Quito, Sept 21 (Reuters) - Ecuador's highest court said Monday it had ruled in favor of holding a referendum on banning large and medium-scale mining activity near water sources in Cuenca, a city in southern Ecuador's highlands.
Cuenca's city government had proposed that the Constitutional Court approve questions for the referendum, which seeks to prohibit mining and pollution in areas surrounding five rivers that cross the city and are its source of water.
The Constitutional Court ruled in favor of five questions, but clarified that its decision was not retroactive.
Cuenca is already home to key mining projects, such as Loma Larga operated by Canadian INV Metals Inc.
"It has been a dream for Cuencans for so many years to be allowed, through popular consultation, to determine the future protection of our water sources," Cuenca Mayor Pedro Palacios told reporters.
Participation in the referendum on mining will be mandatory, according to city authorities.
Ecuador, an oil-producing country facing a liquidity crisis, is seeking to develop its mining industry to diversify its economy and sources of income as it struggles to pay off its foreign debt.
The Constitutional Court, citing technical errors in the questionnaires, had previously denied three requests seeking a ban on mining activity in all of Azuay Province, where Cuenca is located.
The Energy Ministry, which oversees mining activity, did not immediately comment on the court ruling.
But a representative of a mining industry group said the ruling would harm Ecaudor's ability to attract investment to its mining sector.
"The main effect is the hit to Ecuador's international credibility and the financing of exploration activities," said Andres Ycaza, a lawyer for the Ecuadorian Chamber of Mining.
Ecuador projects mining exports will reach about $642 million this year in the "most pessimistic" scenario.
(Reporting by Alexandra Valencia; Writing by Sarah Kinosian; Editing by Tom Brown)
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