IMF Executive Board Concludes 2016 Article IV Consultation with Ecuador

IMF News, March 21, 2019

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IMF Executive Board Concludes 2016 Article IV Consultation with Ecuador

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Bibliographic details

• Published: March 21, 2019

Economic context and performance

• During 2015, the terms of trade fell by 25 percent and the real exchange rate appreciated by 14 percent.
• Economic growth decelerated to 0.3 percent (from 3.7 percent in 2014).
• The current account deficit worsened to US$2.2 billion (from 0.6 billion in 2014).
• Recent indicators point to a continued decline in domestic demand.
• Inflation was 1.6 percent in May (from 3.4 percent at end-2015).
• Staff projects an economic contraction in both 2016 and 2017.
• Downside risks include further falls in oil prices, constrained external financing, and weakening confidence. A resumption of the U.S. dollar appreciation may put additional pressures on competitiveness and external accounts.

Fiscal developments and financing

• Net oil revenues fell about 5 percent of GDP in 2015.
• The authorities maintained the deficit to GDP ratio at the level budgeted (also the same as in 2014) by lowering public investment and raising tax revenues, while non-oil current spending rose with social security costs, the public wage bill, and interest payments.
• Limited fiscal buffers and a shortfall in financing caused accumulation of spending arrears and recourse to domestic financing (drawdown in public deposits and new borrowing from the central bank).
• The central bank’s net international reserves fell by about US$1.5 billion (to US$2.5 billion) in 2015.
• Recent international financing allowed NIR to increase to about US$3½ billion in early-June.
• After the earthquake, an emergency fiscal package was submitted and should yield 0.7 percent of GDP in new revenues in 2016. The package increases the VAT rate by two percentage points for up to one year and imposes a one-time solidarity surcharge tax on wages, corporate profits, and personal assets.
• International Financial Institutions and agencies offered emergency financial assistance for about US$630 million (of which about US$460 million is new lending, and the rest is reorientation of existing loans).
• Staff estimates the remaining fiscal gap at about US$2¼ billion in 2016 which is likely to require a delay in the planned repayment of spending arrears, a reduction in capital spending on projects not related to the reconstruction, and recourse to additional net domestic financing.

External sector and reserves

• Damage from the April 16 earthquake is estimated to widen the current account deficit by about 1 percent of GDP due to damage to agriculture, commerce, and tourism and the need to import materials for rehabilitation and reconstruction.
• Net international reserves (US$ millions): 2,622 (2010); 2,958 (2011); 2,483 (2012); 4,361 (2013); 3,949 (2014); 2,496 (2015); 1,969 (2016); 1,879 (2017, projection).
• Nominal GDP (US$ millions): 69,555 (2010); 79,277 (2011); 87,925 (2012); 94,776 (2013); 100,917 (2014); 100,872 (2015); 99,403 (2016); 98,490 (2017, projection).
• GDP per capita (US$): 4,633 (2010); 5,193 (2011); 5,665 (2012); 6,008 (2013); 6,297 (2014); 6,196 (2015).

Financial sector and banking system

• During 2015, deposits in private banks declined by 11½ percent and banks responded by rationing credit (which contracted by 4½ percent in 2015).
• In the first quarter of 2016, deposits increased and credit has begun to slowly expand (albeit at short maturities).
• Non-performing loans are rising but remain adequately provisioned on average, and profitability in the sector has been deteriorating.
• Directors noted the financial system is sound and well capitalized but recent buildup of vulnerabilities calls for measures to preserve liquidity, support confidence, and enhance crisis preparedness.
• Directors urged the authorities to avoid central bank financing of the budget and issuance of central bank notes, ensure a swift functioning of emergency assistance mechanisms for financial institutions, and continue to enhance supervision and prudential regulation.
• Over time, Directors recommended gradually phasing out interest rate ceilings and capital controls, introducing risk management tools, and diversifying the deposit insurance scheme away from public debt.
• Directors encouraged the authorities to undertake an FSAP assessment.

Earthquake impact and emergency response

• On April 16, Ecuador was hit by a 7.8-magnitude earthquake.
• The number of dead or missing has reached 675, while more than 4,600 people are injured. More than 33,000 people are now in temporary shelters.
• The authorities estimate reconstruction costs to amount to about US$3.3 billion.
• An emergency fiscal package and emergency financial assistance from international institutions aim to address immediate needs, but a fiscal financing gap of about US$2¼ billion in 2016 remains.

Executive Board assessment and policy recommendations

• Directors welcomed progress in reducing poverty and fostering social inclusion but noted a weak outlook due to the decline in oil prices, the strength of the dollar, limited buffers, tighter external financing conditions, and financial stability risks.
• Recommended policies to preserve macroeconomic and financial stability and restore competitiveness:
  • Implement a comprehensive set of policies, including gradual elimination of untargeted fuel subsidies, a permanent increase in the VAT rate and elimination of exemptions, and expenditure prioritization in favor of productive spending.
  • Continue adjustment of the government wage bill and avoid sharp output contraction.
  • Improve public investment management and eliminate arrears while protecting the most vulnerable.
  • Rebuild fiscal buffers over the medium term to create space for countercyclical policy.
  • Proceed with planned sales of public assets to the private sector to help close the budget gap and increase foreign direct investment, with greater transparency to build credibility and support for fiscal reforms.
  • Contain labor costs, shift from direct to indirect taxes, enhance labor market flexibility, increase competition in goods, labor, and financial markets, and strengthen institutions.
  • Finalize the Multipart Trade Agreement with the European Union and remove the temporary import surcharges as soon as possible.
  • Continue improvements in the statistical framework.

Ecuador: Selected economic indicators (percent change or levels as published)

• Social Indicators
  • Life expectancy at birth (years): 75.6 (2010); 75.9 (2011); 76.2 (2012); 76.5 (2013); ...
  • Infant mortality (per thousand live births): 21.3 (2010); 20.7 (2011); 20.1 (2012); 19.5 (2013); 19.0 (2014); 18.4 (2015).
  • Adult literacy rate: 91.9 (2010); 91.6 (2011); 92.1 (2012); 93.3 (2013).
  • Poverty rate (total): 32.8 (2010); 28.6 (2011); 27.3 (2012); 25.6 (2013); 22.5 (2014).
  • Unemployment rate: 5.0 (2010); 4.2 (2011); 4.1 (2012); 3.8 (2013); 4.8 (2014); 6.1 (2015); 6.9 (2016); (percent change, unless otherwise indicated).

• Production and prices
  • Real GDP: 3.5 (2010); 7.9 (2011); 5.6 (2012); 4.6 (2013); 3.7 (2014); 0.3 (2015); -2.3 (2016 proj.); -2.7 (2017 proj.).
  • Real domestic demand: 8.0 (2010); 7.5 (2011); 4.4 (2012); 6.2 (2013); -1.6 (2014); -4.3 (2015); -4.0 (2016 proj.).
  • Consumer price index period average: 3.6 (2010); 4.5 (2011); 5.1 (2012); 2.7 (2013); 4.0 (2014); 3.4 (2015); 1.3 (2016 proj.).
  • Consumer price index end-of-period: 3.3 (2010); 5.4 (2011); -0.6 (2012).

• External sector
  • Exports: 25.8 (2010); 6.4 (2011); -28.6 (2012); -14.6 (2013); 11.8 (2014).
  • Imports: 37.7 (2010); 19.1 (2011); 6.8 (2012); 1.8 (2013); -22.4 (2014); -15.3 (2015); 0.4 (2016 proj.).
  • Terms of trade, national accounts data (deterioration -): 20.4 (2010); 51.9 (2011); -33.3 (2012); -6.1 (2013); -25.1 (2014); -6.5 (2015); 6.7 (2016 proj.).
  • Real effective exchange rate (depreciation -): -2.2 (2010); 2.2 (2011); 2.9 (2012); 13.7 (2013).

• Money and credit
  • Broad money: 20.6 (2010); 20.5 (2011); 16.0 (2012); 13.0 (2013); 11.4 (2014); -10.5 (2015); -6.4 (2016 proj.); -5.2 (2017 proj.).
  • Credit to the private sector: 24.4 (2010); 22.6 (2011); 14.7 (2012); 10.5 (2013); 8.7 (2014); -3.3 (2015); -5.3 (2016 proj.).

• Public sector (in percent of GDP)
  • Revenue: 33.3 (2010); 39.3 (2011); 38.7 (2012); 31.8 (2013); 33.1 (2014); (2015 value not listed in table extract).
  • Primary expenditure: 34.1 (2010); 38.8 (2011); 39.5 (2012); 42.9 (2013); 37.1 (2014); 35.4 (2015); 30.7 (2016 proj.).
  • Primary balance: -0.8 (2010); 0.5 (2011); -0.2 (2012); -3.6 (2013); -3.8 (2014); 2.4 (2015).
  • Overall balance (deficit -): -1.4 (2010); -0.1 (2011); -0.9 (2012); -4.6 (2013).

• Debt
  • Total external debt: 18.6 (2010); 21.6 (2011); 25.2 (2012); 28.5 (2013); 34.0 (2014); 34.4 (2015).
  • Total public debt: 19.7 (2010); 19.4 (2011); 25.9 (2012); 31.2 (2013); 33.8 (2014); 39.4 (2015).
  • Domestic: 5.7 (2010); 8.8 (2011); 12.4 (2012); 12.8 (2013); 12.6 (2014).
  • External: 15.4 (2010); 18.7 (2011); 21.4 (2012); 26.6 (2013); 27.0 (2014).
  • Total public debt, official definition 1/: 19.2 (2010); 21.2 (2011); 24.1 (2012); 29.7 (2013); 32.5 (2014); 37.0 (2015).

• Saving investment balance
  • Gross investment: 28.0 (2010); 28.1 (2011); 27.8 (2012); 28.8 (2013); 27.4 (2014); 25.1 (2015); 22.2 (2016 proj.).
  • National saving: 27.6 (2010); 27.7 (2011); 22.8 (2012).

Sources: Central Bank of Ecuador; Ministry of Economy and Finance; and Fund staff estimates and projections.

Press Release No. 19/85 — March 21, 2019 — IMF Communications Department

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• Ecuador and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home