Stronger Public Finances, Structural Reforms are key to Ecuador’s Growth

International Monetary Fund. External Relations Dept.
Published Date:
March 2006
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Despite a difficult political environment, Ecuador recorded a generally positive economic performance in 2005, the IMF said in its economic review. The strong growth in the oil sector that followed the completion of a pipeline in 2003 has tapered off, but high oil prices have helped underpin domestic demand. Employment growth remained sluggish, however, and inflation picked up in the second half of 2005 in the context of significant increases in bank credit and public spending. In addition, while banking intermediation grew strongly, it is still well below pre-crisis (1997) levels, and the overwhelming majority of deposits are at short maturities.

The IMF Executive Board expressed particular concern about the widening non-oil fiscal deficit. While welcoming the authorities’ plan to strengthen the fiscal policy stance in 2006, Directors stressed the need for a solid institutional framework for promoting fiscal discipline, reduced dependence on oil revenue, greater budget flexibility, and higher-quality government spending. They also urged the authorities to follow through on reforming the tax system and emphasized the need to control civil service wage costs, reform the pension system, reduce highly distortional fuel subsidies, and strengthen the social safety net to help those most vulnerable to subsidy cuts.

Directors welcomed ongoing efforts to improve financial sector supervision and regulation. At the same time, they underscored the need for an effective deposit insurance system and an adequate lender-of-last-resort facility. Outstanding issues from the 1998-99 banking crisis, particularly the liquidation of the remaining closed banks and the return of frozen deposits, must also be resolved. Directors expressed grave concerns about provisions in the banking reform bill that would introduce administrative controls on interest rate spreads and credit allocation because such provisions could stifle the much-needed expansion of financial intermediation and jeopardize banking system stability.

To sustain competitiveness and allow the economy to reap the full benefits of dollarization, Directors called for intensified structural reforms. To attract private investment, high priority should also be given to developing the petroleum sector, including through a comprehensive reform of PetroEcuador; strengthening the petroleum sector’s regulatory framework; and setting market-based prices for oil products.

(annual percent change, unless otherwise indicated)
Real GDP3.
Consumer price index, end of period9.
Credit to the private sector13.64.528.626.2111.6
Noninterest expenditure (percent of GDP)21.520.722.023.823.7
Overall fiscal balance (percent of GDP)
Data: Central Bank of Ecuador; Ministry of Finance; and IMF staff estimates and projections.

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