## Ecuador and the IMF -- Address by Stanley Fischer

_IMF News, May 19, 2000_

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## Bibliographic details
- Published: May 19, 2000

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### Background and lead-up to dollarization
- Ecuador's decision to dollarize was taken in January 2000 by then President Jamil Mahuad.
- Historical context and political fragmentation:
  - Deep split between highlands (Quito) and coast (Guayaquil) hampered coherent economic policy.
  - 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.
- Key macroeconomic indicators and events leading into the crisis:
  - Mid-1990s: GDP was about $20bn; exports amounted to 20 percent of GDP; half these exports were oil.
  - By 1998 GDP had fallen to less than $18.5bn.
  - By 2000 GDP had fallen to $13 billion—for a population of 12.5 million.
  - 2001 GDP will probably rise to more than $17 billion.
  - Ecuador's last good year economically was in 1994: GDP grew by 4 percent and inflation was 27 percent.
  - Public sector deficit rose from 2.6 percent of GDP in 1997 to 6.2 percent in 1998.
  - External debt was more than $16bn.
- Policy and political disruptions:
  - Recurrent banking-sector problems addressed through ad hoc actions (including a deposit freeze in March 1999).
  - Political instability: frequent changes in leadership (Bucaram ousted, interim president Fabian Alarcón, later Jamil Mahuad).
  - 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.
  - Devaluation of the exchange rate band by 15 percent; $250m in intervention failed to save the band.

### Economic deterioration and social impact
- Financial and output deterioration:
  - The sucre lost almost 80 percent of its dollar value in the 16 months since Mr. Mahuad had taken office.
  - Ecuador entered a recession that saw output decline by more than 7 percent in 1999.
- Social outcomes:
  - The proportion of the population in poverty reached almost 45 percent in 1999, up by a third since 1995.
  - Unemployment had doubled to 17 percent since the beginning of 1998.
- Banking-sector crises and micro events:
  - 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.

### IMF engagement and programs
- Timeline of IMF interactions:
  - President Mahuad visited the IMF in September 1998 preferring to manage without an IMF program initially.
  - IMF Article IV discussions began in late September 1998; protracted negotiations followed with missions in Quito frequently between November 1998 and March 2000.
  - 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.
- IMF support after dollarization:
  - Following dollarization, IMF worked closely with Ecuadorian authorities and supported the program.
  - IMF Executive Board approved a 12-month standby credit of $304m on April 19.
  - 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.
- IMF stance on lending while in arrears:
  - 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.

### Debt restructuring and creditor negotiations
- Private-sector debt exchange:
  - 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.
  - Some 97 percent of all bondholders accepted the exchange offer.
  - 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.
- Official creditor support:
  - In September, Paris Club creditors agreed to grant Ecuador a rescheduling/deferral of about $800 million in arrears and maturities due in 2000.
- IMF comments on creditor coordination:
  - IMF did not advise Ecuador to default on specific payments; private sector involvement was necessary but decisions on specific payments remained the authorities’ responsibility.
  - A flexible approach to coordinating private creditors is necessary in cases of large short-term financing needs or unsustainable medium-term debt profiles.

### Early outcomes of dollarization and immediate effects
- Financial stability indicators:
  - 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.
- Political ramifications:
  - President Mahuad announced dollarization on January 9; he was ousted on January 21.
  - Gustavo Noboa, the successor, opted to stick with dollarization.
  - Demonstrations and occupation of Congress by indigenous groups (with some army support) underscored the need for national cohesion.
- Legislative and programmatic developments:
  - 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.

### Remaining challenges and policy recommendations
- Key structural needs identified:
  - Build a strong banking system; comprehensive revamping of the financial sector.
  - Put in place other monetary and fiscal institutions compatible with dollarization.
  - Assemble a durably stable legislative coalition to sustain reforms and political stability.
- Specific fiscal and tax priorities:
  - Implement a sensible tax reform to replace highly distortionary taxes (the financial transactions tax and an import tariff surcharge).
  - Avoid excessive reliance on oil revenues.
- Debt and corporate restructuring:
  - Implement corporate debt restructuring that does not bail out large borrowers at taxpayers' expense.
- Social policy and growth:
  - Policies should invest in critical social sectors to support sustainable growth and political stability.

### Conclusion and caution
- 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.

*Stanley Fischer, First Deputy Managing Director, International Monetary Fund — Hoovers Institution Conference on Currency Unions, Palo Alto, California; May 19, 2000 (edited version).*

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## References

- [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)
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- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051900_