Press Release: IMF Approves Stand-By Credit for Ecuador
April 19, 2000
The International Monetary Fund (IMF) today approved a 12-month stand-by credit for Ecuador in an amount equivalent to SDR 226.73 million (about US$304 million) to support the government's economic program for 2000. The first disbursement in a amount equivalent to SDR 85 million (about US$114 million) is available immediately and the remainder will be disbursed in five equal bimonthly installments.
In commenting on the Executive Board discussion, Stanley Fischer, Acting Managing Director, said: "The authorities' policies as set out in the program have already achieved some important initial success in halting the run on banks and beginning to restore confidence. The program is very demanding and successful implementation will require firm resolve on the part of the authorities, and the support of the Congress and the public at large. To build on their initial success, the policies envisaged in the program will need to be implemented decisively and will need to be supported by adequate external financing, including debt relief and the restoration of banks' external credit lines.
"While the decision to dollarize the economy has achieved initial successes, its continued success poses major challenges: structural reforms will need to be implemented vigorously to enable the economy to better withstand external shocks; and the public finances need to be strengthened to reduce pressures coming from the budgetary needs of the public sector. In addition, the authorities will need to move ahead quickly with the bank resolution strategy, including by implementing the steps envisaged in the program to improve bank supervision and prudential regulation, and speed up the restructuring of household and corporate debt. It will be necessary to preserve a voluntary framework for restructuring large debts, in order to minimize the ultimate costs to the taxpayer of resolving the banking crisis.
"The authorities' program calls for wage restraint and significant increases in heavily subsidized domestic fuel prices; these subsidies mainly benefit middle- and upper-income groups. To offset the impact on the poorest groups, the program provides for substantial increases in cash payments to the poor. The program also provides for the possibility of further increases in social expenditures in the second half of 2000, if projected financing is realized and fiscal revenues are higher than programmed.
"The budget for 2001 will include measures to mobilize additional revenue, diversify the tax base away from oil, reduce tax earmarking, and create a more efficient and equitable tax structure. These measures would be complemented by legislation aimed at liberalizing the production, distribution, and pricing of domestic fuels.
"The external financing needs of the program are large, and the prospects for Ecuador regaining market access in the near future are poor. An appropriate degree of private sector involvement in the resolution of Ecuador's debt and balance of payments problems is essential. It probably will need to include both cash flow relief and debt reduction, if a sustainable external and fiscal position is to be restored over the medium and longer term. The authorities intend to make every effort to reach an early cooperative solution with their private creditors. They have announced a further meeting with private creditors to be held in May 2000 to work toward this objective", Fischer said.
Ecuador's economic situation deteriorated sharply in 1997-98, and the economy plunged into a major economic and financial crisis in 1999. Real GDP stagnated in 1998 and fell by 8% in 1999, mainly reflecting declines in private consumption and investment. The unemployment rate almost doubled to about 17% over the two years to January 2000, and there was a large increase in the number of people living in poverty. Twelve-month inflation in consumer prices rose to 90% in February 2000 from 31% at end-1997.
To restore confidence in economic management, stem the decline in economic activity, and lay the basis for renewed economic growth, the new administration, which took office in January 2000, is undertaking a broad-based program of economic reform. The legal basis for many of the reforms is the recently enacted Ley Fundamental para la Transformación Económica del Ecuador (the "economic transformation law"), whose centerpiece is the official dollarization of the economy at a conversion rate of 25,000 sucres per U.S. dollar, introduced last January 9 by the previous administration.
The new administration decided to continue with this plan, using it as a means to enforce greater fiscal discipline and to enact legislation aimed at strengthening the banking sector, a strategy that has yielded positive initial results; interest rates have declined sharply and there has been a net inflow of deposits into the banking system since the dollarization announcement, suggesting an improvement in confidence.
The macroeconomic framework of the government's program is based on a further decline in real GDP in the first half of 2000, followed by a recovery of 3½ % to 4% growth (year-on-year) in the second half, with real GDP growth for the year assumed to be close to zero. Notwithstanding the process of dollarization, price increases are likely to occur for some time, with the pass-through of the earlier sharp depreciation. The 12-month increase in consumer prices is projected to come down to about 60% by year-end from 91% in March 2000, implying a decline in monthly price increases to under 1% by year-end from 10% in February 2000. The program targets an increase in the net freely disposable international reserves of the central bank (in excess of the 100 percent legally mandated backing for central bank sucre liabilities under the dollarization framework and outstanding credit from the IMF) of US$160 million by end-December 2000 to provide partial backing for the issuance of U.S. dollar-denominated central bank bonds and to meet liquidity needs of the banking system.
The fiscal program aims at adapting the fiscal position to the realities of a dollarized regime and at setting the basis for moving medium-term viability. The combined fiscal deficit would be reduced to 3.2% of GDP in 2000 from 7.2% in 1999. To achieve this the program envisages a reduction in the deficit of the non-financial public sector to 3.9 % of GDP this year from 6% in 1999, and an increase in the primary surplus to 6½ percent of GDP. The improvement in the fiscal balance is to be achieved through a combination of higher fiscal revenues from oil exports, a significant increase in domestic fuel prices aimed at reducing costly subsidies, extension of the temporary import tariff surcharge through end-2000, tight control over expenditures, and further improvement in tax administration.
The approval of the economic transformation law has paved the way for important structural reforms in the labor market, the oil sector, and privatization. The labor code has been amended to eliminate rigidities and create conditions to increase employment. Private companies have been allowed to refine, process, and store oil and gas, as well as to build oil pipelines--a provision that will facilitate the planned construction of a new US$600 million oil pipeline from the Amazon region to the northern coast, scheduled to begin later this year. In 2000, privatization will include the sales of majority shareholdings in the state electricity generation, distribution, and transmission companies, and in the two state telecommunications companies.
Public expenditure under the program will give priority to addressing the needs of the poorest segments of the population, protecting them from the worst effects of the adjustment process and improving their human capital and earning capacity over the medium term. Key elements of the government's social program include improved targeting of cash transfers to the poor (bono solidario), taking into account families whose children have good school attendance records; the provision of nutritional and medical support for young children and pregnant women; and the development of a fund to accelerate the social and economic development of indigenous communities.
Ecuador is an original member of the IMF. Its quota1 is SDR 302.3 million (about US$405 million); it has no outstanding use of IMF credit.