Boletin de Coyuntura (Economic Update Bulletin), Vol 2 No 4, April 2001.
Monthly publication of Dept of Research and Postgraduate Study of Science Faculty, University of Cuenca, Ecuador

If we do not accept the imposition of the IMF and other foreign agencies to increase VAT we will probably face an external shock because the country needs international credit to maintain its money supply levels, as follows from the behaviour of the balance of payments over the last two decades.

Forecasts for the 2001 trade balance are for a surplus of $427 million, of which exports will be a low percentage. This is due to decrease recently both in banana and shrimp prices and international crude prices are low. As for imports these should be rising to $3983 million for 2001, because inflation makes imports more accessible to local consumers and because devaluation is not longer an option given that Ecuador’s currency is now the US dollar.

As for the services balance, the crisis has meant more migration of Ecuadoreans abroad and family remittances sent home have become an important element in the balance of payments. (Weekly Analysis calculates it will be $1,300 million in 2001), more than the outflow of capital in foreign direct investment profit (Weekly Analysis calculate this to be $634 million for 2001). However, taking into consideration all the current non financial transactions particularly those occasioned by debt service, the surplus becomes substantial, creating a negative current account balance which has been the case indeed throughout the period.

The demands of debt service exceed the trade surplus and family remittances: therefore in 2001 the country will again incur a current account deficit: of $$434 million. This would not be a problem if Ecuador were increasing its debt levels so as to increase production capacity and pull through the recession. However this requires a capital account surplus. Here direct foreign investment and new foreign debt would have to be substantial to avoid a fall in the monetary base, otherwise a capital account deficit means demand contraction.

It has to be stressed that the current account deficit in Ecuador is due to the major deficit in the services balance ($2,255 million for 2001) and fundamentally, the foreign debt service.As for the capital account, in 2001 direct foreign investment is calculated to be $1,205 million, at least $500 million more than last year. For the public sector foreign debt it is assumed that disbursements less amortisation will be $528 million in 2001, $99 million more that in 2000. This is due to the multilateral institutions’ support for the Economic programme Ecuador signed with the IMF.

For the private sector, the reduction of the debt position will reach its end and there should be a net increase in credit to the country of $135 million in 2001. Arrears and other capital will record a drop of 41,390 million in 2001, less than 1999-2000 but more than 1997-1998. All this will lead to a surplus in the capital account of $532 million in 2001 which is $100 million more than current account deficit. In this scenario neither crisis nor boom is likely, rather balance.

However the danger lies in that if there is not an increase in VAT or if the government does not manage to put together a fiscal package it is calculated that there will be a reduction of $400 million in the disbursements of multilateral organisations. Neither will there be an increase of credit from the private sector and in its place there will be a downward trend continuing and instead of an influx of $135 million net of private debt there will be a drop of the same amount. Therefore the capital account in stead of a surplus of $532 million will have a deficit of $138 million which added the $434 million deficit of the current account makes a total of $572 million deficit in the balance of payments. This is the backdrop to the attempt of the IMF to impose its conditions.