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IMF is “open” to adjusting its agreement with Ecuador’s next president

Published on February 10, 2021

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The International Monetary Fund (IMF) is “open” to adjusting the program with Ecuador with the new president emerging from the ballot, “if the government so wishes,” the director of the Western Hemisphere Department of the Fund, Alejandro Werner, said on Monday.

“The Fund is always open to modifying programs,” Werner said in a video press conference.

After the presidential elections on Sunday in Ecuador, the socialist (and ally of former president Rafael Correa) Andrés Arauz, will have to contest a ballot on April 11 with another finalist, which has yet to be settled between the leftist indigenous Yaku Pérez and the right-wing former banker Guillermo Lasso.

Both Arauz and Pérez have questioned Ecuador’s agreement with the IMF reached by current president Lenín Moreno, who did not run for re-election.

Asked about the possibility of renegotiating the pact, Werner assured that the IMF is always willing “to find a way in which to frame the priorities of different governments” to achieve economic stability in the countries.

“From our side there is obviously an important opening to sit down, to analyze what will be the new program of the government (…) of Ecuador once it is determined who is going to be the next president, and work with them in case the government wants it, to find a policy framework that can be supported by an IMF financial program,” Werner said.

In September, the IMF approved a 27-month loan for Ecuador under the Expanded Facility Service (SAF), for some $6.5 billion, of which it has already delivered $4 billion. The loan supports a reform plan with austerity and anti-corruption measures in the Andean country.

Arauz said in an interview with AFP that a possible government of his could not comply with the current conditions agreed to with the IMF “because they would directly attack the pockets of Ecuadorian families.”

“If the International Monetary Fund wants to join our (government) plan, we welcome that support,” he said.

Arauz, says that he has met with representatives of the IMF to tell them that, if he comes to power, he will not comply with the agreement signed by the current Government, but will present his government’s own plan based on the reactivation of consumption.

“We have told them that the recovery of public accounting will be done gradually but respecting the dignity of Ecuadorian families. And they have said that it is something rational, which is what the whole planet is doing…”

From his side, Pérez called for a “review” of the loan with the IMF during the electoral campaign. “When we are a government, we will have to review and see if they are acts that are harmful to the interests of Ecuador,” he said on Twitter about what was negotiated by Moreno.

Although it is a commitment assumed by the State, he says that the country is not able to comply with “conditions that are completely wrong.”

For example, he says that the eventual VAT increase from 12% to 15% is not viable. “We are not going to submit to raising taxes. What’s more, our proposal is to lower the VAT to 10%, so that there is more fresh money, and the productive apparatus can be reactivated.”

Lasso on the other hand, has said, “We are not going to increase VAT.” His proposal to fund the deficit is to double oil production in the medium term.

“Ecuador has 4.8 billion barrels of oil in proven reserves and produces 500,000 barrels per day, Colombia has half the reserves, and produces twice … It is realistic to consider doubling production in the medium term so that with these revenues, [we can] solve the fiscal deficit without increase taxes, without continuing to indebt the country.”

He said will have no problem talking to the IMF, “but the IMF will follow what we are going to do, we will not do what it says.”

IMF has focused on Latin America during pandemic

The coronavirus pandemic has affected the entire world and has caused many problems, both in health and in other areas of life for each person.

One of the greatest effects, after the pain caused by the death of more than 2.3 million people, is in the labor, productive and economic fields in most countries.

In this context, more than half of the funds committed by the IMF to counteract the crisis derived from the pandemic are concentrated in Latin America (only Brazil and Uruguay have not requested support from the organization).

“I want to congratulate Latin America for taking fiscal measures to counteract the pandemic from the outset, also using different Fund instruments such as lines of credit or emergency financing,” said Kristalina Georgieva, the managing director of the IMF.

In total, the organization has committed more than $127 billion of the total of about $250 billion committed globally, to Latin America.

Among them, it has opened credit lines with Chile, for $23,000 billion, and with Peru for $11 billion. It has also renewed the existing line of credit with Mexico for $61 billion. It has also explicitly offered support to all the Central American countries (excluding Belize).

Even Costa Rica and Panama, two of the most prosperous regional economies, have knocked on the IMF’s doors.

In Latin America, only Brazil and Uruguay have not resorted to the Fund to cushion the economic blow of the pandemic. Argentina is currently immersed in negotiations for a new rescue program, and Venezuela, which maintains a strained relationship with the organization is doing the same.

Asked about the possibility of a new debt crisis in the region, Georgieva was cautious.

“The loans and credit have helped, despite the terrible impact of the pandemic, to mitigate the crisis for now, although it has had as a consequence the rise in debt levels in Latin America,” she explained.

She said that the debt in the region has grown by ten percentage points, to 79% of GDP, in just one year.

For the director of the Fund, however, the greatest danger is the low growth of the region, which is why she called for reforms to boost the economy to not be left behind globally.

“We forecast recoveries and positive growth in Latin America, we see that the 4% forecasts will help debt obligations and stabilize the situation in this regard, but it is also true that growth compared to 5.5% globally is lower,” warned Georgieva.

Low growth could still lead to economic crisis

IMF’s Werner warned that the Latin American and Caribbean region will not recover the level of its economic activity prior to the coronavirus pandemic until 2023, mainly due to the strong impact of the health crisis on employment.

“According to the forecast, the region’s product won’t return to pre-pandemic levels until 2023, and per capita gross domestic product (GDP) will do so in 2025, that is, later than other regions of the world,” he said.

In a report, by a team led by Werner, the IMF explained that despite the fact that the economies of Latin America and the Caribbean began to reverse the initial economic devastation left by the pandemic in early 2020, the worsening of cases at the end of that year, “Threatens to frustrate an already uneven recovery and to compound the enormous social and human costs.”

This situation led several governments in the region to reintroduce stricter containment measures, orders that also affected the economic activity of these countries with high rates of informal work.

Despite this context, the IMF raised its regional growth forecast for 2021 to 4.1% on Monday, compared to the 3.6% calculated in October, in view of the stronger results than expected in 2020, the expectation of expanded vaccination campaigns, the best growth prospects for the United States and the increase in the prices of some raw materials.

Beyond the macroeconomic forecasts, the Fund regretted that the social and human costs of the pandemic “have been enormous” so far, and they warned that “they cast a great shadow on this latest forecast.”

In this sense, they pointed out that it is estimated that more than 17 million people have entered a situation of poverty within the region, while employment remains below pre-crisis levels and “it is probable” that inequality has increased in most countries.

In fact, the IMF stressed that its aggregate calculations for the region “hide important differences between countries,” since growth for this year has been revised upwards in Brazil, Mexico, Chile, Colombia and Peru, but downwards in the Caribbean region, from 4% to 2.4%, as the resumption of travel and tourism activities, vital for the region, has taken much longer than expected.

“The inability to contain new infections, the imposition of new confinements and the consequent change in people’s behavior will be a drag on growth,” they added.


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