Front Matter

Front Matter Page

2006 International Monetary Fund

March 2006

IMF Country Report No. 06/98

Ecuador: 2005 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Ecuador

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2005 Article IV consultation with Ecuador, the following documents have been released and are included in this package:

  • the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on November 16, 2005, with the officials of Ecuador on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 4, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff statement of January 25, 2006 updating information on recent developments.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January 25, 2006 discussion of the staff report that concluded the Article IV consultation.

  • a statement by the Executive Director for Ecuador.

The document listed below has been or will be separately released.

  • Selected Issues Paper

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

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Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

Front Matter Page



Staff Report for the 2005 Article IV Consultation

Prepared by the Staff Representatives for the 2005 Consultation with Ecuador

Approved by Charles Collyns and Adnan Mazarei

January 4, 2006

Discussions. A staff team held discussions in Quito and Guayaquil during November 7–16, 2005. The team met with Mr. Alfredo Palacio (President of the Republic); Mr. Wilfrido Lucero (President of Congress); Ms. Magdalena Barreiro (former Minister of Finance), Mr. Alejandro Maldonado (former Superintendent of Banks); other senior government officials; and representatives of the industrial, banking, and export sectors, political leaders, leading economic analysts, and NGOs.

Team. The staff team comprised Trevor Alleyne (Head), Lisandro Abrego, Enrique Flores (both WHD); Bjoern Rother (PDR), and Alexander Pivovarsky (FAD), and was assisted by Jorge Guzman (Resident Representative).

The authorities’ response to recent Fund policy advice. In the 2004 Article IV consultation, Directors noted the important role of the Fiscal Responsibility and Transparency Law (FRL) and stressed the importance of controlling government spending, in particular on pensions and wages. However, the authorities have had great difficulty in restraining spending growth, which far exceeded the FRL targets in both 2004 and 2005. Moreover, changes to the FRL and the pension system in 2005 have weakened the overall macroeconomic framework. Directors also urged the authorities to advance on key structural reforms, in particular phasing out revenue earmarking and subsidies, taking measures to improve the soundness of the pension system, strengthening the performance of public enterprises, and implementing the recommendations of the 2004 FSAP. Only in the last case was any progress made.

Exchange Regime and Relations with the Fund. The U.S. dollar is the legal tender in Ecuador. Outstanding Fund credit is SDR 58.52 million (19.4 percent of quota). Ecuador has accepted the obligations of Article VIII, sections 2, 3, and 4, and maintains an exchange restriction subject to Fund approval under Article VIII, Section 2 (a) in the form of a freeze on demand and savings deposits held in closed banks managed by the Deposit Guarantee Agency. Staff is monitoring the authorities’ economic program at their request, including via quarterly quantitative targets.

Data. Ecuador has subscribed to the SDDS. While data provision for surveillance purposes is adequate overall, the statistical base remains uneven, with shortcomings in the balance of payments (e.g., oil imports, non-oil foreign direct investment, and private capital flows); public finances (e.g., lack of coverage of key public enterprises); and labor market (e.g., unreliability of employment data).

Selected Issues Papers. The companion Selected Issues paper comprises four chapters: (i) economic performance under dollarization, (ii) an assessment of competitiveness, (iii) performance and sustainability of fiscal policy, and (iv) developments in banking sector intermediation.


  • Executive Summary

  • I. Background

    • A. Political Context

    • B. Recent Economic Developments

  • II. Macroeconomic Outlook and Risks

  • III. Report on the Discussions

    • A. Fiscal Policy

    • B. Long-Run Growth and Competitiveness Issues

  • IV. Staff Appraisal

  • Boxes

  • 1. Modifications to the Fiscal Responsibility Law

  • 2. The Draft Banking Sector Law

  • 3. Policy Reforms for More Efficient Oil Resource Management

  • Figures

  • 1. Real Sector

  • 2. Prices

  • 3. External Sector Indicators

  • 4. Monetary Sector Indicators

  • 5. Fiscal Indicators

  • 6. Medium-Term Scenario, 2003–10

  • Tables

  • 1. Selected Social and Economic Indicators

  • 2. Central Government Operations, Net Accounting

  • 3. Central Government Financing

  • 4. Operations of the Nonfinancial Public Sector, Net Accounting

  • 5. Nonfinancial Public Sector Financing

  • 6. Summary Accounts of the Financial System

  • 7. Balance of Payments

  • 8. Passive Medium-Term Scenario

  • 9. Active Medium-Term Scenario

  • 10. Selected Vulnerability Indicators

  • 11. Millennium Development Goals

  • Appendices

  • I. Public Sector Debt Sustainability, 2000–10

  • II. External Debt Sustainability, 2000–10

  • III. Fund Relations

  • IV. Relations with The World Bank

  • V. Relations with the Inter-American Development Bank

  • VI. Statistical Issues

  • VII. Table of Common Indicators Required for Surveillance

Executive Summary


  • Aided by high international oil prices, macroeconomic performance in 2005 was generally positive. Output growth is expected to exceed 3 percent and external sector performance has been strong. Inflation remains low but has picked up in recent months and is now expected to end the year at 4 percent, driven by a strong growth in bank credit and public spending.

  • Financial market conditions have been favorable. Robust deposit growth signaled continued improvement in confidence in the banking system. Ecuador’s successful international bond issue—its first voluntary placement in 8 years—reflected improved investor sentiment, even though Ecuador’s EMBI spread remains the widest among Latin American countries.

  • The public sector primary surplus narrowed in 2005, notwithstanding rising oil revenues. Spending on wages, pensions, and fuel subsidies has risen rapidly. Nevertheless, public debt has continued to decline relative to GDP.

  • With the political environment highly unsettled, there was no progress on most of the critical issues discussed in the 2004 Article IV consultation. The elimination of the oil stabilization fund and changes to the fiscal responsibility law and pension system have weakened the macroeconomic policy framework.

Key Issues and Staff Recommendations

Ecuador should be doing more to take advantage of the favorable external conditions to strengthen the macroeconomic policy framework and advance structural reform. Stronger long-run growth and the sustainability of dollarization depend crucially on improved fiscal policies and advancing with structural reforms to strengthen the public finances and the financial system and improve the investment climate.

  • Fiscal policy in 2006. In light of recent inflationary pressures and the need to save a higher share of the oil windfall, the authorities should aim for a higher primary surplus than currently programmed and firmly resist spending pressures from powerful interest groups.

  • Fiscal reforms. The authorities need to strengthen the institutional framework for fiscal policy to (i) strengthen the budget’s resilience to shocks, including through further improvements in debt sustainability; (ii) increase budget flexibility by reducing earmarking and subsidies; and (iii) ensure appropriate use of the country’s limited oil wealth.

  • Banking system. The authorities should strengthen efforts to implement the 2004 FSAP recommendations. Staff strongly supports the authorities’ stand against the dangerous banking system law currently being discussed in Congress.

  • The investment climate. Staff emphasizes the need to address many deficiencies in the environment for doing business, including the labor market and regulatory issues in key sectors such as oil, energy, and telecommunications.

Front Matter Page

Public Information Notice (PIN) No. 06/15


February 9, 2006

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