Ecuador and the IMF
IMF Completes First Ecuador Review
The Executive Board of the International Monetary Fund (IMF) completed today the first review under the stand-by credit for Ecuador. As a result, Ecuador will be able to draw up to the equivalent of SDR 28.345 million (about US$ 37 million) from the IMF.
In commenting on the Executive Board discussion, Stanley Fischer, First Deputy Managing Director, said:
"The Executive Board welcomed Ecuador's improved macroeconomic performance in the first half of the year. The fiscal position is significantly stronger than anticipated, the liquidity situation in the banking system has improved, and there are indications of recovery in economic activity. This performance, combined with the successful debt exchange earlier this month, suggests a gradual return of confidence in the Ecuadoran economy. Directors granted the authorities' request for waivers for non-observance of two end-June performance criteria and regarding the applicability of two end-June performance criteria for which data are preliminary. At the same time, Directors pointed to the continued fragility of the current situation, and emphasized that securing the economic stabilization gains of recent months will require additional action to keep fiscal deficits low and create a more robust financial sector.
"Directors welcomed the fiscal adjustment this year, but stressed the need for a tight fiscal stance for the foreseeable future, with substantial primary surpluses and low overall deficits, to support dollarization in the near term and to achieve a sustainable fiscal and external position over the medium term. A number of measures will be necessary to accomplish this, including a comprehensive tax reform to broaden the tax base and increase non-oil tax revenues. Moreover, the degree of revenue earmarking should be sharply reduced to allow for more flexible fiscal management. Further reductions in the subsidies on domestic fuels, tight control over expenditures, and elimination of domestic payment arrears were also considered important fiscal objectives.
"Directors underscored the urgent need to strengthen the social safety net, reverse the deterioration in social indicators, and repair basic public infrastructure. Given the fiscal constraints, the authorities were encouraged to improve the targeting of public spending as well as capital spending implementation capacity. Directors were concerned at the dependence of the fiscal system on oil revenues and encouraged the authorities to use any windfall gains from the oil sector to further reduce the fiscal deficit.
"The introduction of schemes to recycle bank liquidity, establish a liquidity stabilization fund to provide limited lender-of-last resort financing, and to restructure on a voluntary basis the large debts to banks of households and enterprises are important steps towards reestablishing a sound banking system. However, the authorities should move with greater speed and determination to implement the banking strategy as delays and inadequate measures have added significantly to the fiscal cost of the banking crisis. Directors welcomed the greater interest rate flexibility implicit in the new method of calculating the usury interest rate ceiling, but emphasized that the ceiling, along with the restrictions on bank fees, should be removed to support dollarization and encourage the recapitalization of banks from private sources.
"The process of structural reforms has moved forward significantly following approval of the two trolleybus laws. Directors were encouraged by the steps taken to inject more flexibility in the labor market, increase private sector participation in the economy, as well as the commitment to phase out price regulations on domestic fuels and electricity. It was also noted that a more liberal trade regime would complement these reforms.
"Executive Directors welcomed the progress the Ecuadoran government has made in normalizing relations with private sector external creditors, which had led to the successful conclusion of the debt exchange on August 23. They regarded this as an encouraging example of private sector involvement in the resolution of financial crises. Similar agreements with Ecuador's Paris Club creditors and with foreign banks would enable the financing gaps to be closed in the near term, and make a substantial contribution toward a more sustainable fiscal and external position in the medium term", Fischer said.
IMF EXTERNAL RELATIONS DEPARTMENT