IMF Executive Board Concludes 2007 Article IV Consultation with Ecuador

Public Information Notice (PIN) No. 08/27
February 28, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 25, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ecuador.1


Despite vulnerabilities, macroeconomic performance in recent years has been strong, supported by favorable global conditions. In 2007, however, growth is estimated to have declined, owing mainly to a decline in oil output from long-standing underinvestment at the state oil company but also to a tapering off in non-oil growth. The latter was driven by a decline in business confidence due to uncertainties over the new constitution and pending decisions on key policy issues. Inflation remained low at international levels, despite a slight pick up in the last part of the year.

Supported by higher oil prices, both the external and fiscal positions continue to be healthy. For 2007, the external current account surplus is estimated to have been roughly unchanged from the previous year. In contrast, the non-financial public sector primary surplus weakened significantly, mainly on account of a strong increase in capital spending. With sustained primary surpluses and robust growth in recent years, the public debt to GDP ratio has declined dramatically.

In the financial sector, banking system soundness indicators remained generally positive. Deposits and credit to the private sector continued to grow but at a slower pace than in 2006. After spiking at the beginning of the year on concerns over the authorities' debt service policies, the sovereign spread (EMBI) has declined significantly, but remains the highest in the region.

The government is embarking on comprehensive political and economic changes to reduce poverty, and promote equity-enhancing growth by improving infrastructure and the efficiency of the financial system. Against this background, discussions focused not only on policies to address fiscal and financial system vulnerabilities, but also covered fiscal space for investment and social spending, and lowering the cost and increasing the availability of credit.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Ecuador's broadly positive macroeconomic performance, with high oil prices and a depreciating U.S. dollar having supported robust growth over the last five years, and inflation declining to international levels. The external current account has been in surplus since 2005, the public debt ratio has declined significantly, and the government has accumulated large deposits in the oil funds. At the same time, a drop in business confidence and in private investment has resulted in a sharp deceleration of growth more recently. Directors considered that the supportive environment represents a good opportunity to address macroeconomic and financial vulnerabilities and reduce uncertainties by implementing promptly the envisaged reform measures, in order to unleash the country's economic potential and decisively reduce poverty.

The real effective exchange rate has been broadly in line with macroeconomic fundamentals. Other indicators of competitiveness, including the healthy performance of non-oil exports, do not point to competitiveness problems under Ecuador's dollarized system. That notwithstanding, Directors observed that investment and production trends have lagged behind other economies in the region, in particular in the oil sector, highlighting the importance of improving the business climate, maintaining sound fiscal policies, and continuing with structural reforms that would reinforce long-run sustainability.

Directors welcomed the authorities' plans to tackle structural weaknesses in the fiscal area. Recent legislation aimed at improving tax administration and reducing exemptions will help lessen oil revenue dependence.

Directors considered that fiscal measures will need to be combined with spending policies that safeguard macroeconomic stability. They supported the increase in social and infrastructure spending. Given the current oil price and production outlook, the authorities' overall spending program is fully financed. Directors stressed, however, the importance of keeping non-priority spending under control in order to avoid inflationary pressures and to ensure fiscal space for priority projects, in particular against the background of inherently volatile oil prices. Directors recommended the formal approval of a medium-term fiscal framework to help reduce the risks of procyclical and unsustainable policies, and to transparently identify the path to achieve the authorities' medium-term rule of a zero non-oil current deficit.

Directors welcomed the steps being taken to ensure that spending is of high quality, including recent improvements in the public financial management system, the ongoing program to upgrade the capacity of the public investment system, and plans to introduce comprehensive reforms in the state-owned oil and electricity companies. Directors viewed the recent move to make transparent in the budget the cost of fuel subsidies as a step toward developing a strategy and timetable for the elimination of these subsidies, which will be important to make space for better-targeted spending to reduce poverty. More broadly, Directors recommended that social needs be addressed through carefully targeted income transfer measures, rather than generalized subsidies.

Directors agreed that the financial system is liquid and that bank soundness is largely well secured. At the same time, there is a need to improve the efficiency of the system by lowering the cost of credit and improving access to credit. Directors welcomed plans to establish an augmented liquidity fund and a strengthened deposit insurance scheme, and to reform the bank resolution framework. At the same time, Directors cautioned that the new tax on foreign exchange remittances abroad could have negative effects on financial system intermediation. Directors called for improvements in supervision of the financial system, including by ensuring the autonomy of the supervising agency; strengthening legal protection for supervisors; and implementing an appropriate supervisory framework for small financial cooperatives that are not under the jurisdiction of the superintendent of banks.

It is expected that the next Article IV consultation with Ecuador will be held on the standard 12-month cycle.

Ecuador: Selected Economic and Financial Indicators
  2003 2004 2005 2006 2007
(Annual percentage changes; unless otherwise indicated)

National income and prices


Real GDP

3.6 8.0 6.0 3.9 1.8

Real GDP per capita

2.1 6.5 4.5 2.4 0.3

Consumer price index end-of-period

6.1 2.0 3.1 2.9 3.3

Real effective exchange rate (avg.; depreciation -) 1/

2.0 -4.9 -4.3 -0.5 -5.6

Banking system


Liabilities to the private sector

18.7 27.1 21.1 16.8 14.3

Credit to the private sector

4.5 28.6 25.9 19.1 15.2

EMBI Ecuador (bps, end of period)

799 690 669 920 614
(In percent of GDP)

Public finances



24.1 25.1 24.2 27.4 28.8

Non-interest expenditure

20.1 20.4 21.4 21.7 25.0

Primary balance (deficit -)

4.4 4.6 2.9 5.8 3.8

Overall balance (deficit -)

1.6 2.2 0.7 3.7 1.8

Total public debt

49.9 43.1 38.5 33.9 32.0


9.7 9.2 9.3 9.2 8.4


40.2 33.9 29.2 24.7 23.5

Saving investment balance


National saving

20.0 21.7 24.6 26.7 27.2

Gross investment

21.5 23.4 23.8 23.1 24.0

Foreign saving = - external current account balance

1.5 1.7 -0.8 -3.6 -3.3

Sources: Central Bank of Ecuador; Ministry of Finance; and IMF staff estimates and projections.
1/ November data for 2007.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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