Abstract
This 2005 Article IV Consultation highlights that despite a difficult political environment, economic growth in Ecuador is estimated to have exceeded 3 percent in 2005, with the non-oil sector expanding by 3½ percent. The strong growth in the oil sector that followed the completion of the new oil pipeline in 2003 has tapered off, but high oil prices have helped bolster confidence and underpin domestic demand. The external current account deficit is estimated to have remained unchanged at about 1 percent of GDP.
Statement by the Staff Representative on Ecuador January 25, 2006
Since the issuance of the staff report, Mr. Diego Borja has replaced Ms. Magdalena Barreiro as finance minister in the Palacio government. A staff team visited Quito on January 17–18, 2006 to meet with Mr. Borja to discuss his policy approach. Additional information has also become available on inflation. The information in this statement does not alter the thrust of the staff appraisal.
1. Inflation ended the year higher than anticipated. The 12-month CPI inflation rate increased to 4.4 percent (projected inflation was 4.0 percent) in December 2005, largely reflecting surging housing rent inflation and education costs.
2. The new minister of finance, Mr. Diego Borja, is committed to an economic program that broadly maintains the same lines as that of his predecessor described in the staff report.
In discussion with staff, the Minister emphasized the authorities’ firm commitment to fiscal discipline and to orient fiscal policy toward reducing recent inflation pressures. He noted that the President had signed a decree to cut spending by 1 percent of GDP from the budget approved by Congress (with cuts in recurrent spending across ministries and the cancellation of low-priority capital projects), to bring overall central government spending back in line with the government’s original budget proposal. The authorities’ new fiscal target for 2006 is consistent with the staff report’s recommended nonfinancial primary surplus of 5.2 percent of GDP. The minister also reiterated the authorities’ intention to use excess financial resources to repurchase high-interest external debt and short-term domestic debt.
The minister outlined plans to strengthen fiscal transparency and expenditure management. In particular, he stated that the government would establish mechanisms to improve the governance, transparency, and public accountability for funds earmarked in the Fiscal Responsibility Law, so as to ensure that they would be used to finance only projects of the highest quality. The staff endorsed efforts to strengthen the oversight of these funds but expressed concern over the important role planned for the public banks in this process, especially given their poor past record in areas of governance and administration.
No significant changes have been made to existing reform proposals in the oil, electricity, and telecommunications sectors, the financial system, or in trade policy. The authorities plan to continue their preparatory work in the area of tax reform and the reduction of fuel subsidies, although the minister felt that it was unlikely, given the delicate political situation, that the government would launch any initiatives before the October elections.