Press Release No. <a name="P17_75"></a>05/253

"A mission of the IMF visited Quito and Guayaquil during November 7-16 for the 2005 Article IV consultation discussions with the Ecuadorian authorities. The mission met with His Excellency, President Alfredo Palacio; Mr. Wilfredo Lucero, President of the National Congress; Ms. Magdalena Barreiro, Minister of Economy and Finance; Mr. Ivan Rodriguez, Minister of Energy and Mines; officials of various ministries, the Central Bank of Ecuador (CBE) and other public institutions; and representatives of the private sector and civil society. The mission would like to thank those involved, particularly its counterparts at the Ministry of Economy and Finance and the CBE, for their openness and generous assistance.

"The mission estimates that output growth would exceed 3 percent in 2005, with the non-oil economy expanding by 3.5 percent. However, inflation has risen in recent months and is now projected to close the year at almost 4 percent, largely reflecting sharp increase in public spending and credit to the private sector. On the basis of government spending plans contained in the 2006 budget proposal and current international futures market prices for oil, the mission projects that economic growth would decelerate slightly in 2006.

"The mission stressed that much needs to be done to lower macroeconomic vulnerabilities and bolster financial stability. In this connection, the mission supported the economic team's efforts to maintain prudent fiscal management in the midst of a difficult political environment. The mission emphasized that the emergence of inflation pressures and the expected decline in international price of petroleum underscored the importance of resisting demands to increase current government spending above that contained in the budget proposal and to rigorously prioritize capital spending. In this context, the mission advised against re-classifying oil revenue as current revenue, which would complicate efforts to control spending. It also emphasized that steps were needed to curtail the high and rising government spending on subsidies for domestic consumption of petroleum products (with domestic fuel prices frozen since January 2003) and allocate a portion of these resources toward the government's priority economic and social programs.

"Fiscal reforms are essential to ensure economic stability, reduce dependence on volatile oil revenues, and to make room for greater sustainable spending on essential social programs and economic infrastructure. Toward this end, the mission supported the authorities' intentions to strengthen the public finances, including through measures to strengthen tax administration and widen the tax base and to lengthen the maturity and lower the cost of public debt. The mission also pointed to the need to improve the institutional framework for fiscal policy.

"The mission also encouraged the authorities to develop a broad consensus in favor of economic reforms to bolster external competitiveness, and achieve high, sustainable output and employment growth. Such reforms are needed so that Ecuador can take greater advantage of the opportunities provided by the expected increased opening of foreign markets to Ecuadoran exports in the years ahead in the context of bilateral and multilateral trade liberalization. Priority needs to be given to reforms that would (1) boost efficiency in the electricity, telecommunications, and petroleum sectors, including through depoliticizing the administration of the public enterprises and encouraging private investment; and (2) strengthen financial system supervision, and achieve durable improvements in financial system efficiency and reductions in interest rates. The mission cautioned against initiatives that could disrupt financial intermediation, jeopardize the health of the financial system, and put depositors at risk.

"The mission agreed to continue cooperating closely with the authorities, including via regular assessment of the government's 2006 economic program. We look forward to continue helping Ecuador achieve its economic and social development objectives."