{ "title": "Ecuador and the IMF -- Address by Stanley Fischer", "publication": "IMF News, May 19, 2000", "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051900", "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051900", "overlayPath": "/en/news/articles/2015/09/28/04/53/sp051900/index.md", "summary": "Hoover Institution Conference on Currency Unions, Palo Alto, California", "publishDate": "2000-05-19", "sections": [ { "heading": "Background and lead-up to dollarization", "content": "- Ecuador's decision to dollarize was taken in January 2000 by then President Jamil Mahuad.\n- Historical context and political fragmentation:\n - Deep split between highlands (Quito) and coast (Guayaquil) hampered coherent economic policy.\n - El Niño in 1997 caused severe crop damage and destroyed infrastructure in the coastal region at a total cost of about 13 percent of GDP.\n- Key macroeconomic indicators and events leading into the crisis:\n - Mid-1990s: GDP was about $20bn; exports amounted to 20 percent of GDP; half these exports were oil.\n - By 1998 GDP had fallen to less than $18.5bn.\n - By 2000 GDP had fallen to $13 billion—for a population of 12.5 million.\n - 2001 GDP will probably rise to more than $17 billion.\n - Ecuador's last good year economically was in 1994: GDP grew by 4 percent and inflation was 27 percent.\n - Public sector deficit rose from 2.6 percent of GDP in 1997 to 6.2 percent in 1998.\n - External debt was more than $16bn.\n- Policy and political disruptions:\n - Recurrent banking-sector problems addressed through ad hoc actions (including a deposit freeze in March 1999).\n - Political instability: frequent changes in leadership (Bucaram ousted, interim president Fabian Alarcón, later Jamil Mahuad).\n - Policy reversals such as replacement of the income tax with a financial transactions tax in November 1998 and rollback of energy price increases under political pressure.\n - Devaluation of the exchange rate band by 15 percent; $250m in intervention failed to save the band." }, { "heading": "Economic deterioration and social impact", "content": "- Financial and output deterioration:\n - The sucre lost almost 80 percent of its dollar value in the 16 months since Mr. Mahuad had taken office.\n - Ecuador entered a recession that saw output decline by more than 7 percent in 1999.\n- Social outcomes:\n - The proportion of the population in poverty reached almost 45 percent in 1999, up by a third since 1995.\n - Unemployment had doubled to 17 percent since the beginning of 1998.\n- Banking-sector crises and micro events:\n - Run on Banco Progreso (the second largest bank in Ecuador in terms of assets) led to a five-day bank holiday and freezing of all deposits and loans in the bank for a year." }, { "heading": "IMF engagement and programs", "content": "- Timeline of IMF interactions:\n - President Mahuad visited the IMF in September 1998 preferring to manage without an IMF program initially.\n - IMF Article IV discussions began in late September 1998; protracted negotiations followed with missions in Quito frequently between November 1998 and March 2000.\n - Agreement on a program reached in August 1999 conditional on congressional approval and banking reforms; Letter of Intent delivered on September 29, 1999, coinciding with deferment of some Brady bond interest payments.\n- IMF support after dollarization:\n - Following dollarization, IMF worked closely with Ecuadorian authorities and supported the program.\n - IMF Executive Board approved a 12-month standby credit of $304m on April 19.\n - With additional multilateral support, Ecuador had around $900m available over the next 12 months, with up to $2bn possibly available from official lenders over the next three years.\n- IMF stance on lending while in arrears:\n - Willing to lend to Ecuador while it was in arrears to its private creditors on the basis of an agreed program and good faith negotiations with creditors." }, { "heading": "Debt restructuring and creditor negotiations", "content": "- Private-sector debt exchange:\n - Ecuador offered to exchange all of its Brady and Eurobonds with a combined face value of $6.5 billion for new 30-year and 12-year bonds.\n - Some 97 percent of all bondholders accepted the exchange offer.\n - The exchange produced substantial debt reduction by about 40 percent of the face value of the bond debt and significant cash flow relief in the initial years.\n- Official creditor support:\n - In September, Paris Club creditors agreed to grant Ecuador a rescheduling/deferral of about $800 million in arrears and maturities due in 2000.\n- IMF comments on creditor coordination:\n - IMF did not advise Ecuador to default on specific payments; private sector involvement was necessary but decisions on specific payments remained the authorities’ responsibility.\n - A flexible approach to coordinating private creditors is necessary in cases of large short-term financing needs or unsustainable medium-term debt profiles." }, { "heading": "Early outcomes of dollarization and immediate effects", "content": "- Financial stability indicators:\n - Early success of dollarization helped restore confidence in the banking system, promoting a rise in bank deposits and an increase in bank reserves with the central bank.\n- Political ramifications:\n - President Mahuad announced dollarization on January 9; he was ousted on January 21.\n - Gustavo Noboa, the successor, opted to stick with dollarization.\n - Demonstrations and occupation of Congress by indigenous groups (with some army support) underscored the need for national cohesion.\n- Legislative and programmatic developments:\n - The Noboa administration managed to muster support for a broad-based program of economic reform, symbolized by passage of the so-called \"trolleybus law\" through Congress." }, { "heading": "Remaining challenges and policy recommendations", "content": "- Key structural needs identified:\n - Build a strong banking system; comprehensive revamping of the financial sector.\n - Put in place other monetary and fiscal institutions compatible with dollarization.\n - Assemble a durably stable legislative coalition to sustain reforms and political stability.\n- Specific fiscal and tax priorities:\n - Implement a sensible tax reform to replace highly distortionary taxes (the financial transactions tax and an import tariff surcharge).\n - Avoid excessive reliance on oil revenues.\n- Debt and corporate restructuring:\n - Implement corporate debt restructuring that does not bail out large borrowers at taxpayers' expense.\n- Social policy and growth:\n - Policies should invest in critical social sectors to support sustainable growth and political stability." }, { "heading": "Conclusion and caution", "content": "- The decision to dollarize was taken in desperation and without many of the traditionally cited preconditions (unhealthy banking system, weak fiscal position).\n- Early success has been largely unexpected but fragile: much work remains to consolidate banking, fiscal and political institutions.\n- Final caution: it is less than a year since the dollarization decision and sustained success requires building institutional strength and political consensus.\n\nStanley Fischer, First Deputy Managing Director, International Monetary Fund — Hoovers Institution Conference on Currency Unions, Palo Alto, California; May 19, 2000 (edited version).\n\n---\n\n\n References\n\n- Argentina and the IMF\n- Ecuador and the IMF\n- Peru and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051900" } ], "bullets": [ "[Markdown version](/en/news/articles/2015/09/28/04/53/sp051900/index.md)", "[Structured JSON version](/en/news/articles/2015/09/28/04/53/sp051900/index.json)", "[Bundle manifest](/en/news/articles/2015/09/28/04/53/sp051900/bundle-manifest.json)", "Published: May 19, 2000", "Ecuador's decision to dollarize was taken in January 2000 by then President Jamil Mahuad.", "Historical context and political fragmentation:", "Key macroeconomic indicators and events leading into the crisis:", "Policy and political disruptions:", "Financial and output deterioration:", "Social outcomes:", "Banking-sector crises and micro events:", "Timeline of IMF interactions:", "IMF support after dollarization:", "IMF stance on lending while in arrears:", "Private-sector debt exchange:", "Official creditor support:", "IMF comments on creditor coordination:", "Financial stability indicators:", "Political ramifications:", "Legislative and programmatic developments:", "Key structural needs identified:", "Specific fiscal and tax priorities:", "Debt and corporate restructuring:", "Social policy and growth:", "The decision to dollarize was taken in desperation and without many of the traditionally cited preconditions (unhealthy banking system, weak fiscal position).", "Early success has been largely unexpected but fragile: much work remains to consolidate banking, fiscal and political institutions.", "Final caution: it is less than a year since the dollarization decision and sustained success requires building institutional strength and political consensus.", "[Argentina and the IMF](http://www.imf.org/external/country/ARG/index.htm)", "[Ecuador and the IMF](http://www.imf.org/external/country/ECU/index.htm)", "[Peru and the IMF](http://www.imf.org/external/country/PER/index.htm)", "[Speeches](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2015/09/28/04/53/sp051900/index.md", "json": "/en/news/articles/2015/09/28/04/53/sp051900/index.json", "bundleManifest": "/en/news/articles/2015/09/28/04/53/sp051900/bundle-manifest.json" }, "generatedAtUtc": "2026-09-27T09:54:36.944Z" }