Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Ecuador
IMF News, February 28, 2008
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- Published: February 28, 2008
Background
- Date: January 25, 2008 — the Executive Board concluded the Article IV consultation with Ecuador.
- Macroeconomic performance in recent years was strong, supported by favorable global conditions.
- 2007 developments:
- Growth is estimated to have declined, owing mainly to a decline in oil output from long-standing underinvestment at the state oil company and a tapering off in non-oil growth.
- The decline in non-oil growth was driven by a decline in business confidence due to uncertainties over the new constitution and pending decisions on key policy issues.
- Inflation remained low at international levels, with a slight pick up in the last part of the year.
- External and fiscal positions:
- Supported by higher oil prices, both the external and fiscal positions continued to be healthy.
- For 2007, the external current account surplus is estimated to have been roughly unchanged from the previous year.
- The non-financial public sector primary surplus weakened significantly, mainly due to a strong increase in capital spending.
- Public debt to GDP ratio has declined dramatically with sustained primary surpluses and robust growth in recent years.
- Financial sector:
- Banking system soundness indicators remained generally positive.
- Deposits and credit to the private sector continued to grow but at a slower pace than in 2006.
- Sovereign spread (EMBI) spiked at the beginning of the year on concerns over the authorities' debt service policies, then declined significantly but remained the highest in the region.
- Government objectives: comprehensive political and economic changes to reduce poverty and promote equity-enhancing growth by improving infrastructure and the efficiency of the financial system.
- Discussions covered fiscal and financial vulnerabilities, fiscal space for investment and social spending, and lowering the cost and increasing the availability of credit.
- It is expected that the next Article IV consultation with Ecuador will be held on the standard 12-month cycle.
Executive Board Assessment — key findings
- Directors welcomed Ecuador's broadly positive macroeconomic performance:
- High oil prices and a depreciating U.S. dollar supported robust growth over the last five years.
- Inflation declined to international levels.
- External current account has been in surplus since 2005.
- Public debt ratio has declined significantly.
- Government accumulated large deposits in the oil funds.
- Concerns and constraints:
- Recent sharp deceleration of growth due to a drop in business confidence and private investment.
- Investment and production trends have lagged behind other economies in the region, in particular in the oil sector.
- Competitiveness:
- The real effective exchange rate has been broadly in line with macroeconomic fundamentals.
- Other indicators, including the healthy performance of non-oil exports, do not point to competitiveness problems under dollarization.
- Fiscal area:
- Directors welcomed plans to tackle structural weaknesses in the fiscal area.
- Recent legislation aimed at improving tax administration and reducing exemptions will help lessen oil revenue dependence.
- Spending quality and subsidies:
- Directors welcomed improvements in public financial management and public investment capacity upgrades.
- Plans to introduce comprehensive reforms in the state-owned oil and electricity companies were viewed positively.
- Making the budget cost of fuel subsidies transparent was seen as a step toward developing a strategy and timetable for elimination of these subsidies.
- Directors recommended addressing social needs through carefully targeted income transfer measures rather than generalized subsidies.
- Financial system:
- Directors agreed the financial system is liquid and bank soundness is largely well secured.
- Need to improve efficiency by lowering the cost of credit and improving access to credit.
- Welcomed plans to establish an augmented liquidity fund, a strengthened deposit insurance scheme, and reform the bank resolution framework.
- Cautioned that the new tax on foreign exchange remittances abroad could have negative effects on financial system intermediation.
- Called for improvements in supervision, including ensuring autonomy of the supervising agency; strengthening legal protection for supervisors; and implementing an appropriate supervisory framework for small financial cooperatives not under the superintendent of banks.
Policy recommendations and priorities
- Implement promptly the envisaged reform measures to reduce macroeconomic and financial vulnerabilities and reduce uncertainties.
- Improve the business climate, maintain sound fiscal policies, and continue structural reforms to reinforce long-run sustainability.
- Combine fiscal measures with spending policies that safeguard macroeconomic stability.
- Support for increasing social and infrastructure spending, while keeping non-priority spending under control to avoid inflationary pressures and preserve fiscal space for priority projects given volatile oil prices.
- Formally approve a medium-term fiscal framework to reduce risks of procyclical and unsustainable policies and to transparently identify the path to achieve the authorities' medium-term rule of a zero non-oil current deficit.
- Ensure spending is of high quality through public financial management improvements and public investment system upgrades.
- Develop a strategy and timetable for elimination of fuel subsidies to make space for better-targeted poverty-reduction spending.
- Improve financial system efficiency and access to credit; strengthen supervision and legal protections for supervisors; implement supervisory framework for small cooperatives.
Selected Economic and Financial Indicators (Annual percentage changes; unless otherwise indicated)
- Table years: 2003, 2004, 2005, 2006, 2007 (Proj.)
- National income and prices:
- Real GDP: 3.6, 8.0, 6.0, 3.9, 1.8
- Real GDP per capita: 2.1, 6.5, 4.5, 2.4, 0.3
- Consumer price index end-of-period: 6.1, 2.0, 3.1, 2.9, 3.3
- Real effective exchange rate (avg.; depreciation -) 1/: -4.9, -4.3, -0.5, -5.6, (November data for 2007)
- Banking system:
- Liabilities to the private sector: 18.7, 27.1, 21.1, 16.8, 14.3
- Credit to the private sector: 28.6, 25.9, 19.1, 15.2
- EMBI Ecuador (bps, end of period): 799, 690, 669, 920, 614
- Public finances (In percent of GDP):
- Revenue: 24.1, 25.1, 24.2, 27.4, 28.8
- Non-interest expenditure: 20.1, 20.4, 21.4, 21.7, 25.0
- Primary balance (deficit -): 4.4, 4.6, 5.8, 3.8
- Overall balance (deficit -): 1.6, 2.2, 0.7, 3.7
- Total public debt: 49.9, 43.1, 38.5, 33.9, 32.0
- Domestic: 9.7, 9.2, 9.3, 8.4
- External: 40.2, 29.2, 24.7, 23.5
- Saving investment balance:
- National saving: 20.0, 24.6, 26.7, 27.2
- Gross investment: 21.5, 23.4, 23.8, 23.1, 24.0
- Foreign saving = - external current account balance: 1.5, 1.7, -0.8, -3.6, -3.3
- Sources cited in table: Central Bank of Ecuador; Ministry of Finance; and IMF staff estimates and projections.
Public Information Notice (PIN) No. 08/27 — February 28, 2008 — Executive Board conclusions on the 2007 Article IV consultation with Ecuador.