Press Release No. 18/278

IMF Staff Completes 2018 Article IV Mission to Ecuador

July 5, 2018

A team from the International Monetary Fund (IMF) visited Quito, Guayaquil and Cuenca during June 20 to July 4 to hold discussions for the 2018 Article IV Consultation with Ecuador. At the end of the visit, the mission team, led by Ms. Anna Ivanova, issued the following statement:

“The Ecuadorian authorities have been taking important steps recently to strengthen fiscal institutions and re-establish a competitive private-sector driven economy. The new “Productive Development Law”, approved by the National Assembly in June, contains marked improvements in the fiscal policy framework that go in the right direction though further refinements are possible. Efforts are also underway to increase fiscal transparency and adhere to international accounting standards. On the competitiveness front, we are encouraged by the recently adopted measures aimed at softening the rigidity of the labor market in some sectors, improving the legal framework for investors and facilitating trade.

“Nonetheless, Ecuador is still adjusting to external shocks that have exposed underlying structural imbalances in the country’s economy. In this context, important challenges lie ahead, including tackling a high fiscal deficit and rising public debt, an overvalued real effective exchange rate, and vulnerabilities in the country’s balance of payments.

“After five consecutive quarters of contraction, Ecuador’s growth had resumed in late 2016 and rebounded strongly to 3 percent in 2017. However, the economy seems to be cooling off, as witnessed by the contraction of 0.7 percent in the first quarter of 2018 relative to the previous quarter.

“Addressing fiscal imbalances remains an important policy priority. After the 2014 oil price decline, the non-financial public-sector deficit rose to 8.4 percent of GDP in 2016. But at 4.8 percent of GDP in 2017, the overall deficit is still large, particularly for a dollarized economy. Higher oil prices, temporary tax measures, cuts in capital spending, and a public sector hiring freeze, could help reduce the fiscal deficit. However, a more balanced and frontloaded fiscal consolidation would help boost confidence, reduce borrowing costs and reach more sustainable deficit levels more quickly.

“Ecuador’s external position needs to be strengthened, including by building up adequate reserve cushions. The real effective exchange rate is overvalued representing a constraint on competitiveness, growth and job creation, as well as a vulnerability for the economic outlook.

“The financial system appears sound; it is well-capitalized, with solid credit quality, and high levels of liquidity. Private credit is still growing robustly albeit at a slower pace. The supervision of the cooperatives should be strengthened though the sector doesn’t appear to represent systemic risks. Removing barriers to effective financial intermediation, enhancing banks’ risk management, and improving oversight and contingency planning could help fortify the system.

“Additionally, further supply-side reforms are needed to improve Ecuador’s competitiveness, foster job creation and raise productivity. Further softening the rigidity of the labor market, broadening a set of trade agreements, improving the efficiency and reliability of the energy sector, and continued efforts to tackle corruption would benefit Ecuador.

“Looking ahead, the authorities should stay the course of prompt and decisive actions to address the vulnerabilities in the economy. This is particularly important considering the possibility of tighter global financing conditions, lower oil prices, and a further appreciation of the U.S. dollar. Fund staff stands ready to provide technical assistance in the areas identified by the authorities.

“We are grateful to the authorities for their impeccable organization of the Article IV meetings, a spirit of open dialogue, and the demonstrable transparency under which they undertook the consultation.”