Press Release No. 19/84

On March 11, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Ecuador. At the same time, the Board approved a three-year Extended Arrangements under the Extended Fund Facility; a press release on this was issued separately.

The 2014 oil price decline exposed the underlying structural imbalances of Ecuador’s economy, including the very high non-oil primary fiscal deficit and rising public debt. Following several quarters of economic contraction in 2015 and 2016, the economy returned to growth, with a rebound of 2.4 percent in 2017. Since then, however, growth has decelerated and is forecast to be 1.1 percent for 2018. An expansion in domestic demand has been met through a rise in imports, particularly following the removal of tariff safeguards. Cumulative inflation was negative for much of 2018 reflecting slow growth, the overvaluation of the real exchange rate, and broader imbalances in the economy.

The government lowered the non-oil primary deficit (including fuel subsidies) from 7.6 percent of GDP in 2016 to 5.3 percent of GDP deficit in 2018. The adjustment that took place in 2018 was largely a product of a reduction of capital spending and the temporary effects of a tax amnesty during the year.

The authorities plan to reduce the non-oil primary balance by 5 percent of GDP over the next three years. There are likely to be near-term costs to growth from the planned fiscal consolidation, but supply-side reforms are expected to improve growth prospects over the medium term. Inflation is likely to remain subdued throughout the next few years. This, alongside nominal wage restraint and improving productivity, should steadily erode the overvaluation of the real effective exchange rate, which will allow the maintenance of a current account surplus over the medium term. Fiscal consolidation will also enable a moderate build-up of reserves, from very low levels.

Executive Board Assessment [2]

Directors commended the authorities for their efforts to transform the economy and address Ecuador’s complex macroeconomic and structural challenges. Directors welcomed the authorities’ focus on strengthening the fiscal, financial, and institutional foundations, and emphasized that strong commitment to sound policies and reforms will be critical to reducing balance of payments vulnerabilities, consolidating macroeconomic stability, putting dollarization on a stronger footing, and fostering job creation and sustainable growth.

Directors welcomed the authorities’ commitment to restore fiscal discipline and sustainability. They agreed that adjustment efforts should focus on a combination of expenditure and revenue measures. Directors saw need for a realignment of the public sector wage bill, careful reduction in untargeted subsidies, and reprioritization of capital and goods and services spending. They also emphasized the importance of making the tax system more equitable, growth friendly, and simpler. Directors acknowledged that while these fiscal efforts might impact growth in the near term, they are key to sustained and equitable growth over the medium term.

Directors welcomed the focus on lowering the debt to GDP ratio and complementing the existing expenditure growth rule with binding annual targets for the non oil primary balance. They concurred that the publication of timely and periodic in year reports to assess compliance with fiscal rules would further strengthen credibility. Over time, better public financial management, budget procedures, and procurement practices, combined with more rigorous fiscal controls, would make fiscal policy more effective.

Directors welcomed the authorities’ commitment to protect the poor and the most vulnerable. To manage the impact of the economic transition and maintain societal support for the economic program, Directors encouraged the authorities to move quickly to expand the eligibility of social assistance programs, with better targeting and a higher level of benefits. Over the longer term, they called for action to improve education and health outcomes.

Directors underscored the importance of supply side reforms in restoring competitiveness. A more efficient tax system, public wage restraint, enhanced access to the formal labor market through improved hiring processes, and better governance will all contribute to a vibrant, private sector led growth model. Directors emphasized that there remains scope to remove trade barriers, improve the business climate, and create opportunities for greater private sector involvement.

To support dollarization, Directors endorsed measures to build financial resilience, remove impediments to effective financial intermediation, and strengthen the central bank, including through building up international reserves. To better anticipate and adapt to shocks, Directors recommended increasing the oversight of banks and cooperatives and building crisis preparedness and contingency planning capabilities. Directors considered that simplifying the complex system of liquidity regulations and gradually phasing out interest rate ceilings would support greater access to financial intermediation. They commended the authorities’ efforts to make the central bank more operationally independent, to strengthen its governance, and to restrict it from providing fiscal financing. Directors encouraged steps to strengthen the effectiveness of the AML/CFT framework.