Press Release: IMF Approves US$205 Million Stand-By Arrangement for Ecuador
IMF News, March 21, 2003
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- Published: March 21, 2003
IMF approval and financing
- The Executive Board approved a 13-month SDR 151 million (about US$205 million) Stand-By Arrangement for Ecuador to support the country's economic and financial program through March 2004.
- The approval opened the way for the immediate release of SDR 30.2 million (about US$41 million).
Repurchase/repayment extension decision
- The Executive Board approved the authorities' request to extend by one year the repayment expectations arising from a purchase under a Stand-By Arrangement approved on April 19, 2000.
- The repayments in an aggregate amount are equivalent to SDR 14 million (about US$19 million) and were expected to be made on August 30, 2003; November 30, 2003; and February 29, 2004.
- Purchases in the credit tranches are expected to be repaid in eight quarterly installments made within 2.25 and 4 years after the date of purchase.
- The extension is allowed under the Fund's general policies governing repurchase expectations which authorize the Executive Board to extend repurchase expectations on request by a member with an insufficiently strong external position.
Managing Director Horst Köhler — key observations
- Policy slippages in 2002 led to a slowing of economic growth, continued payments arrears in the public sector, and rising concerns about the inconsistency of fiscal and wage policies with dollarization.
- Rapid public sector wage increases undercut the fiscal position and contributed to the continued relatively high rate of inflation.
- Structural reforms were suspended in key areas.
- The new administration acted immediately to reverse 2002 policy slippages by implementing decisive measures to boost revenues and control expenditures, balanced with social safety net support, and by announcing a broad program of economic reforms.
- Upfront fiscal measures are already helping to raise the public sector primary surplus and overcome the very difficult liquidity position in the Central Government.
- Sustaining fiscal consolidation objectives is imperative, including customs reform, civil service reform, and tax and revenue earmarking reforms.
- Greater attention should be paid to improving the living conditions of the poor, including improving the targeting of the social safety net.
- Authorities have acted to revive the reform agenda by unfreezing public enterprise tariffs and taking steps to deal with closed banks; additional initiatives are contemplated to improve public enterprises in electricity, telephone, and petroleum sectors.
- The Fund anticipates continuing to work closely with the Ecuadoran authorities as they implement their program.
Recent economic developments (summary)
- Ecuador experienced severe economic stress in the 1990s, culminating in accelerating inflation, a banking crisis, a deposit freeze, and the closure of some 18 banks, affecting half of total deposits and ending in a currency crisis.
- Adoption of the U.S. dollar in January 2000 stabilized expectations and economic activity began to turn around.
- Oil price slump in 1998, El Niño damage, and shrimp disease worsened outcomes in the late 1990s.
- In 2001, construction of the Oleoducto de Crudos Pesados (OCP) and higher public sector spending boosted demand.
- Real GDP growth slowed to 3 percent of GDP in 2002 from 5.1 percent in 2001 due to policy slippages and faltering confidence.
- Consumer price inflation: 91 percent at end-2000 to 9.4 percent by end-2002.
- Wages have more than doubled since dollarization in early 2000 (led by the public sector), exceeding inflation over this period.
- Unemployment fell to 8.5 percent at end-2002 (half its 2000 rate), recovering by end-2001 its pre-crisis level.
- External current account deficit widened to 5 percent of GDP in 2002 from 2.4 percent in 2001 due to rapid import growth and an appreciating real effective exchange rate.
Authorities' program and projections
- The program projects:
- Real GDP growth of 3.5 percent in 2003.
- Decline in consumer price inflation to an end-of-period rate of 6-7 percent after initial adverse effects of unfreezing utility, fuels, and other prices.
- Assuming a cautious oil price of US$18 per barrel, the external current account deficit is projected at just over 5 percent of GDP in 2003.
- The program's four building blocks:
- A package of immediate fiscal measures.
- Fiscal structural reforms.
- Liquidating closed banks and resolving outstanding issues from the banking crisis.
- Reforms in the state enterprises.
- Fiscal program objectives and measures:
- Address immediate liquidity constraints and bring expenditure growth under control, consistent with dollarization.
- Government implemented revenue measures and a budgetary freeze on wages and other expenditure controls.
- Fiscal Responsibility law (approved in 2002) limits primary expenditures growth to a maximum of 3.5 percent in real terms annually; the budget sent by the government and approved by congress in February is consistent with this rule.
- Strengthened social safety net to compensate the poor for some revenue measures.
- Planned reforms:
- Customs reform: law submitted to Congress to overhaul customs administration and bring it under the SRI tax administration office.
- Public sector wage unification and civil service reform law to achieve a lower nominal wage bill in 2004 through shrinking government size and reducing personnel; wage unification aims to phase in a broadening of the base for social security contributions and income taxes.
- Tax reform law to eliminate revenue earmarking not mandated in the constitution, eliminate most tax exemptions (including special rules in the income tax system), cut some low-yielding taxes, increase vehicle fees, and reduce the currently high standard deduction for income taxes.
- Reassessment of social security operations and actuarial positions of IESS, ISSFA, and ISSPOL with outside technical assistance.
- Banking sector actions:
- Plans to address unresolved issues including liquidation of Filanbanco and preparation for sale of Banco del Pacífico.
- Discussion of a strategy to replace the existing Liquidity Fund; contemplated new Liquidity Fund to be administered by an independent private manager, who would keep most of the liquidity abroad.
Program-related institutional facts
- Ecuador's IMF quota is SDR 302.3 million (about US$410 million).
- Outstanding use of IMF credit currently totals SDR 226.7 million (about US$308 million).
Key statistics (select figures from Table 1)
- Real GDP (annual percentage changes): 1999 -6.3; 2000 2.8; 2001 5.1; 2002 3.0; 2003 3.5; 2004 6.0.
- Consumer price index end-of-period: 1999 -25.2; 2000 -10.1; 2001 22.4; 2002 9.4; 2003 6.5; 2004 4.0.
- Unemployment: 1999 14.4; 2000 14.1; 2001 10.4; 2002 8.7.
- External current account (percent of GDP): 2001 2.4 (implicitly in text); 2002 5.0.
- Public finances (percent of GDP):
- Revenue: 1999 22.5; 2000 27.6; 2001 24.7; 2002 25.9; 2003 27.8.
- Primary balance (deficit -): 1999 7.7; 2000 4.3; 2001 4.5; 2002 5.2; 2003 6.7.
- Overall balance (deficit -): 1999 -4.6; 2000 1.0; 2001 -0.5.
- Total public debt: 1999 101.6; 2000 91.4; 2001 70.2; 2002 59.6; 2003 51.7; 2004 44.1.
- Public sector external debt (percent of exports of goods and nonfactor services): 1999 27.7; 2000 28.7; 2001 26.5; 2002 22.3; 2003 20.8.
- Net foreign assets (in millions of US$): 1999 872; 2000 1,180; 2001 1,074; 2002 1,008; 2003 919; 2004 1,154.
- Public sector deposits (US$ millions): 1999 570; 2000 1,228; 2001 1,261; 2002 1,282; 2003 1,306; 2004 1,589.
- Central government deposits (US$ millions): 1999 78; 2000 396; 2001 86; 2002 118; 2003 218.
International Monetary Fund — Press Release No. 03/39 (March 21, 2003).