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The latest IMF report on Ecuador is optimistic

Published on October 12, 2021

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The IMF published the report detailing the results of the latest mission to Ecuador. It includes details on the current situation of the country and suggested policies for the management of resources in the future.

 The economy of Ecuador will grow on average 2.8% annually between 2022 and 2026 , according to the International Monetary Fund (IMF). Last Thursday, October 7, 2021, the IMF published the report detailing the results of the latest mission to Ecuador—a visit to monitor the economic policies of member countries. The document combines the second and third revision of the agreement that Ecuador has with the Fund.

What the report says about Ecuador

The published report says that from July 2020 to the present, the Ecuadorian authorities have “significantly expanded social assistance programs.” Since that month, more than 440,000 low-income families have been added to one of these programs, such as the Human Development Bonus.

The document says that the ongoing pandemic and gradual economic recovery “justify continued support from the economy this year.” In the future, the text says, the authorities undertake to guarantee fiscal sustainability, the reduction of public debt and “the creation of buffers through a consolidation strategy” to protect the most vulnerable, which will be “complemented with a progressive tax reform.”

In addition, the report says that in the medium term it is key to achieve spending objectives that include increasing social spending and reducing expenditures. It also said that it considers it important that structural reforms have been implemented to strengthen dollarization by having approved the Law for the Defense of Dollarization that was approved in April 2021, in the government of then-president Lenín Moreno, and that reforms the Organic Monetary Code and Financial.

Fund Recommendations

The report concluded that the historic recession in 2020 – which was triggered by the Covid-19 pandemic – was milder than expected. Last year the country’s economy decreased by 7.8%, less than the 10.9% expected by the IMF. However, the recovery “has been timid so far in 2021.” In addition, it says that progress on vaccination and the global economic outlook “should support the recovery going forward.” Risks to the country’s economic outlook “remain high, though balanced,” the report says.

The policies suggested by the Fund for Ecuador are:

  • Improve fiscal sustainability with equity through progressive tax reform. The report says that the government was planning to send this legislative proposal to the Assembly for approval. [The document – called the Law for the Creation of Opportunity project – was sent to the legislature on September 24, 2020. But since that time, they have refused to move it forward.]

The government proposed to eliminate some taxes, increase the income tax for those who earn more than $2,000 a month and established special contributions for the people and companies that earned the most. However, the bill was not qualified to be processed by the Assembly because it dealt with issues requiring changes in multiple laws, and was not cohesive in its attempt to focus on a single issue, as required by the constitution.

  • Prioritize spending by reducing the growth of the State payroll; implementing more efficient measures to save and improve public purchases; evaluate the management of public investment, among other things.
  • Manage public resources transparently and improve trust in institutions by implementing a new public finance management (PFM) framework. In addition, the IMF report says that the Ecuadorian authorities “intend” to conduct a public spending review that will include assistance from the IMF and the World Bank.
  • Review the pension system. The report says that the Ecuadorian Ministry of Economy and Finance and the World Bank did an analysis and found that the system “is too generous in payments compared to contributions.” That is why the report says that the authorities are working on a reform to “avoid major imbalances in the medium term.”
  • Stimulate investments in Ecuador by creating legal security and improving borrowing costs in the country.

In a statement published on Thursday, the Ecuadorian government said that “with the support of the IMF” the country will have “a stronger economy and will be able to better face external shocks such as falls in oil prices,” that was one of the aggravating factors of last year’s economic crisis. In addition, the government said that with the support of the IMF they will be able to protect dollarization and increase the delivery of bonds to vulnerable families.

The current relationship between Ecuador and the IMF

In September 2020, Ecuador reached an agreement with the IMF within the framework of the Expanded Service of the Fund (SAF) to receive $6.5 billion in 27 months. A year later, in September 2021, the Ecuadorian government and the IMF announced that they had reached a new agreement. The document has updated conditions appropriate to the priorities of the government of Guillermo Lasso, who assumed the presidency in May 2021, months before the IMF mission arrived in Ecuador.

The agreement contemplates that Ecuador will receive a total of approximately $1.5 billion in 2021 that will be distributed as follows:

The first disbursement of $802 million arrived last Wednesday.

The second disbursement made by the IMF will be delivered at the end of the year for an amount of $700 million.

By 2022, Ecuador will also receive more disbursements worth one billion dollars.

In total, in the remainder of the year and at the beginning of the next, $4.5 billion will come to Ecuador from the international community – such as the IMF, the Inter-American Development Bank, the Development Bank of Latin America (CAF), various others of anticipated disbursements.

 

2 Comments

  1. You can bet things will go downhill if the incompentent and corrupt partisans in the assembly bring him down for the crime of having been a successful businessman who divested himself of his investments before becoming President as prescribed by law. The Correistas and Pachakutic are completely incapable of running the country and will crash the economy if the succeed in impeaching Lasso without valid cause.

    Reply
  2. Ecuador has effectively invited the wolf into the hen house.

    Reply

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