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Headline: The rocky route to IMF favour Source: euromoney.com Date: June 2001 Author: Felix Salmon
It is understandable that Gallardo could do with a bit of a rest these days: the Ecuadorean government has come through a huge battle with the legislature, which threatened the whole basis of its fiscal accounts. The war is not completely over, but the theatre of conflict has moved from congress to the courts, and the government’s achievements so far have proved enough for a crucial vote of confidence in the country in May from the IMF. Ecuador was originally scheduled to get the second disbursement from its IMF programme in September 2000. Everything in Ecuador takes longer than expected, and a few delays here and there are usually built in to projections, but this one lasted until well past the date that Ecuador’s entire IMF programme was due to expire. More than just IMF disbursements were at stake: the country is dependent on aid from the World Bank and the Inter-American Development Bank, none of which is allowed to be paid out if the country’s IMF programme has expired. Ecuador negotiated a two-month extension of its IMF programme, which gave it enough time to implement the sales tax increase that the Fund insisted on and which the fractious congress, in the end, proved unable to overturn. That in turn won another six-month extension, until the end of this year, and the release of the second tranche of IMF funds. But Gallardo cannot rest easy just yet. There’s no guarantee that Ecuador will be able to negotiate a new programme with the IMF. The sales tax, after all, was part of the conditionality for the first programme, and no-one’s even started thinking about what the country will have to do in order to get a second. “The fact that you have VAT does not mean that you have an IMF agreement,” says Leo Goldstein, Ecuador analyst at Salomon Smith Barney. “This VAT increase is not a condition for a new programme. It’s for this programme. You want to have a new one, let’s discuss a new one.” Ecuador certainly wants a new programme. “We need the IMF programme to fill the fiscal gap,” says Gallardo. “The only way to finance a gap this big is by cutting public spending, and I can’t cut further.” Alicia Duran, Andean analyst at Merrill Lynch, adds that “you have the indigenous movement extremely opposed to VAT and threatening to march to Quito, as they have done on any number of other occasions. This whole indigenous issue has been very quiet for several months now, it’s been off the radar screens of the market, but we’ve seen what the indigenous groups can do.” An indigenous uprising was responsible for the ouster of Ecuador’s last democratically elected president, Jamil Mahuad. Renewed uncertainty about Ecuador’s future prompted Standard & Poor’s to downgrade the country’s long-term foreign-currency credit rating to CCC+ from B– at the beginning of April. It is the only country that S&P puts on a C rating. And the battle with Congress over VAT will not be the last Gallardo has to fight. “We have to go to Congress again and again and again,” he says, especially with bills reforming the country’s shattered financial system. The crisis that persuaded Congress to pass key reforms last year has long since passed. “You have the downgrade by S&P, you have the IMF sending a pretty strong message that no reform, no programme: this is now becoming readily apparent to investors. It’s not so readily apparent to Congress,” says Michael Henry, Ecuador analyst at ABN Amro. “The reason is that they don’t have any sort of thermometer. It used to be that every time something went wrong, the currency would plunge. Now you have a situation where real interest rates remain negative, and of course the currency is fixed and the economy has dollarized. So it’s not as though there are financial variables that are telling politicians that they are doing something terribly wrong. They see bond prices move, but the practical implications for them are zero. They can’t borrow externally on the bond markets anyway.” Henry adds: “I think the perception among investors has been that because of Ecuador’s strategic location, being right next to Colombia, it was essential that the US support Ecuador so that they could have some sort of foothold. “Certainly there’s the mistaken impression that the US is willing to give unyielding support to Ecuador on the basis that they need them to carry out their plans in the region. I don’t see that as the case. Ecuador will get money based on Ecuador’s ability to reform, and that’s the line that’s being drawn in Washington.” The problem is that Ecuadoreans have seen no benefit at all from the reforms that have been implemented so far, and they don’t want an executive that does whatever the IMF says. “In the past six years, poverty has doubled,” notes Gallardo. “That means that 66.6% of the population lives on less than a dollar a day.” It’s a recipe for the triumph of populism over paternalism. Ecuador’s current president, Gustavo Noboa, was never elected to his position – he replaced Mahuad after the 2000 coup. General elections are scheduled for 2002, and Ecuador will once again have an elected president in 2003, a prospect that does little to hearten observers. Looking back over Ecuador’s last three elected presidents, Gallardo says that “the people of Ecuador decided to elect Mr Bucaram as president. And he lasted five or six months. And since then we have had several political problems, because neither Bucaram nor Alarcon nor Mahuad took the right decisions in the economic sector. That’s why instability in Ecuador has been present for a long time.” Salomon Smith Barney’s Goldstein agrees. “The politicians need to change their leaders,” he says. “Mahuad was elected, Bucaram was elected, this one is much better. I’m afraid of what you can get. I’ll stick with my view, which is that things will always be bad. How bad, let me think about it. But they’re going to be bad.” |
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