Thanks to the boom in oil prices, between 2007 and 2014, Ecuador experienced a period of growth and poverty reduction. This boom hid some structural problems — such as an inefficient public sector, large macroeconomic imbalances, a lack of stabilization mechanisms, and low private investment — which became evident when prices fell.
Since 2014, Ecuador has been trying to balance and adapt its economy to a challenging international context characterized by low oil prices, the dollar appreciation, and increasing external financing costs. In the absence of fiscal savings, the government began a process of rationalizing public investment and current expenditures. It has also mobilized different sources of external financing and applied temporary measures to increase non-oil public revenue.
While the fiscal consolidation underway has reduced the fiscal deficit from a peak of 7.3 percent of GDP in 2016 to 1.2 percent in 2018, there is a long road ahead to achieve shared prosperity. GDP growth averaged just 0.6 percent between 2015 and 2018, and poverty and the Gini coefficient have remained relatively stable —at around 22.5 percent and 0.47, respectively— since 2014.
In March 2019, the International Monetary Fund approved an agreement with Ecuador to provide support to government economic reforms framed within a broad program of reforms proposed in the 2018-2021 Prosperity Plan. Several international institutions, including the World Bank, committed financial support of USD 10 billion to support this plan.
The program includes measures to ensure fiscal sustainability, strengthen the foundations of dollarization, and promote private investment while guaranteeing social protection of the most vulnerable population.
It is essential to improve the effectiveness and progressiveness of fiscal policy to achieve a consolidation that guarantees macroeconomic stability, protects the most vulnerable people, and preserves the confidence of the private sector. The plan also proposes improving the provision of public services and creating mechanisms that protect the country from fluctuations in oil prices.
The government is also working to strengthen the foundations of dollarization by enhancing the Central Bank institutional framework, building up international reserves, and improving oversight of financial intermediaries.
Given the importance of private investment, the government is aiming at fostering it to improve competitiveness and job creation. In a context in which public investment cannot longer drive growth, it is crucial to promote an conducive investment climate and facilitate capital and labor mobility to emerging economic activities.
The fulfillment of this reforms will be critical to establish the groundwork for achieving sustainable growth, which will enable the country to continue reducing poverty.
lastupdated: Apr 10, 2019