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, however, such as an inefficient public sector, large macroeconomic imbalances, a lack of stabilization mechanisms and limited private investment. These deficiencies became evident when oil prices fell and the income this commodity generated sharply declined.
Since 2014, Ecuador has been trying to adapt its economy to a challenging international context characterized by low oil prices, appreciation of the U.S. dollar, increasing external financing costs, and growing trade conflicts. In the absence of fiscal savings, the government began a process of rationalizing public investment and optimizing 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 sustainable 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 22.7 percent and 0.47, respectively— since 2014.
In March 2019, the International Monetary Fund (IMF) 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 Group, committed financial support of USD 10 billion to support this plan. The plan includes measures to ensure fiscal sustainability, strengthen the foundations of dollarization, and promote private investment while guaranteeing social protection of the most vulnerable population.
The IMF conducted its first review of the implementation of the agreement, which confirmed that Ecuador is satisfactorily working towards the advances agreed upon (June 2019). In light of these advances, the World Bank Board of Directors approved an initial Development Policy Loan (DPL).
As part of a plan to improve public resource allocation and establish the foundations for sustainable, inclusive growth, the government has continued to implement important structural reforms. These reforms seek to improve public finance management, reduce discretional spending, curb spending on wages and salaries, limit Central Bank financing of the public sector, attract oil sector investments and improve integration into global markets. Recently, the government announced that it will submit a packet of reforms to the National Assembly. These reforms are designed to ease some rigidities in the labor market and streamline the tax and tariff system.
The implementation of measures to achieve fiscal consolidation and macroeconomic stabilization are crucial for promoting inclusive growth, safeguarding protection mechanisms for the most vulnerable sectors and advancing down the road of shared prosperity.
Last Updated: Oct 15, 2019