INTER-AMERICAN DEVELOPMENT BANK REGIONAL OPERATIONS DEPARTMENT 3
ECUADOR COUNTRY PAPER
December 3, 2001
This document was prepared by Gonzalo Giraldo (Economist RE3/OD5) and supervised by Dora Currea (Representative COF/CEC), with support from EN3, FI3, SC3, SO3, OD5, COF/CEC and DPP/SPO.
TABLE OF CONTENTS
EXECUTIVE SUMMARY I.
KEY CHALLENGES: OBSTACLES TO DEVELOPMENT .................................... 1 A. B. C. D. E. F.
II.
Governance ........................................................................................................ 1 Macroeconomic Stability................................................................................... 2 Poverty reduction and social inclusion .............................................................. 4 Investment and competitiveness ........................................................................ 5 The Environment ............................................................................................... 6 How the Bank Program will meet these challenges .......................................... 6
BANK OBJECTIVES AND STRATEGY .................................................................. 7 A. B. C.
D. E. F. G. H. I.
Strategy 1995-1999............................................................................................ 7 Bank Objectives 2000-2002 ............................................................................ 10 Strategy 2000-2002.......................................................................................... 12 1. Economic stabilization and recovery of growth capacity 2. Poverty reduction, human capital formation and social inclusion 3. Efficient infrastructure management with private-sector participation 4. Modernization and decentralization of the State and promotion of sustainable regional development. Coordination with the Private Sector Group ................................................... 17 Coordination with other multilateral agencies................................................. 18 Lending scenario.............................................................................................. 20 The Bank’s exposure ....................................................................................... 22 Program risks ................................................................................................... 23 Studies and dialogue ........................................................................................ 23 1. Stabilization and growth 2. Poverty and human capital 3. Modernization of the State and sustainable regional development
- ii -
ANNEXES
ANNEX I
Strategy Outline
ANNEX II
Lending Program
ANNEX III ANNEX IV
Loans in execution
ANNEX V
Active loans The Ecuadorian Crisis 1996-2000
- iii -
ABBREVIATIONS AND ACRONYMS
AGD
Deposit Guarantee Agency
BEDE
State Bank
CAF
Andean Development Corporation
CII
Inter-American Investment Corporation
CONAM
National Council on Modernization of the State
FISE
Social Investment Fund
GDP
Gross Domestic Product
IMF
International Monetary Fund
MEF
Ministry of Economic Affairs and Finance
MIF
Multilateral Investment Fund
MOP
Ministry of Public Works
PRI
Private Sector Department
SRI
Internal Revenue Service
Executive Summary Page 1 of 4 EXECUTIVE SUMMARY The challenges for Ecuador: 1. Governance 2. Economic Stability 3. Poverty reduction and social inclusion 4. Investment and competitiveness 5. Environmental conservation and sustainable development
The years 1995 to 2000 were a time of great political and economic instability in Ecuador. The living standards of Ecuadorians declined sharply and pressures on natural resources increased. In these circumstances, little substantive progress could be made on modernizing the economy and the State. Stability began to return early in 2000 as a new president took office and the decision was made to dollarize the economy. Today, the country’s major challenges are as follows: i.
Improving governance and finding mechanisms to overcome political and regional fragmentation. The political, fiscal and administrative decentralization process about to begin offers the framework necessary to confront this first challenge.
ii.
Stabilizing the economy within the context of dollarization. With the disappearance of monetary policy, the central challenge lies in strengthening fiscal policy, and in particular assuring fiscal sustainability in the medium and long term. This challenge is compounded by the uncertainty of oil revenues and the impact of the decentralization process.
iii.
Poverty Reduction. The living conditions of the population dropped dramatically with the recent economic crisis. By 2000, 65 percent of the population had fallen below the poverty line due to inflation and unemployment. The indigenous and Afro-Ecuadorian population have been severely affected by the crisis. As a country, Ecuador confronts the challenge of integrating these groups more fully into political and economic life and the modernization process, while protecting their cultural identities.
iv.
Investment and Competitiveness. The economic crisis led to the deterioration of transportation, energy and communications infrastructure, due to the lack of resources in the public sector for investment and maintenance. After dollarization, modernization of infrastructure has become an urgent priority in order to improve economic competitiveness. To confront this challenge, Ecuador must attract private investment.
v.
Sustainable development. One consequence of the recent economic and social crisis has been the population’s unsustainable use of natural resources and the deferral of measures to tackle environmental pollution. Ecuador now faces the challenge of
Executive Summary Page 2 of 4 implementing a sustainable development strategy that will be concordant with initiatives to raise living standards. How the Bank Program will meet these challenges The Bank’s program is supporting Ecuador’s efforts to respond to priority challenges over the three-year period from 2000 to 2002, the term of the current administration. The purpose of this country paper is to reaffirm the strategy being implemented since 2000 and that is being pursued in 2001 and 2002. Objectives
The program has the following objectives:
The Bank program’s objectives are focused on the central challenges
i. ii. iii. iv.
Economic stabilization and recovery of growth capacity. Poverty reduction, human capital formation and social inclusion. Efficient management of infrastructure with private sector participation. Modernization and decentralization of the State, and promotion of regional sustainable development.
Strategy Focuses Objective 1
Strategy - Financial sector: support for resolution of intervened banks (Finance Sector Loan, Component 2 – 834/OC-EC) Economic stabilization and recovery of growth - Fiscal Sector: Law of Fiscal Responsibility and Transparency (Decentralization Support Program – capacity 1358/OC-EC), and Strengthening of Finance Ministry (1366/OC-EC) as regards macroeconomic programming, external debt management and investment programming. - Science and Technology Program (874/OC-EC) to strengthen competitiveness. - Support for agricultural sector through the Rural Land Regularization and Administration Program (EC-0191). Objective 2 Poverty reduction, human capital formation and social inclusion
Strategy - Protection and recovery of social spending (Investment Sector Loan, Component 3 – 1259/OC-EC). - Support for targeting of social spending (Social Program. Beneficiary Identification System – 1261/OC-EC). - FISE III: targeting of lowest-income groups, indigenous population and Afro-Ecuadorians. - Improvements in execution of preschool education programs (Early Childcare Program - 1056/OC-EC) and primary rural education (Education Quality Improvement 1142/OC-EC). - Provision of physical assets for the poor (Housing Sector Program – 1002/SF-EC & 1078/OC-EC).
Executive Summary Page 3 of 4 Objective 3 Efficient management of infrastructure with private sector participation
Objective 4 Decentralization of the State and promotion of regional sustainable development
Strengthening of the campesino social security system. Support for social statistical information systems (Support Census and Strengthening Statistics – 1296/OC-EC).
Strategy - Support privatization and regulation of electricity and telecommunications sectors (Investment Sector Program, Component 1 – 1259/OC-EC). - Support road infrastructure investment program, subject to restructuring of MOP and road maintenance privatization (Road Program II – EC-0132). - Support the creation of small public-works contracting enterprises. - Support the construction of rural and tertiary road network (Rural Transport Infrastructure Program – 1282/OC-EC). - Support Urban Public Transport for mid-sized cities (Urban Public Transport Program – EC-0185). - Support the concession of water and sewerage services in Guayaquil. Strategy - Support a legal framework for the management of municipal finances. Support the transfer of resources and responsibilities to sectional governments (Decentralization Support Program – 1258/OC-EC). - Support municipal infrastructure and sustainable financial policies for the Banco del Estado and local governments (Municipal Development Program II – EC-0139). - Support natural resource management and sustainable development in ecologically vulnerable regions. (Environmental Management Program for the Galápagos Islands, 1274/OC-EC; Coastal Resources Management Program II (Pacific Coast) (EC-0193) and Sustainable Development Program for the Northern Amazon Border Region (EC-0201) - Quito Environmental Sanitation Program (EC-0200).
Coordination -
With MIF
The focus of the MIF program, which complements the Bank’s, is to nurture entrepreneurship (microentrepreneurs) and help prepare concessions and make industry and transportation ecoefficient.
-
With IIC and PRI
IIC and PRI operations in Ecuador have been limited due to the recent economic crisis and delays in the concession process for electricity, telecommunications and transportation. The Bank program’s support for economic recovery and privatization is creating new opportunities for IIC (fishing industry) and PRI (water and sewerage concession in Guayaquil).
Executive Summary Page 4 of 4 With other multilateral agencies
In early 2000, several multilateral agencies (IDB, IMF, World Bank and CAF) jointly agreed to coordinate actions to support economic stabilization, implementation of sustainable economic policies, resolution of the financial crisis, poverty reduction and structural reforms. These shared objectives are addressed, with differing focuses, in each of the agencies’ support programs for Ecuador.
Lending Scenarios
In 2000, the Bank approved $186.4 million in loans to Ecuador. The high scenario considers approvals for an additional $311.2 million in 2001 and 2002, the base scenario (the most probable) for $216.2 million, and the low scenario for $131.2 million. The triggers for each scenario are listed on page 21.
Bank Exposure
The Bank has been involved in an important effort to support development in Ecuador. The Bank’s portfolio of US$1.9 billion makes up 17.7 percent of the country’s external debt stock and 52.6 percent of its debt to multilateral development banks. A recommendable strategy for containing the Bank’s country exposure includes: (i) giving preference in this program to projects of relatively moderate amounts but with strong development impact potential, and (ii) coordinating closely with the other multilateral agencies, particularly the World Bank, so as to lower to below 50% the IDB’s share in the multilateral banks’ Ecuador portfolio.
Issues for study and consensus-building
The Bank will initiate studies to lay the groundwork for dialogue with the country authorities on prospective targets for Bank support in the next programming cycle. Topics include competitiveness, policies for specialized public banks, development of the rural financial market, secondary education, vocational education, public employment and a strategy to provide potable water more efficiently to mid-sized cities.
-
I.
KEY CHALLENGES: OBSTACLES TO DEVELOPMENT
1.1
Since 1995, the challenges that Ecuador has faced in terms of economic and social development have grown considerably because of numerous internal and external shocks: the conflict with Peru, the premature termination of two presidential terms, the El Niño phenomenon and unstable oil prices. Since August 1996, the country has had five different presidents.
1.2
Political instability and external and natural shocks created the most serious economic and social crisis in Ecuador in the second half of the 20th century. Repeated and successive periods of instability resulted in the loss of confidence, pressure on the currency market, capital flight, high interest rates, weak fiscal policy and the progressive erosion of the sucre. This process hit its lowest point in 1999-2000 with the freezing of bank deposits, a crisis in the financial system and the sucre’s collapse. Since the dollar was designated as the national currency in January of 2000 and with the inauguration of a new administration for 2000-2002, the country has begun to move progressively towards greater political and economic stability and a rise in the quality of life for the population. The focus of the Bank’s Program for Ecuador is to support the current administration’s effort to attain greater economic, political and social stability during its three-year period (2000 to 2002).
1.3
Ecuador faces innumerable difficulties. The 1995-2000 crisis highlighted the priority of the following challenges: (i) governance and political stability; (ii) economic stability; (iii) the reduction of poverty and the reversal of the deterioration of living standards; and (iv) competitiveness and investment conditions. These are the four major bottlenecks the country faces in order to achieve a higher level of development.
A.
Governance
1.4
In Ecuador, there are three main sources of governance problems. First, political and regional fragmentation makes it difficult to attain a legislative majority in order to approve appropriate laws. Secondly, important ethnic groups such as indigenous peoples and Afro-Ecuadorians do not fully participate in the formal political system and in the state modernization process. Finally, systems of political and public control to insure transparency are deficient and public sector institutions are weak.
1.5
The Ecuadorian government is pursuing the following strategy in order to improve governance: (i) the execution of annual decentralization plans to combat regionalpolitical fragmentation. Government ministries and local government have agreed on these plans to gradually transfer resources and responsibilities; (ii) The establishment of roundtables for consensus-building on economic and social issues in order to increase the political participation of ethnic groups in political life. Indigenous Ecuadorians have been included in the ministerial cabinet and efforts will be made to overcome barriers that prevent government programs from reaching ethnic groups; and (iii) a Law of Fiscal Discipline and Transparency will
-2– be sent to the Congress for approval, promoting the modernization of the state. Public employees will be subject to prosecution and citizens will attain the right of access to all budgetary and accounting information from public institutions. As regards strengthening public institutions, authorities have prioritized the following entities: Ministry of Economic Affairs and Finance (MEF), regulatory entities, the Ministry of Public Works (MOP), and ministries involved in the decentralization process. GOVERNANCE Problems with Governance Political 1996 Instability: Durán Ballén 5 Presidents Bucaram 1996-2002
1998 1999 2000-2 1997 Alarcón Mahuad Noboa Bucaram Mahuad Arteaga Alarcón Law-making difficulties: The Congress is made up of 10 political groups. It is difficult to get a majority. Regional divisions: There are no political parties with a national support base. All parties are regionally based. Transparency: One of the last five presidents was in jail and two others face prison sentences. Source of Governance problems: 1. Political and regional fragmentation 2.
Limited participation of indigenous and Afro-Ecuadorians in the country’s social and political life
3.
Deficient systems of political and public control to assure transparency
Government initiatives to improve Governance 1. Decentralization Plan: Gradual transfer of resources and responsibilities to local entities 2.
Roundtables for consensus-building with indigenous Ecuadorians and social movements on social and economic issues. Indigenous participation in the ministerial cabinet.
3.
Law of Fiscal Discipline and Transparency presented to Congress for approval.
B.
Macroeconomic Stability
1.6
In January of 2000, authorities began to tackle the problem of stabilization of the economy and financial system through dollarization. Monetary stabilization was the number one priority at that time because of the massive monetary expansion arising from a 100 percent guarantee on bank deposits, financed by the Central Bank in the middle of the financial crisis. The monetary base grew at an annual rate of 136 percent and this bloated liquidity transformed into demand for dollars, resulting in the devaluation of the sucre by 194 percent in 1999. After dollarization, the impact of monetary stability became evident by May 2001, when domestic prices started to converge to international levels.
1.7
Authorities took several actions to back up dollarization and shore up the economy. They signed an agreement with the IMF that ends in December 2001. They approved laws to attract foreign investment, restructured the external private debt, initiated negotiations with the Paris Club, and decreed two price hikes on
-3combustible fuels along with targeted subsidies. The increase in oil production is also an important component of the strategy to consolidate dollarization. This is being accomplished through a concession to private companies to build a new oil pipeline that will double oil production within two years. The behavior of oil prices has helped sustain the dollarization process while the prices of other primary exports have remained low.
MACROCONOMIC STABILITY Percentage Growth Stability Indicators Consumer Price Index
1996
1997
1998
1999
2000
2001proj.
25.5
30.7
43.4
60.7
91.0
19.0
Devaluation of the Sucre
24.2
22.1
52.6
194.2
0.0
0.0
Growth of Monetary Base
26.9
31.6
41.2
135.7
--
--
2.0
3.4
0.4
-7.3
2.3
5.5
Growth of GDP
Government Strategy: Measures Implemented - Implementation of dollarization through the Law of Economic Transformation of March 2000 - Agreement with the IMF from April 2000 through December 2001. - Increase in domestic prices of combustible fuels (June and December 2000) - Substantial improvement in Internal Revenue Service tax collection capacity - Restructuring of external debt with private creditors (August 2000, exchange of Brady bonds and Eurobonds for Global Bonds). Negotiations with the Paris Club in September 2000. - Omnibus Law of August, 2000, which opens the electricity sector to private investment and establishes a framework for restructuring debts with the financial system. - Concession of a new oil pipeline to a consortium of private companies. Government Strategy: Future Measures - Law of Fiscal Discipline and Transparency: will eliminate earmarked public spending, will establish macro-fiscal rules for public spending, and will channel fiscal income from the new oil pipeline towards payment of the foreign debt. - As of January 1, 2002, domestic prices of combustible fuels will increase by 10% - Law to increase municipal taxes and regulate local finances - New agreement with the IMF in 2002
1.8
Fiscal Challenges. The fiscal challenge is crucial in terms of economic stabilization. The government has assured satisfactory fiscal returns in 2000 and 2001 through the following measures: two substantial hikes in the domestic price of combustible fuel, targeting of subsidies, improved tax collection and a sales tax increase from 12 to 14 percent. The new sales tax lasted just three months before the Constitutional Tribunal reversed it.
1.9
The remaining challenge is the implementation of reforms to assure fiscal sustainability in the medium and long term. The reforms pending are: the creation of mechanisms to stabilize oil revenues, the elimination of earmarked revenues and expenditures, a policy to reduce foreign debt and getting municipal and provincial finances in order.
1.10
Ecuadorian authorities presented the Law of Fiscal Transparency and Discipline to Congress. This law includes the majority of the required reforms. It establishes
-4– macro-fiscal rules which oblige the public sector to generate an annual structural surplus, to eliminate existing earmarked expenditures, to channel fiscal income generated by the new pipeline towards payment of the foreign debt, limits the amount of debt that local governments can incur, and establishes rules for transparency in public spending. This law must be sent to Congress for consideration as a prior condition to the completion and third and final revision of the IMF program. Following the presentation of this legislation, authorities will send another bill to congress to establish a framework for municipal finances and to increase the capacity of municipalities and provinces to generate fiscal income. C.
Poverty reduction and social inclusion
1.11
The economic crisis has had a serious impact on the State’s ability to reduce poverty levels and improve the quality of life for the Ecuadorian population. The poverty level doubled between 1995 and 2000, due to the rise in inflation and unemployment rates, lending to a steep drop in real per capita income as shown in the table below. IMPACT OF THE ECONOMIC CRISIS ON POVERTY LEVELS 1995 1999 2000 Income per Capita (dollars) $1.571 $1.109 $1.100 Population below poverty line 34% 56% 67% Social spending as percentage of GDP 5.1% 4.7% 4.5% ECUADORIAN GOVERNMENT STRATEGY TO COMBAT POVERTY Sector macro-measures: - Economic stabilization: Recovery of real salary and employment levels. - Social spending should return to a level of at least 20 percent of the budget by 2001. - Implementation of targeting mechanisms for beneficiaries of social programs. - Approval of a Social Sector Investment Plan for the medium term. Social Safety Net Programs: - (i) Infant nutrition and care. - (ii) Educational reforms, autonomous management of schools in marginalized urban and rural areas. - (iii) Strengthening and extension of basic health services. - (iv) FISE, investment in social infrastructure based on community decision-making. - (v) Solidarity Bond: Monetary transfer program to benefit poorest households.
1.12
Social spending, which made up 5.1 percent of the GDP in 1995, fell by 4.5 percent in 2000. This drop, however, is not due to the reduction of state social services but to the drop in real salaries of workers in health and education. Budget assignments for 2001 put social spending at over 5 percent of the GDP once again, and also support the increase of real salaries of workers in social sectors and extension of services.
1.13
The level of social spending is relatively high. When compared with a poverty level of 67 percent, one must question the efficiency of social spending. However, the dramatic drop in real income for the population is the one factor that overwhelmingly explains the precipitous deterioration in the quality of life and rapid increase in poverty. This drop in real income was caused by inflation and unemployment. Thus, the recovery of macroeconomic stability is vital in order to bring down poverty levels. In this respect, the dollarization process is already
-5showing results as the drop in inflation has led to a recovery of real salaries in 2001. 1.14
Besides improving macroeconomic conditions and increasing social expenditure, the social strategy of the Ecuadorian authorities seeks to improve the efficiency, targeting and coverage of social spending through the programs described in the table above. These programs constitute the cornerstones of a developing social safety net for the population.
1.15
Poverty levels are higher among indigenous and Afro-Ecuadorians than among the general population. Indigenous Ecuadorians continue to be one of the poorest groups with a poverty level of over 78 percent; Afro-Ecuadorians have a poverty rate of 81 percent. The government strategy to combat poverty among these ethnic groups is based on targeting of subsidies and social programs for the poorest of the poor, as well as the implementation of consensus-building mechanisms to break down barriers that impede access to social programs.
D.
Investment and competitiveness
1.16
The deterioration of the transport, energy and communications infrastructure was one of the most devastating consequences of the economic crisis. This deterioration was caused by the lack of resources in the public sector for investment and even maintenance. The modernization of infrastructure became a top priority with dollarization, given the urgency to improve economic competitiveness. Authorities have begun to confront this challenge by approving reforms to attract private investment through a legislative package called the “Omnibus� Laws. These laws allow the private sector to be majority stockholders in state enterprises that are privatized or offered for concession. Authorities have also created new regulatory institutions for the electricity and telecommunications sectors and are strengthening regulation in both areas.
1.17
Policies to broaden opportunities for private sector participation in transport infrastructure, electricity and telecommunications have had mixed results thus far. Although in eight years Ecuador has only privatized $100 million of public assets (less than 1 percent of the GDP), important advances have been made as regards concessions for new investments, particularly for cellular phones, the construction of a new oil pipeline with an investment of $1.1 billion, and for water supply and sewerage in Guayaquil. CONAM is auctioning off the electricity distribution companies and hopes to conclude this process January 2001. However, the deterioration in the international investment climate since September 11th could delay the concessions and privatization processes.
1.18
The Ecuadorian government’s policy as regards the road system consists in maximizing private sector participation through concessions to rehabilitate and expand the primary road network. Furthermore, the government has decided to privatize all road maintenance services. However, a percentage of the road network is still not ready to be offered for concession, and will require public investment. A restructuring of the Ministry of Public Works (MOP) has been decided in order to allow this ministry to better manage public investments and administer concessions
-6– and road maintenance contracts. The main challenge remaining in the area of infrastructure is to strengthen the regulatory and legal frameworks in order to gain the confidence of investors. E.
The Environment
1.19
Ecuador’s greatest environmental challenge is to safeguard and the sustainable development of several natural systems that harbor a sizeable ecological, economic and cultural wealth. These systems are extremely vulnerable and provide an economic base for sizeable populations. The most crucial among these systems are: the Galápagos islands, the mangroves, forests and humid areas of the Pacific Coast, and the tropical forests of the Amazon. Due to the recent social and economic crisis, poverty has sometimes driven the population to a non-sustainable use of natural resources in some of these systems. The crisis has also diverted attention from environmental problems. As part of their strategy to contain environmental deterioration, the authorities are carrying out programs for natural resource management in the Galápagos islands and on the Pacific Coast, as well as sustainable development programs in the Amazon and border regions. The programs emphasize the participation of local communities and, in the Amazon region, also include the support of the international community through a donors meeting held recently.
F.
How the Bank Program will meet these challenges
1.20
The Bank’s program is supporting Ecuador’s efforts to respond to priority challenges over the three-year period from 2000 to 2002, the term of the current administration. The purpose of this country paper is to reaffirm the strategy being implemented since 2000 and that is being pursued in 2001 and 2002.
-7-
II. BANK OBJECTIVES AND STRATEGY 2.1
During several years of political and economic instability, the Bank experienced some difficulties completing the programming process in Ecuador. The last Country Paper was approved in 1993, and between 1995 and 2000 programming was carried out on the basis of an annual dialogue with the administration in charge at the moment. In general terms, the Bank’s strategy through this period had these objectives: (i) to increase productivity and eliminate institutional and policy distortions, particularly in the finance, agricultural and transport sectors; (ii) to improve access to, and quality of education and health for the lowest income groups, and to support the design of a social strategy; and (iii) to improve environmental preservation and control, in particular through the support for the design of a sustainable development policy.
A.
Strategy 1995-1999
2.2
Results of the Strategy 1995-1999. The implementation of three sector loans (finance, agriculture and transport) approved in 1994 was delayed because of economic instability and the difficulty of approving reforms, as well as the lack of an agreement with the IMF between February 1995 and April 2000. It took six years to disburse loans for the agriculture and finance sectors, and the transport program expired before planned disbursements were made. Only the agricultural program was carried out without restructuring. This program supported reforms in agricultural institutions and improved the functioning of the market for agricultural inputs and products. The finance program helped to eliminate financial repression and to deepen intermediation. The concession of ports began with the implementation of the transport program.
2.3
Instability also led to slow implementation of investment projects. Projects, particularly those of the national government, suffered delays as a result of the frequent turnover of authorities. Projects run by local authorities --the most stable during this period-- and decentralized autonomous entities were the most successful. Social projects were the most affected by political instability, and education projects suffered delays because established interest groups oppose the educational reform proposals. Weak institutions and lack of counterpart funds, as well as the complex acquisitions process also affected investment projects. Road projects were delayed because of weak institutional capacity and the lack of appropriate social and environmental designs.
2.4
Portfolio Management. As of September 30, 2001, the active loan portfolio of the Bank in Ecuador included 22 projects and sector programs, 31 nonreimbursable technical cooperations (NRTC), and 10 MIF operations. The approved amount of projects and sector programs totals $803.4 million dollars, of which $487.4 million was disbursed and $316 million has yet to be disbursed (39.3 percent). Approved NRTC operations total over $14.4 million dollars, of which $6.8 million was disbursed and $7.7 million (61 percent) has yet to be disbursed.
-8MIF operations approved total over $9.3 million, of which $4.5 million was disbursed and $4.8 million (51.6 percent) not disbursed. General problems affecting portfolio execution Problem Reform capability
Manifestation Slow execution of sector programs
•
Postponement of opportunities to get some projects financed by PRI
• •
Capacity to provide counterpart funds
Institutional capacity
Extended deadline for a group of operations that were already in their final phase (coastal resource program, science and technology, two operations dealing with El Niño)
• • • •
Delays and unsatisfactory achievement of goals in the Agricultural Services Modernization Program (PROMSA)
•
High management turnover
•
Inexperience of management of executing units
•
Lack of knowledge regarding public bidding processes
• • • •
Complex auditing processes
2.5
Delays in the availability of financial audit reports
•
Actions Dialogue with authorities on macroeconomic sustainability and reforms Closer coordination with the IMF and other multilateral entities Restructuring of the Finance Sector Program. Final disbursement of this and of Agricultural Sector Program Expiration of Transport Sector Program Support of fiscal sustainability in Bank’s Program. Periodic follow-up meetings with MEF, the executor and the Bank. Identification of operations with serious counterpart problems and identification of opportunities to cancel or reformulate projects. Reformulation and downsizing of PROMSA loan. Fiscal improvements by sectional and local governments to partially compensate delays in central government funds. Along with executor, monthly follow-up of compliance with contract clauses and review of project schedules. Workshops to relaunch projects with turnover of directors/executors. Restructuring of executing units of three projects. Hire consultants to resolve execution problems. Technical advise on bidding process. Review and increase of salaries for personnel of executing units. With Bank support, the comptroller transferred contracting capacities to the executor so they can hire private auditors.
In recent years the Bank has intensified efforts to improve the execution of its project portfolio. The percentage of the portfolio that is more than four years old dropped from 60 to 24 percent between November 1999 and June 2001, date of the last Portfolio Review Mission. The following actions helped to bring about this drop: (i) reformulation of projects to help meet goals; (ii) cancellation in cases where reformulation did not work; (iii) close coordination between executors, the MEF and the Bank in order to identify problems and find solutions; (iv) support for executors through relaunching workshops in cases of team turnover, consultancies
-9on bidding processes and other specific needs; and (v) agreements with control entities in order to avoid delays, particularly as regards auditing of financial reports. The key problems for portfolio execution over the past year are summarized in the table above. This table describes problems and joint actions that the Bank and Ecuadorian government took. 2.6
Lessons learned. The most relevant lessons learned with respect to operations design are related to the need to: (i) focus the Bank program on crucial areas where smaller projects have a more significant impact in a relatively short term; (ii) improve institutional analysis, particularly as regards organization, functions, incentives and profiles of executing entities; and (iii) clearly establish financial responsibilities (guarantees and/or counterparts) for each level of government involved in the project. As regards institutional strengthening, the 2000-2002 Bank program tries to attack problems in diverse ways, for example through institutional improvements as triggers or conditions of disbursements.
2.7
Compliance with goals of the Bank’s Eighth Replenishment. As regards social equity and poverty-targeted investments (SEQ-PTI), compliance with these goals established in the Eighth Replenishment will improve substantially with the Program 2001-2002 (see below). Goals of the Eighth Replenishment: Social Equity (SEQ) and Poverty Targeted Investments (PTI) Number of Operations Total
SEQ & PTI
Amount (US$ millions)
SEQ-PTI/Total
Total
SEQ & PTI
SEQ-PTI/Total
Portfolio in Execution*
22
6
27.3%
803.4
185.5
23.1%
Project Pipeline**
16
8
50.0%
311.2
180.0
57.8%
* Includes projects approved in 2000 ** Projects in the 2001-2002 pipeline
2.8
Consultations on the new strategy. The Bank’s new strategy, to be presented later in this document, was discussed with Ecuadorian authorities and civil society representatives after being reviewed by the Bank’s Programming Committee. Bank staff participated in four gatherings with representatives of civil society in the cities of Quito, Guayaquil, Cuenca and Loja, during which a PowerPoint presentation was made explaining the Country Paper and background leading up to it. Copies of the slides were made available and a dialogue took place on the points raised. Representatives of industry and commerce, labor unions, microenterprises, local governments, non-governmental organizations and indigenous and Afro-Ecuadorian organizations participated in the meetings. The Bank found a broad consensus regarding the main challenges to sustained economic growth in Ecuador and the Bank’s objectives in the country. However, there were diverse opinions on the instruments most suitable to obtain the
- 10 objectives and differences over regional priorities. One area of consensus was the recommendation to the Bank to promote greater transparency in public sector management. B.
Bank Objectives 2000-2002
2.9
Time horizon. This document describes the Bank’s strategy for Ecuador during the three years of the current government’s term (2000 to 2002). The greatest challenge is to overcome the aftermath of five years of political and economic instability through economic stabilization, the consolidation of the dollarization process, the strengthening of the financial system, the reduction of poverty, the initiation of the decentralization process, the strengthening of governance and the improvement of the investment climate. The strategy is helping to lay foundations for economic, social and political stability in the country, with a view to moving ahead in the next programming cycle in areas such as the unfinished sectoral, political and social reforms. These issues will be central to programming with authorities that takes office in 2003.
2.10
Program Objectives. following objectives:
2.11
The Bank program in Ecuador for 2000-2002 has the
i)
Economic stabilization and recovery of growth capacity.
ii)
Poverty reduction, human capital formation and social inclusion.
iii)
Efficient infrastructure management with private sector involvement.
iv)
Modernization and decentralization of the State, and promotion of sustainable regional development.
The table below illustrates the relationship between the challenges the country is facing (Chapter I), the stated objectives of the Bank’s Program for Ecuador, and the Bank’s strategy as described in the following pages.
- 11 CHALLENGES FOR ECUADOR, PROGRAM OBJECTIVES AND BANK STRATEGY Development Challenges Economic stabilization
Bank’s Objectives Economic stabilization and recovery of growth capacity
Bank Strategy -
Poverty reduction and social inclusion
Poverty reduction, formation of human capital and social inclusion
-
Investment in physical infrastructure to improve competitiveness
Efficient infrastructure management with private sector involvement
-
Improve governance vis-à-vis political fragmentation and regional inequalities.
Modernization and decentralization of the State, and promotion of sustainable regional development
-
-
-
Support resolution of intervened banks (Investment Sector Program, Comp. 2 – 1259/OC-EC). Support Law of Fiscal Responsibility and Transparency. (Decentralization Support Program – 1358/OC-EC). Strengthening of the Finance Ministry – 1366/OC-EC: macroeconomic programming, foreign debt management and investment programming. Science and Technology Program (874/OC-EC) to strengthen competitiveness. Support for agricultural sector: Rural Land Regularization and Administration Program (EC-0191) Protection and recovery of social spending (Investment Sector Program Comp. 3 – 1259/OC-EC). Targeting of social expenditure (Social Program. Beneficiary Identification System – 1261/OC-EC). FISE III: Targeting the poorest groups, indigenous and Afro-Ecuadorians Expansion and improvements in quality of preschool education programs (Early Childcare Program 1056/OC-EC) and basic rural education (Education Quality Improvement - 1142/OC-EC) Provide assets to the poor (Housing Sector Program II – EC-S/N) Support for Social Security for Small Farmers (EC-0101) Support for social statistical information systems (Support Census and Strengthening Statistics – 1296/OC-EC) Support privatization and regulation of electricity and telecommunications (Investment Sector Program, Comp. 1 – 1259/OC-EC). Support MOP investment program in highway infrastructure, subject to restructuring of MOP and privatization of road maintenance: Road Program II (EC0132). TC: Support creation of firms and micro-enterprises for road maintenance. Building and maintenance of rural roads and tertiary road network (Rural Transportation Infrastructure – 1282/OCEC) Urban Public Transport Program (EC-0185) for mid-size cities. Support for concession of potable water and sanitation systems in Guayaquil. Support legal framework for municipal finances and process to transfer resources and responsibilities to local governments (Decentralization Support Program (PAD) – 1358/OC-EC) Municipal Development Program II (EC-0139): support development of municipal infrastructure and implement sustainable financial policies for Banco del Estado. Support natural resource management and sustainable development in ecologically vulnerable regions (Environmental Management Program for the Galápagos Islands – 1274/OC-EC, Coastal Resource Management Program II (Pacific Coast) and Sustainable Development Program for the Northern Amazon Border Region (EC0201). Quito Environmental Sanitation Program (EC-0200).
- 12 -
C.
Strategy 2000-2002 1.
Economic stabilization and recovery of growth capacity
2.12
Stabilization. In 2000, the Bank contributed to economic stabilization and to the consolidation of dollarization through helping the authorities to meet the conditions for the final disbursements of the Agricultural and Financial Sector Programs, approved in 1994. The Bank also approved in 2000 the Investment Sector Program (1259/OC-EC), which supports an stable macroeconomic framework and the resolution of intervened banks. In the area of tax administration, the Taxation System Modernization (1062/OC-EC) supports the restructuring of the Internal Revenue Service (SRI), and this has resulted in a substantial increase in tax collection.
2.13
Programs pending approval to support stabilization are specifically concentrated in the fiscal area, where the Bank’s strategy aims at establishing the adequate legal and normative framework, as well as strengthening the institutions responsible for fiscal policy. The Decentralization Support Program (PAD)(1358/OC-EC) will provide technical advice to authorities as they prepare and implement the Law of Fiscal Responsibility and Transparency. This legislation establishes macroeconomic rules for fiscal spending, eliminates the earmarking of fiscal revenue and channels new oil revenues towards servicing external debt. The Strengthening of the Finance Ministry (MEF)(1366/OC-EC) will improve macroeconomic programming, following-up of public investment projects, and external debt management.
2.14
Growth. The activities described above to support stability will also contribute indirectly to growth through restoring confidence. The GDP is growing at a rate of 5 percent in 2001, and the projected growth rate for 2002 is 4 percent, after discounting the impact of a possible international recession. An important direct contribution to rebuilding the growth capacity of the economy is the Science and Technology Program II (EC-0205), currently in preparation, as it is geared towards the needs of the productive sectors and is expected to improve competitiveness, an urgent need in light of dollarization.
2.15
The Bank program will also support recovery in specific sectors. In the agricultural sector this will be done through the Rural Land Regularization and Administration Program (EC-0191), which focuses on shoring up property rights and improving the functioning of the land market. The Bank will also support the agricultural sector with non-financial products, such as studies to analyze mechanisms and institutional arrangements for better functioning of the rural financial market.
2.16
In addition to the contraction of the domestic market during the crisis of the last years, economic growth was hampered by low external prices and other difficulties for non-oil exports. Through technical assistance, the Bank will try to meet needs in this area through the support for small and medium exporters of non-traditional agro-industrial products.
- 13 2.17
The Bank is helping to improve the markets of services for micro enterprises through MIF and other funds. Technical cooperation projects include a program of subsidized training through vouchers for microentrepreneurs, a project to train firms that provide services in areas such as clean production and exports, and a pilot program for the electronic marketing of handicrafts. 2.
Poverty reduction, human capital formation and social inclusion
2.18
The Bank’s strategy to confront the Ecuadorian social crisis and to protect the human and physical assets of the poor has five components. First, the Bank supports social protection measures that halt the drop in the quality of life, such as increasing social public spending and providing key services for the most vulnerable groups (Component 3 of the Investment Sector Loan - 1259/OC-EC). Second, the strategy includes targeting social programs and subsidies (Social Program Beneficiary Identification System, 1261/OC-EC, approved in 2000) and the improvement of demographic and social statistical information (Support Census and Strengthening Statistics - 1296/OC-EC approved in 2000). A third component involves support for physical capital formation of the most vulnerable groups through the Housing Program II currently in preparation. The fourth component supports the preservation and formation of human capital through: (i) the acceleration of the preschool education (Early Childcare Program 1056/OC-EC) and primary low-income rural education (Education Quality Improvement - 1142/OC-EC) programs already in execution; (ii) a study on modernization of training services; and (iii) a Social Security for Small Farmers (EC-0101) that will support some reforms and the strengthening of the social security system for poor peasants. Finally, the fifth component will address the needs of small and poor communities in terms of physical and social infrastructure through a third phase of the Social Investment Fund (FISE), EC-0203.
2.19
Maintain Social Spending. The third component of the Investment Sector Loan (1259/OC-EC) supports the protection of a set of priority social expenditures on basic services including basic education, primary health care and disease control, and targeted assistance programs, including conditional cash transfers.
2.20
Targeting and social information system. The Bank supports the targeting of social spending both through the Investment Sector Loan and through the Social Programs Beneficiary Identification System (1261/OC-EC). It also supports the social and demographic information system through technical assistance for the Integrated System of Social Indicators (ATN/JF-6366-EC) and the Support Census and Strengthening Statistics (1296/OC-EC), particularly as regards demographic information, the next population census and household survey design.
2.21
Physical assets of the poor. The Bank will support a second housing program for the low-income population. Housing Support Program II (EC-S/N) will finance subsidies for housing, and will consolidate reforms undertaken in the first program as regards targeting of housing subsidies, involvement of private construction companies, and policies to stimulate savings and the leverage of resources.
- 14 2.22
Human capital. The Bank’s educational strategy in Ecuador is currently concentrated on the formation of human capital among the youngest and most vulnerable population (preschool and rural primary school). The immediate educational priority is to speed up projects underway that were held up by the difficulty of implementing innovative reforms and also by institutional factors. There are two such projects. The Early Childcare Program (1056/OC-EC) is based on the provision of services by civil society organizations, which must compete among themselves. The Education Quality Improvement (1142/OC-EC) covers primary education in rural areas and seeks to improve its quality through the decentralization of decisions, the establishment of a local monitoring system and the promotion of local autonomy with the participation of parents, the community and teachers. New activities on education during the current programming cycle include a study on the modernization of training services and a study to identify the needs for reform at the high school level. These studies will help to carry on the dialogue in education with the authorities and others involved.
2.23
Support for the health sector includes one project underway and another in the pipeline. MIF is providing technical support to Franchises in Health Services (ATN/MH-7083-EC) in order to increase the private sector’s capacity to provide primary health care along with the public sector. The Social Security for Small Farmers (EC-0101) will back improvements to “Seguridad Social Campesina” in order to increase the coverage and quality of health services for the rural poor and the indigenous population.
2.24
FISE III. The Bank has already supported FISE through two previous loans. In this new phase, FISE III will strengthen local organizational capacity and will finance priority social infrastructure projects. The communities themselves will define their projects in 220 of the poorest parishes in the country, where many indigenous and Afro-Ecuadorians live.
2.25
Social Inclusion. The Bank’s Program will specifically incorporate indigenous and Afro-Ecuadorian groups as beneficiaries of projects with a high content of community development, and they will also be consulted. Indigenous and AfroEcuadorian communities benefit particularly from those programs targeted to the poor and to the areas where they live. Indigenous Ecuadorians, who live mainly in rural areas, benefit from projects such as the Education Quality Improvement (1142/OC-EC), which supports bilingual education in Quechua and Spanish, and the Social Security for Small Farmers. Afro-Ecuadorians will benefit from programs for the Pacific Coast such as the Coastal Resources Management Program II (EC-0193). This program will support the sustainable use of the coastal resources and the development of productive and environmentally friendly activities.
2.26
Activities specifically designed to benefit the indigenous population still face some challenges. More flexible institutional arrangements are needed to match the plurality of indigenous associations. Methods are also needed to strengthen community development activities and separate these activities from political activities. The Bank is helping to confront these challenges through direct dialogue, with the approval of Ecuadorian authorities. In May, 2000, the Bank
- 15 organized a workshop with indigenous leaders from the Sierra, Amazon and Coastal regions. Participants discussed their concerns regarding dollarization, modernization, foreign debt and the Bank’s support for Ecuador. The Bank has also initiated discussions with national authorities and indigenous groups as regards possible ways of combating poverty through productive investment. Through technical assistance, the Bank is supporting initiatives to insert the indigenous population in the formal economy, specifically in the gas and oil sector in the Amazon region. 2.27
In July 2001, the Bank held a workshop with over 100 representatives of AfroEcuadorian organizations with the goal of improving the quality of dialogue. The Bank presented information about its activities, programs and portfolio in Ecuador. Participants proposed a list of actions for the Bank respond more effectively to their problems. 3.
Efficient infrastructure management with private-sector participation
2.28
There are four components to the Bank’s strategy for infrastructure: (i) strengthening the Ministry of Public Works (MOP) and privatizing road maintenance services; (ii) supporting public investment in areas where concessions are not yet viable, in order to prevent greater deterioration; (iii) strengthening regulatory capacity in the electricity and telecommunications sectors; and (iv) supporting the implementation of concessions in the electricity sector.
2.29
The institutional strengthening of the Ministry of Public Works is the focal point of the Bank’s strategy in the transport sector. The goal of restructuring the MOP is to cut back on the Ministry’s functioning as a direct agent in the road network (currently 90 percent of its total activity). The Bank seeks to strengthen the ministry’s planning capacity, policy formulation, regulation, contracting capacities and concessions management. Management of the road network will be contracted out to private firms and will involve terminating a large number of ministry personnel. These workers will be given the training and opportunity to start small businesses in road maintenance services. Road Program II (EC-0132), which is currently in preparation, focuses on MOP’s restructuring along with the most urgent repair works that will help facilitate implementation of a new contracting scheme for road maintenance. This program is set up in two phases within the framework of the master plan elaborated by MOP. It is designed to promote national and regional integration and complement two other programs already underway to repair roads affected by the El Niño phenomenon.
2.30
One area where urgent attention is required and where public investment would bring important economic and social benefits, is the rehabilitation of the tertiary (rural) road network managed by local governments. This network covers mainly low-incoming rural farming areas. The Bank’s program includes a two-phase operation for this network. The first phase was approved in 2000 (Rural Transportation Infrastructure, 1282/OC-EC), and a second phase is planned for the end of 2002. This operation seeks that beneficiaries and local authorities participate in the identification of needs and in the rehabilitation, maintenance, management and financing of the tertiary road network.
- 16 2.31
In addition to inter-municipal and rural transport, the Bank supports institutional strengthening for urban transport. Migration from rural to urban areas has been widespread, with a notable increase in urban population and in demand for transport in medium and large cities. The Urban Public Transport Program (EC-0185) will help to address this need primarily in mid-sized cities.
2.32
Support for regulation and the concessions process. The Bank is helping the “Consejo Nacional de ModernizaciĂłnâ€? (CONAM) to improve the regulatory framework and the process of private sector participation in the electricity and telecommunications sectors. Electricity companies are being prepared for privatization (Support for Private Sector Investment in Infrastructure, 1136/OCEC). Through the Investment Sector Program (1259/OC-EC) the Bank is helping to: (i) establish regulatory frameworks for the electricity and telecommunications sectors; (ii) change some legislation to allow greater private sector participation in electric companies; and (iii) carry out concessions of electric companies. 4.
Modernization and decentralization of the State and promotion of sustainable regional development.
2.33
After five years of instability heightened by political and regional fragmentation, Ecuadorian society is looking to political, fiscal and administrative decentralization as the avenue to improve governance, modernize the state and facilitate regional sustainable development. The Bank is supporting these objectives through several different programs.
2.34
Decentralization. Bank strategy in this area bears on a number of fronts. The Decentralization Support Program (PAD (1358/OC-EC) includes the introduction of new legislation on fiscal responsibility at all levels of government, transparency in the use of public resources, and indebtedness of local governments (Law of Fiscal Responsibility and Transparency). Second, PAD will help set in place an institutional framework to carry out the decentralization process and to gradually transfer resources and responsibilities from central to local governments. The Municipal Development Program II (PDMII) will promote fiscal responsibility at a local level, strengthen municipal management and finances, and improve local public services. The PDMII will also help to implement sustainable financial policies for Banco del Estado, the official bank which finances municipal development.
2.35
In addition, the Bank is helping change the way the water, sewer and sanitation utilities are run in the two major cities (Guayaquil and Quito). With Bank support, the concession of water and sewer utilities was accomplished in Guayaquil (Concession program for Guayaquil - 1026/OC-EC). In Quito, the Environmental Sanitation Program (EC-0200) will support financial and administrative strengthening of the municipal utility company and the preparation of concessions in specific areas, given that the magnitude of investments requires private sector participation. This program includes extending an existing risk prevention operation on the slopes of the Pichincha volcano (Laderas de Pichincha Project 935/OC-EC) to other zones of the city, in order to protect the environment and reduce vulnerability to natural disasters.
- 17 2.36
As living conditions have worsened in Ecuador in the wake of the economic crisis, so too have the problems of civic coexistence and security. The Bank will support the improvement of community relations and citizen safety both at the national and local level (National and Municipal Citizens’ Security Program).
2.37
Sustainable border area development. By virtue of the peace accords, Ecuador and Peru adopted a Binational Development Plan for the border region, most of which lies in the Amazon Region. The 10-year blueprint calls for infrastructure, social and productive projects that will cost an estimated $1.5 billion for each country. The Bank is: (i) coordinating the Consultative Group for International Financing and the development of an institutional apparatus to administer the Plan; (ii) supporting and promoting greater public sector involvement in these regions as regards social and environmental programs with national coverage; and (iii) helping prepare some specific projects of sustainable development in the region for approval during the next programming cycle.
2.38
Ecuadorian authorities are seeking international cooperation to foster development in the border area with Colombia to keep illicit crop cultivation and production from moving into Ecuadorian territory. The Bank will finance a Sustainable Development Program for the Northern Amazon Border Region (EC-0201). It is also coordinating the Consultative Group for the Preventive Alternative Development Program, which recently pledged $260 million to finance projects in the northern border areas.
2.39
Sustainable Development in vulnerable areas. The Bank has selected three regions of particular ecological importance –the Galápagos islands, the Pacific Coast and the northern Amazon– for environmental protection and sustainable development programs based on sound natural resource management and the participation of the communities involved. (i) The Environmental Management Program for the Galápagos Islands (1274/OC-EC), approved in 2000, supports the sustainable use of the archipelago’s marine reserve and the execution of a sanitation program. (ii) The Coastal Resources Management Program II (EC-0193) will support the rehabilitation of coastal areas that have suffered environmental degradation for years, as well as the implementation of a framework for the development of sustainable productive activities with the participation of local communities. Special attention will be given to critical zones such as northern Esmeraldas, where mangrove swamps have been despoiled, and the Santa Helena Peninsula. (iii) The Sustainable Development Program for the Northern Amazon Border Region (EC-0201) will support comprehensive environmentally sustainable development in the border region with Colombia. Investments will be concentrated in areas such as sustainable forestry management, basic sanitation and protection of natural resources. The program will benefit a region that is vulnerable because of its forestry wealth and prevailing conditions of poverty and isolation that are conducive to the introduction of illegal crops.
D.
Coordination with the Private Sector Group
2.40
MIF’s program in Ecuador targets the following areas: (i) business development, particularly among small businessmen, small farmers and civil society
- 18 organizations; (ii) eco-efficiency in industry; and (iii) concessions of public utilities and privatization of public businesses. The first area covers the development of financial and non-financial services for small business owners, support for the intellectual property rights system, business development among youth, and initiatives for small business owners in the tourism, agricultural and textile sectors. The second area includes a program to establish a clean production center. In the third area, MIF is helping prepare the sale of public assets in the tourism sector. 2.41
In recent years, the opportunities for the Private Sector Department (PRI) and the IIC in Ecuador have been limited. Delays in privatization processes hampered PRI’s activity, and the economic crisis has limited investment opportunities for the IIC. The IIC currently has a portfolio of $1.4 million in Ecuador. The pipeline for new projects is limited, with possibilities identified in the fishing sector. Since one of the central goals of the present program is to attract private investment for infrastructure, and as concessions processes are reactivating, a window of opportunity is opening for PRI. The most advanced discussions are with the firm that was awarded the concession of the Guayaquil water and sewer utilities. In the longer term, there are possibilities of financing electricity companies as well as new concessions for roads and the Quito and Guayaquil airports, which have been handed over to their respective municipalities. As regards the IIC, the Corporation will support specific sectors where better perspectives are identified as the economy reactivates and the financial crisis begins to subside.
E.
Coordination with other multilateral agencies
2.42
Early in 2000,the multilateral agencies agreed on a joint financial support package for Ecuador, to promote economic stabilization, the implementation of a sustainable economic policy, resolution of the financial crisis, poverty reduction, and structural reforms. These objectives are shared, with differing focuses, by the IDB, World Bank, IMF and CAF in their respective support programs.
2.43
IMF. In April 2000, Ecuador and the IMF reached a 12-month Stand-by agreement that was extended until December 31, 2001. The central themes of the agreement are fiscal sustainability, the resolution of the financial crisis and maintenance of social spending. The Bank supports these same objectives through the Investment Sector Loan (EC-1259/OC-EC), the Strengthening of the Finance Ministry (1366/OC-EC), and the Decentralization Support Program (1358/OCEC). Although the program negotiated with the Fund suffered delays during the second half of 2000, authorities accelerated compliance in early 2001. The Fund completed the second review of the agreement on May 25, and is about to complete the final review. The Ecuadorian government has stated its intention to maintain an agreement with the Fund during 2002.
2.44
World Bank. The strategy of the World Bank (IBRD) for Ecuador supports macroeconomic adjustment, economic growth, rehabilitation of the financial system, sustainable development and poverty reduction. The Country Assistance Strategy (CAS) of June 2000 presents a base lending scenario that envisages US$425 million in approvals for 2000-2002, including the US$150 million sector
- 19 adjustment loan (SAL) already approved. The CAS targets an assignment of two thirds of the amount approved to social and rural poverty programs. Nevertheless, due to institutional weaknesses and the delays in execution of projects, the IBRD currently estimates approvals for 2000-2002 to be in the range between its base and low scenarios, or around US$300-350 million. 2.45
Coordination between the IDB and IBRD frequently results in shared support for the same policies in their respective projects. Other times, the coordination involves the selection of different areas and activities that are still complementary. The selection is made based on accumulated experience and the priorities of each institution. Particularly in the social area, the two banks mutually reinforce support for the same programs and policies. The Investment Sector Loan coincides with the IBRD’s SAL as regards social spending and prioritization of social programs. In addition, policies and mechanisms for targeting of social programs were agreed upon in a tripartite dialogue between the Bank, government and the World Bank. As regards regulation, the IDB and World Bank are both supporting CONAM to implement a regulatory framework for the electricity and telecommunications sectors.
2.46
The IDB and World Bank also have complementary programs in other areas. In the fiscal area the World Bank is supporting tax reforms, an oil revenues stabilization fund and the strengthening of public financial management. The IDB is supporting the MEF to improve macroeconomic programming, public investment analysis and monitoring, and debt management (Strengthening of the Ministry of Finance), as well as the fiscal decentralization process (Decentralization Support Program). The IDB is also supporting the restructuring of the Internal Revenue Service. In the financial sector, the IBRD supports banking supervision and debt restructuring, while the IDB is supporting the resolution of intervened banks (Investment Sector Loan). In terms of sanitation projects, both banks are working together to develop a regulatory framework. In this sector the IDB concentrates its support in large and mid-size urban areas, while the IBRD operates in rural and small urban areas. Finally, the Bank benefits from lessons learned by the IBRD in some projects. For example, the IBRD’s experience with the land titling process in the Development Program for Indigenous Peoples and Afro-Ecuadorians is helping the Bank to design its Rural Land Regularization and Administration Program.
2.47
The CAF supports the Central Bank’s liquidity fund for the financial system and public investment in roads, electricity, irrigation and water projects. Its new loans are concentrated in the transport sector, particularly in roads to better integrate Ecuador with neighboring countries and in the cities of Guayaquil and Quito. The Bank’s work in the transport sector is focused on reform of the Ministry of Public Works and the rehabilitation and maintenance of rural roads. The CAF envisages loans to the public sector for over US$800 million between 2000-2002, an amount that does not necessarily imply major increase in net indebtedness for Ecuador, since loan terms are relatively short (between 5 and 10 years), with a quick initiation of debt repayments.
- 20 F.
Lending scenario SCENARIOS FOR IDB-ECUADOR LENDING PROGRAM 2000-2002 US$ Millions 2000
2001
2002 High
Base
Low
a. Approvals
186.4
65.1
245.0
150.0
65.0
b. Disbursements
245.0
176.0
160.0
125.0
100.0
c. Repayments
125.4
110.0
112.0
112.0
112.0
119.6
66.0
48.0
13.0
-12.0
114.2
112.9
114.1
114.1
114.1
5.4
-46.9
-66.1
-101.1
-126.1
d. Net flow of capital e. Interest f. Net cash flow (f= d-e)
(d= b-c)
Distribution of loans – Base case: Investment loans 63%, Sector loans 37%
2.48
Early in 2000, the Bank offered Ecuador approximately US$ 600 million for the period 2000-2002, as part of a multilateral support package. The viability of this scenario hinged on a suitable fiscal space being created for program execution through timely implementation of the IMF agreement and tax reform. However, a series of economic policy setbacks during the second half of 2000 led to delays in execution of the program agreed upon with the IMF. As a result, the US$600 million program is no longer viable. The Bank Program for 2000-2002 is now based in the following scenarios: approvals for $500 million (high scenario), $400 million (base case, with the highest probability) and $320 million (low scenario). Lending triggers for each scenario are presented in the table below.
- 21 -
Lending Scenario Triggers Low Case
X
X
Base Case
X
High Case
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Trigger - Agreement between MEF and the Bank on prioritizing and committing local counterpart funds for four projects in the low scenario, even in the case of fiscal difficulties, problems in negotiating a new stand-by agreement with the IMF, or a substantial drop in oil prices during 2002.
- Positive evaluation of the first phase of the program. - Strategy to improve targeting of subsidies and financial sustainability of program defined. Maintenance of a macroeconomic program in agreement with the IMF. - Agreement between the municipality of Quito and the Sewerage and Water Supply Company (EMAAP-Q) regarding cost recovery of investments in protecting Quito’s slopes. - Agreement between EMAAP-Q and the Bank on terms for concession of EMAAP’s commercial department and of water and sewer services in eastern Quito. Available indebtedness capacity of beneficiary cities (Quito, Cuenca, Machala, and others). - Agreement with Bank on strategy to restructure MOP. - Setting of criteria for selection of priority investments in roads. - Sustainable financial policy for Banco del Estado. - Available indebtedness capacity of beneficiary cities. - Positive evaluation of the first Science and Technology Program. - Mechanisms to reach the private productive sectors in place. - Advanced execution of phase I, i.e., 75% contracted or 50% disbursed. - Positive mid-term evaluation.
Program to be launched The following national and regional programs focused on improving the living conditions of the poor: - Housing Program II - Social Security for Small Farmers - Coastal Resources Management Program II (Pacific Coast) - Sustainable Development Program for the Northern Amazon Border Region - Housing Program II
Affects all programs listed in the base and high scenarios. - Quito Environmental Sanitation Program
- National and Municipal Citizen’s Security Program - Urban Public Transport Program - Road Program II
- Municipal Development Program II
- Science and Technology Program II
- Rural Transportation Infrastructure Program II
- 22 G.
The Bank’s exposure ECUADOR. IDB EXPOSURE RATIOS IDB Portfolio in Ecuador As percentage of Ecuador’s External Public Debt As percentage of Ecuador’s debt to IDB, CAF and IBRD As percentage of the IDB’s Loan Portfolio Debt Service to the IDB as percentage of Exports Interest as a percentage of exports Principal repayments as a percentage of exports ECUADOR’S EXTERNAL DEBT BY CREDITOR Creditor Development Banks IDB World Bank CAF For balance of payments support IMF FLAR
17.7 52.7 4.9 4.9 2.3 2.6
US$ Millions
%
3.667
33.5 1.932 861 873
473
17.7 7.9 7.9 4.3
148 325
1.3 3.0
Banks
4.265
39.0
Governments
2.380
21.8
146
1.3
10.928
100.0
Providers TOTAL
2.49
The Bank has been making a special effort to support development in Ecuador, and the country’s borrowings from the Bank account for a hefty share of its external debt stock. The US$1,932 million IDB portfolio at year-end 2000 represented 17.7 percent of the country’s external debt and 52.7 percent of its debt to multilateral development institutions. CAF and World Bank have a 23.8 percent and 23.5 percent share in the latter portfolio. The IDB intends to continue making an important contribution to Ecuador’s development, maintaining its exposure at around 50 percent of the multilateral debt. This will mean: (i) giving preference in this program to projects of relatively moderate amounts but strong development impact potential; and (ii) having close coordination with other multilateral agencies. Given the projections of the other multilateral institutions, the IDB’s participation in Ecuador’s multilateral debt would drop from 52.7 percent in 2000 to 51.8 percent in 2001 and 51.5 percent in 2002.
2.50
Currently, the portfolios of multilateral banks represent 37.8 percent of Ecuador’s external debt. This is one more reason for the development banks to keep coordinating their work closely and monitoring fiscal sustainability and mediumterm debt. The country’s debt service to the multilateral banks was affected in early 2000, when IDB disbursements had to be suspended for 37 days on technical default grounds.
- 23 H.
Program risks
2.51
The economic and financial crisis from which the country is emerging stemmed in large measure from a lack of political and social consensus on how to contend with the shocks affecting the country in recent years. Political and regional fragmentation and a variety of interest groups prevented successive presidents from obtaining a legislative majority. Without this majority, presidents were not able to push through a sound agenda to stabilize and modernize the economy. The current administration continues to face this challenge, particularly as regards the approval of economic, financial and fiscal reforms.
2.52
The program’s greatest risks lie basically in the fiscal and financial sectors. The difficulty of obtaining a political consensus could block economic reforms, including the Law of Fiscal Responsibility and Transparency, and delay the implementation of measures to protect a vulnerable economy from drops in oil prices. Such policy weaknesses would affect the Investment Sector Program, and the instability of fiscal revenues would affect public investment projects in general. If the decentralization process is not carried out in an orderly and timely manner, fiscal risks will be accentuated. Nevertheless, fiscal risks stemming from the decentralization process seem to lessen each day.
2.53
Although authorities have made great strides in the financial sector by establishing a liquidity fund and debt-restructuring arrangements, there is still work to be done in terms of the resolution of intervened banks and the strengthening of open banks. Particularly, the process of recovery of non-performing loans of intervened banks has yet to take-off.
I.
Studies and dialogue 1.
Stabilization and growth
2.54
Competitiveness. The exchange rate has been lost as an instrument of price competitiveness, and given the downward wage and price inflexibility, there is some fear that dollarization could make internationally traded goods and services less competitive. These problems have yet to surface thanks to the initial exchange-rate overshooting, but inflation has been eroding this advantage. Henceforward, given that inflation seems to be converging to international levels, policies and actions to improve competitiveness will be situated in the real (i.e., non-financial) sector of the economy. In addition to the Science and Technology Program II, the Bank will contribute to this area through studies of the macro and microeconomic determinants of competitiveness in the country. These studies will produce inputs for dialogue with the private and public sectors and for the continued Bank support to overcome competitiveness problems.
2.55
Finance Sector. During the current programming cycle, the Bank is supporting the resolution of intervened banks and the strengthening of open banks. At the same time, the Bank is undertaking studies on important areas of the financial markets, such as the rural financial market and the specialized public banks. The Bank is preparing the dialogue with authorities on these issues.
- 24 2.56
Sustainable development. A greater depth of knowledge regarding the relationship between poverty and natural resources and between economic policy and the environment will help with the design of sustainable development policies, Bank strategies, and projects and programs for Ecuador. These matters will be dealt with through studies that will be the basis for dialogue with the authorities. 2.
2.57
Poverty and human capital
Education. The Bank is currently supporting preschool education, primary rural education and science and technology programs. There is a need, though, to explore the needs of secondary and vocational education through studies that will be useful for future dialogue. 3.
Modernization of the State and sustainable regional development
2.58
Public employment. Public sector employment is an issue that has barely been discussed in Ecuador. Greater knowledge of this sector will help with modernization policies. Accordingly, the Bank has initiated a study on public sector employment, as a foundation for dialogue with the authorities on opportunities for reform and modernization of public administration.
2.59
Water Supply. Population growth in mid-size cities is a great challenge in terms of the coverage and the quality of water and sewerage services. Studies to be undertaken by the Bank will identify avenues for private-sector participation in these cities and the changes this would entail in legislation and sector regulation.
Ecuador: Strategy Matrix The Bank’s Instruments
Investment Sector Loan (1259/OC approved in 2000), component 2.
Fiscal Responsibility and Transparency Act (FRTA) to improve fiscal sustainability. Support for improvements in municipal taxation and finances.
Support for FRTA to eliminate earmarking, establish an oil revenue stabilization fund and improve transparency.
Program to Strengthen (MEF)
Program to Support Decentralization
Program to Support Decentralization
Support for the resolution of intervened banks
The Bank’s strategy
A. Stabilization of the economy and recovery of growth capacity
The government’s agenda Financial sector Recovery portfolio of closed banks’ portfolio. Contract with Interdin & Ahead to administer the open and intervened Banco del Pacífico
Legislation to improve municipal revenues and finances.
Support for MEF in macroeconomic programming, external debt management and investment programming.
Tax Modernization Program (1062/OC in execution)
Study on specialized public banks
Strengthening of financial management and programming capacity of central government.
Support for improvements in tax collection.
Fiscal Sector
Restructuring of Internal Revenue Service.
Science and Technology Program
Growth
ANNEX I
Performance Benchmarks
At least a third of the financial assets taken over by AGD are in private sector hands by the end of 2002.
Other Agencies
IBRD supports debt restructuring (SAL, $150m) and strengthening of banking supervision (TC $10 millions) CAF supports liquidity of banks ($225 million)
Fiscal Responsibility and Transparency Act passed.
Pre-investment, project monitoring and economic programming activities implemented in MEF.
Law on municipal revenues passed.
IBRD supports tax reform, oil revenues stabilization fund (SAL, $150million).
IBRD supports financial information system for public sector, SIGEF (Modernization of the State, $20 million).
At least 10% real increase in tax collection through VAT, ICE and income tax in 2001 and 2002
30 trainees through Sience and Technology Program working in Ecuador by 2004
Support the economy’s competitiveness.
CAF: Andean Competitiveness Program (TC $4m)
Science and Technology program targeted to productive sectors.
Improved access of small farmers to financial services
Support improvements in land markets and better access to credit for farmers
IBRD: Export Development ($21m)
IBRD: Prolocal-Support Productive Rural Investment ($20m)
Strengthening of property rights of small farmers.
Support growth in selected sectors
-Agricultural Land Management Program -Study on rural financial market -TC Service Center for Exports -TC Intelligent Cards –Credit for microenterprises -TC Intellectual Property Rights -TC Clean Production Centers
B. Poverty reduction, human capital formation and social inclusion
Other Agencies
Assign at least 20% of non-financial expenditures to social spending in 2001-2. To improve the social database and to achieve better targeting of public spending
To maintain the level of social expenditure and to protect a set o priority social investments
-FISE III
-System to Identify Beneficiaries of Social Programs (1261/OC approved in 2000) -Strengthen National Statistics System (1296/OC approved in 2000)
Investment Sector Program (1259/OC approved in 2000), component 3.
IBRD: Development of Indigenous Peoples and Afro-Ecuadorians ($25m)
IBRD: Prolocal-Support Rural Productive Investment ($27m)
The Bank’s Instruments
Improve mechanisms for targeting social spending and subsidies (bono solidario).
To provide social infrastructure for the poorest communities, including indigenous and Afro-Ecuadorians
-TC Support for nationalities and Indigenous Peoples -TC Institutional Strengthening of Afro-Ecuadorian Organizations
The Bank’s strategy
Continue FISE as part of social protection programs. -To support social inclusion -To insure that Bank-financed programs benefit ethnic groups
The government’s agenda
Eliminate barriers preventing indigenous and Afro-Ecuadorians from having access to social programs
Housing Sector Support Program II
-IBRD (SAL, $150m) same conditions -IMF: Agreement maintains public spending
Continue housing program as part of social protection programs.
To provide physical assets, especially housing, to the poor through targeted subsidies and private sector participation in construction and financing.
IBRD: Health Services Modernization USAID: Food Security Program
Rural Social Security Program
-Rural Autonomous School Network Program (1142/OC approved 1998) -Preschool Education Program (1056/OC approved 1998)
To improve access of rural workers to health services
Continue improving and expanding social protection programs for the children.
To support preschool education and private provision of services at this level, and to support rural primary education and increased community participation at this level.
-Study on Secondary Education -Study on Modernization of Training Services
Strengthen and broaden basic health services
Improve secondary and vocational education
To prepare studies on secondary and vocational education for future dialogue.
Performance Benchmarks
Social expenditure of public sector reaches 5.5% of GDP in 2002
-At least 50% of social safety net subsidies are targeted using the new identification system in 2003. - Population and Housing Census conducted
At least 20% of annual FISE’s disbursements are benefiting indigenous or Afro-Ecuadorian municipalities.
48.000 families benefited by yearend 2002
Campesino social security system coverage increased by at least 20% between 2001 and 2004..
Recovery of net enrollment ratios in rural primary school to at least 87% by the end of 2003.
The Bank’s strategy
The Bank’s Instruments
C. Efficient infrastructure management with private capital participation
The government’s agenda
-Road Program II. - TC Road Maintenance Microenterprises
CAF: road support in execution ($350m), prepare $208m in additional funds
IBRD supports through SAL ($151m) and TC ($17m.), privatization of electricity and telecommunications
-MOP restructuring has been completed and at least 20% of the country’s road system maintenance has been outsourced by the end of 2003 -Road concessions process underway by the end of 2002
-Regulations and rules to private investment in electricity and telecommunications are in place. -By the end of 2002, 25% of electricity distribution assets are being managed by the private sector.
Performance Benchmarks
Finance investment in transport infrastructure, subject to restructuring of MOP and outsourcing of road maintenance.
IBRD prepares rural roads project ($40m.)
Other Agencies
Develop infrastructure in rural zones
Rural Transportation Infrastructure Program II (PIRT II)
Investment Sector Program (1259/OC approved in 2000, Component 1)
Modernize the Ministry of Public Works (MOP) Execute master plan for arterial road system.
Urban Public Transportation Program
Support for regulation and privatization in electricity and telecommunications
Rehabilitate rural roads Support programs to improve urban transportation in intermediate cities
Water Supply and Sewerage Services for Guayaquil (1026-OC)
Amend legislation to allow majority private ownership of privatized enterprises.
Improve decentralized management of urban transportation Support concessions of public enterprises
Guayaquil’s water supply and sewerage concession completed by the end of 2001
Increase concessions of water and sewerage services
Performance Benchmarks Program to Support Decentralization (PAD)
15% of central government budget is transferred to provincial and municipal governments, with transfer of corresponding functions by the end of 2002.
Other Agencies
Municipal Development Program II
The Bank’s Instruments
D. Modernization and decentralization of the State and promotion of sustainable regional development
Support the strengthening of municipal finances and the process to transfer resources and responsibilities to sectional governments.
The Bank’s strategy
-Implement decentralization plan through the gradual transfer of responsibilities and resources to sectional governments. -Enact new laws on fiscal responsibility and local taxation.
Finance municipal infrastructure projects subject to implementation of sustainable financial policies for Banco del Estado and for the municipalities.
The government’s agenda
-Continue the Municipal Development Program. -Improve fiscal, financial and managerial capacities of municipalities.
-Locally raised revenues represent at least 30% of municipal budgets, on average, and at least 15% of municipalities and provinces are eligible for credit in 2004. -Banco del Estado has no more than 10% of loans in arrears by the end of 2004.
-
Expand coverage and quality of municipal services Support a permanent dialogue between local communities and civil and law enforcement authorities
Support financial sustainability and gradual reform of municipal enterprises.
Support natural resources management and sustainable development in three ecologically fragile regions: Galápagos Islands, Pacific Coast and Northern Amazon region.
Citizen’s Security Program
Environmental and Sanitation Program for Quito
-Sustainable Development Program on the Northern Amazon border -Coastal Resource Management Program II -Environmental Management Program for the Galápagos Island (1274/OC approved in 2000)
Spur sustainable development and environmental conservation in ecologically fragile areas: -Preventive Development and Social Welfare Program on the northern border area. -Coastal Resource Management Program (Pacific Coast) - Galápagos Islands Environmental Management Program
Implement a citizens security program. Non-financial products
-Coordination of Consultative Groups for Binational Border Plan Ecuador-Perú and Northern Border Preventative Alternative Development Program. -Study on public employment -Study on water services in intermediate cities
IBRD: Water Supply and Sewerage Project in Guayaquil ($35m.)
USAID ($38m) support for Preventive Development and Social Welfare Program on border with Colombia
Progress is made on concession and/or outsourcing processes for water and sewer services in Quito.
Local capacities for environmental and sustainable development management with community participation are in place in the Galápagos Islands, the Pacific Coast and the northern Amazonia.
ANNEX II LOAN PROGRAMS IN ECUADOR 2000-2002
Number 2000 1259/OC 1261/OC 1274/OC 1296/OC 1282/OC
Title Investment Sector Program System to Identify Beneficiaries of Social Programs Environmental Management Program for Galรกpagos Islands Strengthening of National Statistics System Rural Transport Infrastructure Program (PIRT I) TOTAL 2000
2001 EC0203 EC0204 EC0198 EC0191 2002A EC0201 EC0132 EC0199 EC0101 EC0185 EC0200 EC0193 2002B EC0139 SN SN EC0205
Millions
Social Investment Fund III (FISE III) Decentralization Support Program MEF Strengthening Program Rural Land Regularization and Administration Program TOTAL 2001 Sustainable Development Program for Northern Amazon Border Region Road Program II Citizen Security Program Social Security for Small Farmers Urban Public Transport Program Quito Environmental Sanitation Program Coastal Resources Management Program II Municipal Development Program II Housing Support Program II Rural Transport Infrastructure Program II Science and Technology Program II TOTAL 2002 TOTAL 2001-2002
High Scenario 40.0 4.8 5.1 15.0
150.0 4.5 10.4 12.5 9.0 186.4 Base Scenario 40.0 4.8 5.1 15.0
Low Scenario 40.0 4.8 5.1 15.0
65.1
65.1
65.1
10.0
10.0
10.0
35.0 10.0 10.0 15.0 40.0 20.0
35.0 10.0 10.0
10.0
40.0 25.0 20.0 20.0 245.0 310.1
40.0 20.0
20.0
25.0
25.0
150.0 215.1
65.0 130.12
ANNEX III
TECHNICAL COOPERATION PROGRAM 2001-2002 Number
Title
$Thous.
TC0011038
Feasibility Study Sustainable Development Northern Amazon
500
TC0011037
Feasibility Study Coastal Resources II
550
TC0011040
Environmental Feasibility Study Quito Slope Program
300
TC0011036
Cuenca Urban Transport
750
TC0006032
Rural Transport Infrastructure Support Program
750
TC0101042
Institutional Strengthening of Rural Finance Sector
500
TC0101048
Development of Productive Activities in Vulnerable Zones
300
TC0101050
Institutional Support for MOP and road concessions
TC0101052
Support for regulation of transit
300
TC9609506
Decentralization and Municipal Finances
700
2.000
Technical cooperation projects less than $150,000 not included.
MIF – PROGRAM OF PROJECTS Name of Project
$ Thousands
2001 Privatization of Ministry of Tourism Assets
500
Support for Ecuadorian Intellectual Property Rights System
245
Development of locally-based eco-tourism
300
Support for Junior Achievement
201
Institutional Strengthening Banco Solidario
300
Credit Program to Support Microenterprises, Improve System of Remittances between Ecuador and Spain
200
Business Services for Textile Sector
650
2002 Productive Initiatives in Indigenous Communities Private Trade Services Center for Clean Production
700 1.900 700
ANNEX IV Active Loans (November 30, 2001 – thousands of US$) Loan Number
Title
822/OC-EC
Rehabilitation Historical Center Quito
823/OC-EC
Water Supply & Sanitation Project Quito
834/OC-EC
Finance Sector Program
874/OC-EC
Science and Technology Program
892/OC-EC
Approved amount
Disbursed amount
Noncommitted amount
41,000
35,901
3,695
136,000
125,674
10,326
10,000
9,406
594
24,000
23,593
407
Modernization of Agricultural Services I
20,610
14,891
5,626
919/SF-EC
Preinvestment Program
12,000
10,732
1,268
935/OC-EC
Laderas de Pichincha Project
20,000
17,419
2,224
998/SF-EC
Early Childcare Program
7,800
1,898
5,846
37,200
7,032
30,014
30,000
22,654
7,313
1056/OC-EC 1002/SF-EC
Housing Sector Program
1078/OC-EC
32,000
25,889
6,088
1026/OC-EC
Concession Program for Guayaquil
40,000
20,713
17,712
1057/OC-EC
Mitigate El Nino Impact Program
70,800
55,893
14,907
1062/OC-EC
TC Loan Taxation System Modernization
15,800
13,397
2,295
1136/OC-EC
TC Loan Supp.Private Investment .Infrastructure.
13,500
3,360
10,076
1138/OC-EC
Fase Nino Phenomenon Complementary Program.
48,000
35,233
12,767
1142/OC-EC
Education Quality Improvement
45,000
8,504
36,356
1172/OC-EC
PPF:EC0134 Environmental. Management Galapagos Island
800
477
323
1259/OC-EC
Investment Sector Program
150,000
61,250
88,500
1261/OC-EC
Social Program. Beneficiary Identification. System
4,500
490
3,499
1274/OC-EC
Environment. Management Program Galapagos
1282/OC-EC
Rural Transportation Infrastructure (PIRT)
1296/OC-EC
Support Census and Strengthening Statistics
1358/OC-EC
Decentralization Support Program
4,800
1366/OC-EC
Strengthening of the Finance Ministry
5,120
TOTALS
10,400
9,596
9,000
1,071
7,839
12,500
2,865
9,525
810,830
4,752 5,069
498,342
296,617
ANNEX V
The Ecuadorian Crisis, 1996-2000 1996 II. Political Instability Presidents 1996-2000 III. Economic Instability
Durán Ball. Bucaram
1997
1999
2000
Alarcón Mahuad
Mahuad
Mahuad Noboa
22.1 31.6 30.7 3.4
52.6 41.2 43.4 0.4
194.2 135.7 60.7 -7.3
91.0 2.3
-2.6 5.1
-6.2 5.0
-6.9 8.6
1.6 7.7
4.4 2.9
4.5 3.1
4.7 2.5
4.5 2.3
11.5 42.3
15.1 52.3
11.7 54.1
Bucaram Alarcón
1998
Annual Percentage Growth
Devaluation of Sucre Monetary Base Consumer Price Index GDP
24.2 26.9 25.5 2.0 Percentage of GDP
Non-Financial Public Sector
Fiscal results
-3.1 4.5
Spending on interest IV. Social Crisis
Percentage of GDP
Public Sector Social Spending Public Spending on Education
5.1 3.2
Percentage of Economically Active Population
Unemployment Rate Underemployment Rate
10.4 43.4
9.3 42.4
Government Strategy: Measures Implemented - Implementation of dollarization through the Law of Economic Transformation of March 2000 - Agreement with the IMF from April 2000 through December 2001. Final revision soon to be completed. - Increase in domestic prices of combustible fuels (June and December 2000) - Substantial improvement in Internal Revenue Services capacity to collect taxes - Restructuring of external debt with private creditors (August 2000, exchange of Brady bonds and Eurobonds for Global Bonds). Negotiations with the Paris Club in September 2000. - “Trolly bus” II Law of August, 2000, which opens the electricity sector to private investment and establishes a framework for restructuring debts with the financial system. - Concession of a new pipeline to a consortium of private companies. Government Strategy: Future Measures - Organic Law of Discipline and Fiscal Transparency: will eliminate preassigned expenditures, will establish macro-fiscal rules for public spending, and will channel fiscal income from the new pipeline towards payment of the foreign debt. - As of January 1, 2002, domestic prices of combustible fuels will increase by 10% - Law to increase municipal taxes and regulate local finances - New agreement with the IMF in 2002