador copper-gold mine owned by a Chinese consortium.

With its use of the dollar and good road and port infrastructure, Ecuador has the potential to be a leading minerals exporter, analysts say. Between 2018 and 2022, mineral export revenues increased tenfold to $2.7bn and are now behind only those from oil, shrimps and bananas.

But the growing political risks could “lead to the flight of foreign investment”, Silva said.

In the Chocó Andino town of Pacto, a hilltop settlement of wooden lodges, many vehicles have “vote No” stickers on their windows — in contrast to Quito, where slogans urging approval of the referendum to outlaw mining are ubiquitous.

“Nature’s biggest enemy is poverty, not mining,” said Estalin Andrango, a geologist from Pacto who campaigned against the ban, as a toucan perched on the branch of a nearby tree. “Without the jobs that formal mining brings, people will be driven to illegal mining and organised crime.”

Despite the vocal opposition, many in the area supported the ban. Roques Sevilla, a former mayor of Quito who owns a luxury hotel nearby, said the government can “do both things”: outlaw regulated mining while tackling criminal groups.

Sylvia Pillajo, a shopkeeper in Pacto, also backed the ban. “I voted Yes because I want to save life, water and air,” she said. “They talk about responsible mining, but mining always destroys the land it uses.”