Helping Ecuador Confront the Pandemic

IMF News, October 5, 2020

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IMF Country Focus interviewed Ecuador mission chief, Ceyda Oner, about the new IMF financing and its role in managing the pandemic, its aftermath, and strengthening fiscal transparency and governance.
IMF Executive Board approved a new $6.5 billion Extended Fund Facility arrangement on September 30, 2020.
Ecuador is described as a South American country of 17 million.

Economic activity collapsed by a record 12.4 percent in the second quarter, compared to a 2.3 percent decline in the first quarter.
Contractions driving the collapse included:
- total investment: 18.5 percent
- private consumption: 12 percent
Unemployment jumped to 13 percent in June, ten points above the end of last year.
Hundreds of thousands have been pushed into poverty.
Fiscal and external financing needs for 2020 were estimated at 16 and 11 percent of GDP, respectively.

Government measures taken to mitigate impacts included:
- creating a special cash transfer program
- expanding the social safety net to more vulnerable people
- temporarily broadening unemployment insurance
- allowing delays on certain payments (tuitions, utilities, health insurance)
- temporary price controls for basic food items
Program immediate tasks: stabilize the economy, protect lives and livelihoods, and expand social assistance programs.

Total IMF arrangement: $6.5 billion Extended Fund Facility.
Planned disbursement timing:
- $4 billion of the total $6.5 billion is planned to be disbursed this year
- half of that $4 billion disbursed immediately
Rationale: large early disbursements reflect collapsed revenues, increased spending needs for health and social protection, falling oil prices, and loss of access to capital markets.
IMF programs are described as flexible to adapt to country-specific financing needs.

Two key challenges highlighted:
- supporting the people of Ecuador through the crisis
- reducing the debt burden
Ecuador completed a successful international bond exchange expected to save $1.5 billion in interest payments just in 2021, and billions more in the coming years.
Medium-term goal: bring public debt back to sustainable levels in accordance with Ecuador’s own debt targets now enshrined in law.
Reducing debt will involve:
- raising growth potential via comprehensive structural reforms over a long horizon
- carefully calibrating revenue and expenditure measures to support growth while considering distributional effects

Revenue-side measures:
- implement a smart and progressive tax reform to increase revenues and support businesses and job creation
Expenditure-side measures:
- improve efficiency and transparency in public investments and procurement (buying goods and services)
Additional program objectives:
- increase the number of low-income families receiving financial support
- spend more on reactivating the economy and on essential services like health and education
- pay off accumulated unpaid bills
- improve transparency in public procurement
- promote debt transparency
As the economy recovers, the program will aim to ensure sustainability of public finances, strengthen domestic institutions, and lay foundations for a more dynamic and competitive economy that can generate more jobs and strong, lasting growth that benefits all Ecuadorians.

Program length: 27 months, designed to allow the new administration to develop its own reform program while counting on financial support through 2022.
IMF engagement approach: standard practice to engage with a broad range of presidential candidates when programs straddle elections; mission reports broad appreciation from candidates for IMF support.

Source: IMF — Helping Ecuador Confront the Pandemic