Ecuador's New Economic Plan Explained
IMF News, March 21, 2019
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- Published: March 21, 2019
Program goals and support
- Objective: put public debt on a firm downward path, create jobs, protect the poor and most vulnerable, and bolster the fight against corruption.
- Financial support: program supported by a US$4.2 billion Extended Fund Facility from the IMF, along with additional financial support from the international community.
- Expected outcome: restore sustainable growth that benefits all Ecuadorians.
Context and rationale for IMF engagement
- Ecuador previously benefited from dollarization and high oil prices but faced growing vulnerabilities after the oil price plunge of 2014 and US dollar appreciation.
- Past policy inconsistencies with dollarization: wage increases outpaced productivity growth, hurting competitiveness.
- Consequences: public debt doubled over the past five years and international reserves fell to very low levels; previous government resorted to central bank financing.
- Government action: current government proactively sought IMF support to tackle vulnerabilities, restore growth, and improve social outcomes.
Core pillars of the economic program
- Fortify the institutional foundations of Ecuador’s dollarization.
- Boost competitiveness and create jobs.
- Promote shared prosperity and protect the poor and most vulnerable.
- Improve transparency and strengthen the fight against corruption.
Competitiveness strategy in a dollarized economy
- Constraint: using the US dollar prevents exchange rate adjustment to improve export competitiveness.
- Internal devaluation measures emphasized:
- Reign in government spending, particularly through optimization of the wage bill.
- Allow less rigidity in wages and prices to support external adjustment.
- Remove rigidities in the labor and product markets and in the financial sector.
Policies to support jobs and formal employment
- Reforms to attract private investment and boost formal employment:
- Review the system of taxation.
- Remove obstacles to business formation and operation.
- Encourage private investment and deepen capital markets.
- Open international trade.
- Create better conditions for participation of women in the labor market.
Social outcomes and protection measures
- Historical social progress:
- Share of population below the national poverty line fell from 64.4 percent in 2000 to 21.5 percent in 2017.
- Share of population living below US$1.90 a day fell from 28.2 percent in 2000 to 3.6 percent in 2016.
- Remaining challenges: poverty rates among rural and indigenous populations remain high.
- Measures to protect the poor and most vulnerable:
- Increase spending on social assistance programs, such as Bono de Desarrollo Humano and Bono Joaquin Gallegos Lara, and extend coverage of non-contributory pensions.
- Develop a social registry to improve targeting of social programs.
- Increase the efficiency and quality of primary education and health spending to improve outcomes and enhance the quality of the labor force and external competitiveness.
Transparency and anti-corruption measures
- Rationale: improved transparency and anti-corruption efforts support business environment, lower public financing costs, and encourage private investment and jobs.
- Key measures:
- Anti-corruption legislation to enhance the independence and power of law enforcement agencies and the judiciary, and improve access to government operation information.
- Publish central bank financial statements in conformance with international financial reporting standards as they become available.
- Develop an anti-money laundering and countering financial terrorism (AML/CFT) national risk assessment that properly prioritizes corruption-related threats and incidents.
- Gain membership into Extractive Industries Transparency Initiative to improve transparency in the oil sector.
Source: Ecuador's New Economic Plan Explained (March 21, 2019).