By Ceyda Oner
Revenue collapsing while spending surges is by now a familiar narrative of how the COVID-19 pandemic is hurting governments’ finances across the globe. For Ecuador, a South American country of 17 million, this double whammy is compounded by a sharp fall in oil prices, one of its main exports. The result was devastating for the economy.
To support Ecuador’s stabilization and recovery program in the short term and help its economy become more dynamic and competitive in the medium term, the IMF’s Executive Board approved a new $6.5 billion Extended Fund Facility arrangement on September 30, 2020.
IMF Country Focus spoke with Ecuador mission chief, Ceyda Oner, about how the new financing will help the country manage the pandemic and its aftermath and, in the medium term, strengthen fiscal transparency and governance.
How is the Ecuadorian economy, six months into the pandemic?
The pandemic and the sharp fall in oil prices had a devastating impact on the Ecuadorian economy. Preliminary data indicates that economic activity collapsed by a record 12.4 percent in the second quarter, compared to a 2.3 percent decline in the first quarter. This was driven by contractions of 18.5 percent in total investment and 12 percent in private consumption. Unemployment jumped to 13 percent in June, ten points above the end of last year, and hundreds of thousands have been pushed into poverty.
Despite the difficulties, the Ecuadorian government took decisive actions to mitigate the adverse impact of the pandemic on households and firms. This included creating a special cash transfer program, expanding the social safety net to more vulnerable people, and temporarily broadening unemployment insurance. People were allowed to delay certain payments, like tuitions, utilities, and health insurance. Temporary price controls for basic food items were also implemented.
What are the most important aspects of this new program?
The immediate tasks are to stabilize the economy, protect lives and livelihoods, and expand social assistance programs. Broader objectives include strengthening governance and transparency on revenue and spending. To achieve them, the government plans to increase the number of low-income families that would get financial support, spend more on reactivating the economy and on essential services like health and education, pay off accumulated unpaid bills, improve transparency in public procurement, and promote debt transparency.
As the economy recovers, the program will aim at ensuring the sustainability of public finances, strengthening domestic institutions, and laying the foundations for a more dynamic and competitive economy that can generate more jobs and strong, lasting growth that benefits all Ecuadorians.
What are the most pressing challenges for the Ecuadorian economy?
I would highlight two in particular: supporting the people of Ecuador through the crisis and reducing the debt burden. On the first one, the government has rightly reallocated spending to supporting lives and livelihoods. Financing from the IMF will allow more spending on the economic recovery and ensuring the most vulnerable are adequately covered by social safety nets.
In the medium term, the challenge will be to bring the public debt back to sustainable levels, in accordance with Ecuador’s own debt targets that are now enshrined in law. High debt is not just a persistent pressure on public finances but is a burden to future generations. A lower debt burden will allow the government to focus on creating jobs and growth and investing more in education and health.
Reducing debt usually involves cutting spending. Can Ecuador rein debt in while avoiding austerity?
Ecuador is already off to a good start, thanks to the successful international bond exchange that will save $1.5 billion in interest payments just in 2021, and billions more in the coming years. As the economy recovers, public finances would also automatically start recovering.
Beyond that, reducing debt requires two key ingredients: one is raising Ecuador’s growth potential, which requires comprehensive structural reforms over a long horizon. The other, more immediate, is carefully calibrating revenue and expenditure measures to keep supporting growth while being mindful of how people across different income levels are affected.
On the revenue side, a smart and progressive tax reform can both increase revenues and support businesses and job creation. On the spending side, public money can be saved with more efficient and transparent processes for investments and procurement (buying goods and services).
This is a large program relative to the economy’s size and most of the funds come early on. Why is it so?
In all countries, the pandemic caused a collapse in government revenues, while requiring a large increase in spending on health and social protection. On top of that, Ecuador was hit by falling oil prices and lost access to capital markets. This combination caused fiscal and external financing needs estimated at 16 and 11 percent of GDP, respectively, for 2020. That is why $4 billion, of the total $6.5 billion, is planned to be disbursed this year, half of it immediately. It’s not an unusual thing. IMF programs are flexible enough to adapt to countries’ specific financing needs.
In what specific ways will this new IMF loan help Ecuador fight the pandemic and its economic impact?
The revenue collapse has forced the government to make tough decisions about how to prioritize scarcer resources. Fresh financing from the IMF and other financing partners will alleviate that pressure, allowing the government to spend on essential services like health, education, and also settle some unpaid bills. A lot of Ecuadorians lost their jobs and many have fallen or are at risk of falling into poverty. It is therefore essential to support the government in providing sufficient cash transfers to the most vulnerable and reactivate the economy.
With the upcoming presidential election, how do you see the IMF continuing its engagement with Ecuador?
The program’s length of 27 months was designed to ensure the new administration will be able to develop its own reform program while counting on financial support from the IMF and the international community through 2022. In such cases where programs straddle elections, it is standard IMF practice to engage with a broad range of presidential candidates. All those we met were appreciative of the IMF’s support in these difficult times. Our goal is to remain engaged and continue to help the country.
