Public Information Notice: IMF Concludes Article IV Consultation with Ecuador
IMF News, September 7, 2000
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- Published: September 7, 2000
Background and crisis drivers
- Major economic and financial crisis in 1999 after several years of weak macroeconomic performance.
- Principal contributory factors:
- Failure to deal in a timely manner with emerging weaknesses in the banking system.
- External shocks: decline in world oil prices; turbulence in financial markets following the 1997–98 Asian crisis; El Niño weather phenomenon.
- Policy weaknesses: public sector deficits and an expansionary monetary policy.
- Lack of progress in structural reform.
Economic developments and macroeconomic outcomes
- Output and prices:
- Real GDP growth: about 2½ percent a year during 1993–97; stagnated in 1998; fell by about 8 percent in 1999.
- 12-month inflation in consumer prices: averaged 31 percent a year in 1994–98; accelerated to 52 percent by 1999; reached 102 percent in July 2000.
- External sector:
- External current account deficit widened to 11 percent of GDP in 1998 (oil and nontraditional exports fell; imports rose).
- In 1999 private capital outflows forced external current account to a surplus of 7 percent of GDP; imports contracted by 46 percent (in U.S. dollar terms).
- Public finances:
- Combined public sector deficit: about 2½ percent of GDP a year in 1995–97; 6 percent of GDP in 1998; 7 percent of GDP in 1999.
- Government stopped payments on Brady bond obligations in September 1999 and defaulted on its Eurobond obligations in October 1999.
- Monetary and exchange rate developments:
- Growth of the monetary base: 136 percent in 1999, compared to an average of 34 percent during 1995–97.
- Sucre depreciation: 54 percent during 1998; 200 percent during 1999; a further 25 percent in the first week of 2000.
- Real effective exchange rate depreciation: about 47 percent from December 1997 to January 2000.
- Banking sector:
- Weaknesses due to inadequate supervision, connected lending, and high exposure to currency risk.
- 16 financial institutions, accounting for about 65 percent of the system’s onshore assets, were intervened or closed.
- Bank credit to the private sector fell by 27 percent in nominal terms in 1999.
- One-week bank holiday and deposit freeze in March 1999; unfreezing of demand and savings deposits began in August 1999, with estimated one-third of freed deposits going into capital flight.
Policy program (2000) and implementation
- Objectives: restore confidence in economic management, stem decline in activity, and lay basis for recovery.
- Major policy components:
- Dollarization (legal basis: Ley Fundamental para la Transformación Económica approved March 9, 2000).
- Significant fiscal tightening.
- Comprehensive bank restructuring strategy.
- Wide-ranging structural reforms to increase labor market flexibility and private sector participation.
- External support: IMF Stand-By Arrangement approved April 19, 2000; financial resources from international financial institutions.
- Developments under the program:
- Economic conditions stabilized; signs of gradual recovery.
- Dollarization proceeded rapidly and calmed financial markets; significant improvement in bank liquidity.
- Inflation remained high due to pass-through from prior depreciation and domestic fuel price increases in May 2000.
- Debt exchange on August 23, 2000 for Brady and Eurobonds resulting in a debt reduction of about 40 percent.
Executive Board assessment — findings and risks
- Positive assessments:
- Improved economic performance in the first half of 2000: stronger fiscal and external positions than anticipated, improved banking system liquidity, and indications of economic recovery.
- Dollarization and the successful debt exchange seen as indicative of a gradual return of confidence.
- Remaining fragility and risks:
- Situation remains fragile; recent improvement partly attributable to higher world oil prices.
- Directors saw risks to authorities’ objectives as still substantial though diminished recently.
- Emphasized needs and policy priorities:
- Broad and durable consensus to sustain gains; keep fiscal deficit low; create a robust financial system; deepen structural reforms.
- Tight fiscal stance for the foreseeable future, with substantial primary surpluses and lower overall deficits to support dollarization in the near term and achieve medium-term sustainability.
- Comprehensive tax reform to increase non-oil tax revenues and reduce earmarking of tax revenues; compensate expected revenue loss from elimination of some taxes and duties by broadening tax base, changes in VAT and income tax rates, and introduction of excises on domestic fuel. These measures should be included in the budget proposal for next year.
- Priority to reduce subsidies on domestic fuels further and maintain tight control over expenditures.
- Improve targeting of public expenditures and strengthen capacity to implement capital projects.
- Move quickly to eliminate domestic payments arrears.
- Give high priority to pension reform proposal to move the system to a sounder financial footing and reduce its drain on public finances.
- Accelerate and implement banking strategy to achieve an efficient, competitive, adequately capitalized financial system able to intermediate resources in a dollarized economy; remove usury interest rate ceiling and restrictions on bank fees early.
- Aggressive privatization combined with measures to improve labor market functioning; early steps toward a more liberal trade regime could complement reforms.
- Reach agreement with Paris Club creditors at the September meeting and conclude negotiations with foreign banks to stabilize and rebuild trade credit lines and related exposure.
Selected key statistics (as presented)
- National income and prices (annual percentage change)
- GDP at constant prices: 1996: 2.0; 1997: 3.4; 1998: 0.4; Prel. 1999: -8.0; Proj. 2000: 0.5
- Real per capita GDP: 1996: -0.1; 1997: 1.3; 1998: -1.6; Prel. 1999: -9.8; Proj. 2000: -1.4
- Consumer prices (average): 1996: 24.4; 1997: 30.6; 1998: 36.1; Prel. 1999: 52.2; Proj. 2000: 100.6
- External sector (annual percentage change)
- Exports, f.o.b.: 1996: 11.1; 1997: 7.4; 1998: -20.2; Prel. 1999: -1.0; Proj. 2000: 3.6
- Petroleum exports: 1996: 13.8; 1997: -12.3; 1998: -40.7; Prel. 1999: 47.5; Proj. 2000: 35.3
- Imports, f.o.b.: 1996: -2.7; 1997: 18.2; 1998: 11.4; Prel. 1999: -50.1; Proj. 2000: 11.7
- External current account deficit (in percent of GDP) 1/: 1996: 0.7; 1997: 11.0; 1998: -6.3; Prel. 1999: -2.0
- External debt (end-of-year, in percent of GDP) 1/2/: 1996: 76.2; 1997: 76.9; 1998: 82.2; Prel. 1999: 116.2; Proj. 2000: 135.0
- Net official reserves 3/: 1996: 5.0; 1997: 4.6; 1998: 3.3; Prel. 1999: 4.4; Proj. 2000: 2.6
- Real effective exchange rate (depreciation -): 1996: 1.4; 1997: 14.2; 1998: -8.6; Prel. 1999: -36.4
- Nonfinancial public sector (in percent of GDP)
- Nonfinancial public sector balance 4/5/: 1996: -3.1; 1997: -2.6; 1998: -6.2; Prel. 1999: -6.0
- Public external debt 1/2/: 1996: 65.9; 1997: 64.2; 1998: 66.2; Prel. 1999: 97.2; Proj. 2000: 111.0
- Money and credit (annual percentage change)
- Banking system net domestic assets 6/: (table entries not shown)
- Credit to private sector 6/: 1996: 15.6; 1997: 23.7; 1998: 5.9; Prel. 1999: -20.3; 2000: 1.1
- Money and quasi-money (M2) 8/: 1996: 38.0; 1997: 28.6; 1998: 26.8; Prel. 1999: 19.8; Proj. 2000: 10.5
- Interest rate (90-day CDs, in percent) 9/: 1996: 33.5; 1997: 31.5; 1998: 49.5; Prel. 1999: 47.7
Source: Public Information Notice: IMF Concludes Article IV Consultation with Ecuador (September 7, 2000), IMF External Relations Department.