News Brief: IMF Completes Second Ecuador Review and Approves Extension

May 25, 2001

The Executive Board of the International Monetary Fund (IMF) today completed the second review under the stand-by credit for Ecuador and approved the extension of the credit to December 31, 2001. As a result, Ecuador will be able to draw up to SDR 37.8 million (about US$48 million) from the IMF.

In commenting on the Executive Board's decision, Stanley Fischer, First Deputy Managing Director of the IMF, said:

"The Fund welcomes the progress Ecuador has made under the Stand-By Arrangement in recent months, recouping policy slippages of the last year. Economic activity has picked up, unemployment has fallen, and inflation has decelerated sharply. In addition, the fiscal and external positions are stronger than expected and pressures on the banking system have eased. The authorities have shown considerable resolve in implementing politically difficult policy decisions needed to strengthen the public finances and the banking system, and the program is now back on track. Nevertheless, much more remains to be done to continue fiscal consolidation, strengthen the financial sector, and implement structural reforms.

"The recent reduction of energy subsidies and the increase in the VAT rate, together with improvements in tax administration, are crucial to sustaining a viable fiscal position by helping reduce dependence on volatile oil revenues, compensating for revenues lost from the abolition of the financial transactions tax and import tariff surcharge, and allowing for a stronger social safety net and improved public infrastructure. With tight control over spending, the fiscal deficit in 2001 is expected to be contained to about ¼ percent of GDP.

"The steps taken to strengthen the banking system include establishing a bank liquidity fund, liberalizing bank fees and interest rates, the recapitalization of Filanbanco, and the relaunching of the scheme to restructure large household and corporate debts to banks. These measures should give further reassurance to depositors, improve private sector balance sheets, and boost credit to the private sector needed to sustain the economic recovery.

"While the limited progress on structural reforms is of concern, the Fund is encouraged by the agreement reached with a private oil consortium to construct a second oil pipeline, and the good prospects for increased private sector participation in the electricity and telecommunications industries. However, Ecuador's political parties need to reach a consensus on the need for structural reforms to allow the country's economic performance and social indicators to catch up with those of many other countries in Latin America. Further substantial progress is needed to increase the flexibility of markets and strengthen the banking system to allow dollarization to be a success in the long term.

"Ecuador's medium-term prospects for achieving fiscal and external sustainability have improved following the debt relief obtained from private and official borrowers and the increase in fiscal revenue projected to result from the new oil pipeline. However, a strong fiscal effort still remains necessary. The Fund welcomes the authorities' plans to deepen fiscal reform by reforming the oil stabilization fund, reducing tax revenue earmarking, and introducing fiscal responsibility legislation," Mr. Fischer said.


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