IMF Staff Completes 2018 Article IV Mission to Ecuador

IMF News, July 5, 2018

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IMF staff visited Quito, Guayaquil and Cuenca during June 20 to July 4 to hold discussions for the 2018 Article IV Consultation with Ecuador.
Mission team led by Ms. Anna Ivanova.
Statement conveys preliminary findings of the mission and does not necessarily represent the views of the IMF’s Executive Board.

After five consecutive quarters of contraction, growth resumed in late 2016 and rebounded strongly to 3 percent in 2017.
The economy appears to be cooling, with a contraction of 0.7 percent in the first quarter of 2018 relative to the previous quarter.
Risks highlighted: possibility of tighter global financing conditions, lower oil prices, and a further appreciation of the U.S. dollar.

Non-financial public-sector deficit rose to 8.4 percent of GDP in 2016 following the 2014 oil price decline.
Overall deficit was 4.8 percent of GDP in 2017.
Recent and potential measures that helped or could help reduce the fiscal deficit:
- Higher oil prices.
- Temporary tax measures.
- Cuts in capital spending.
- A public sector hiring freeze.
IMF staff recommendation: a more balanced and frontloaded fiscal consolidation to boost confidence, reduce borrowing costs and reach more sustainable deficit levels more quickly.
Authorities have taken steps to strengthen fiscal institutions, including the new “Productive Development Law” approved by the National Assembly in June (contains marked improvements in the fiscal policy framework, with scope for further refinements).
Efforts underway to increase fiscal transparency and adhere to international accounting standards.

The real effective exchange rate is overvalued, constraining competitiveness, growth, and job creation, and posing a vulnerability for the economic outlook.
External position needs strengthening, including by building up adequate reserve cushions.

The financial system appears sound:
- Well-capitalized.
- Solid credit quality.
- High levels of liquidity.
Private credit is still growing robustly albeit at a slower pace.
Supervision of the cooperatives should be strengthened, though the sector does not appear to represent systemic risks.
Policy steps suggested to fortify the system:
- Remove barriers to effective financial intermediation.
- Enhance banks’ risk management.
- Improve oversight and contingency planning.

Authorities have adopted measures to:
- Soften rigidity of the labor market in some sectors.
- Improve the legal framework for investors.
- Facilitate trade.
Further supply-side reforms recommended:
- Further soften rigidity of the labor market.
- Broaden a set of trade agreements.
- Improve the efficiency and reliability of the energy sector.
- Continue efforts to tackle corruption.

Priority actions:
- Address fiscal imbalances promptly and decisively.
- Implement a balanced and frontloaded fiscal consolidation.
- Strengthen external buffers and reserves.
- Advance financial-sector oversight and contingency planning.
- Pursue supply-side reforms to boost competitiveness, job creation and productivity.
Fund staff stands ready to provide technical assistance in the areas identified by the authorities.

IMF Communications Department — July 5, 2018.