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The  IMF will extend 1 billion dollars of credit  to Ecuador

by | Jun 1, 2024

The Ministry of Economy reported on May 31, 2024, that the International Monetary Fund (IMF) would disburse the first $1 billion credit to Ecuador as part of a total line of credit of $4 billion.

The agreement will last 48 months, according to a statement that asserts that the IMF “supports Ecuador’s economic program.”

Credit to Ecuador will also come from other organizations

According to the minister of economy, Juan Carlos Vega, this line of credit will allow the country to access financing from multilateral organizations such as the World Bank and the Inter-American Development Bank.

This first disbursement from the IMF will materialize the agreement with Ecuador, announced in April by Varapat Chensavasdijai, head of the IMF mission. On a visit to this country, Chensavasdijai indicated that the resources are provided to improve the standard of living of Ecuadorians, especially the most vulnerable societal sectors, and promote sustainable growth.

In the statement, the IMF identifies the purpose of the credit to Ecuador as “building fiscal and debt sustainability, expanding the social safety net, improving the financial sector’s resilience, and further strengthening transparency and governance.”

The economic analyst and professor at the Andina University, Carlos Larrea, in statements to the Associated Press, assured that this credit to Ecuador is tied to a series of requirements” that if not met, the rest of the disbursements will not arrive” Larrea went on to say that among the main requests of the IMF are the reduction of the fiscal deficit and the elimination of subsidies to fuels that are being extended in the country.

“It is not certain that Ecuador can comply with such adjustments, especially the elimination of subsidies for gasoline and diesel,” Larrea warned. He also said that “although (these fuels) are very harmful to the country,” their elimination is unpopular.

The rate of interest is considered to be high

This IMF credit to Ecuador has been granted at an interest rate of 5.1%. Larrea explained and specified that the country needed liquidity despite a high-interest rate. “If the country did not obtain this credit to Ecuador, the fiscal situation would have become unmanageable.” He recalled that a few years ago, the interest rate of that organization was around 1%.

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Presidents Lenín Moreno (2017-2021) and Guillermo Lasso (2021-2023) tried, during their governments, to raise fuel prices. Both rulers had to backtrack on their intentions after violent popular uprisings were called. They were led by the Indigenous movement and put the continuity of those administrations at risk.

For this year, the government of President Daniel Noboa estimates that the country will have a fiscal deficit of 5.7 billion dollars. Some of the amounts would be covered with credits, such as the one from the IMF and another recently announced with the Andean Development Corporation, which will be for 800 million dollars. In addition, the government seeks to raise revenue by increasing the value-added tax, which rose in April from 12% to 15%.

Economic analyst Carlos Larrea maintains a positive outlook

The IMF’s extension of a $1 billion credit to Ecuador, part of a more extensive $4 billion line of creit, marks a critical juncture for the country’s economic stability and growth. This financial lifeline, set to span 48 months, underscores the IMF’s commitment to supporting Ecuador’s economic program. It opens doors for further financing from key international institutions like the World Bank and the Inter-American Development Bank. The credit to Ecuador is designed to enhance fiscal and debt sustainability, expand social safety nets, bolster financial sector resilience, and promote transparency and governance. Despite the positive outlook, economic analyst Carlos Larrea cautions that this credit is contingent on stringent conditions, including reducing the fiscal deficit and phasing out fuel subsidies. While essential for long-term stability, these conditions pose significant challenges given their unpopularity and past civil unrest triggered by similar measures. Although higher than past rates, the 5.1% interest rate on this credit to Ecuador reflects the urgent need for liquidity in a country grappling with a projected fiscal deficit of $5.7 billion. The government’s efforts to address this deficit include the IMF credit, an $800 million loan from the Andean Development Corporation, and tax revenue enhancements, such as the recent VAT increase from 12% to 15%. Historically, attempts to adjust fuel prices have faced strong opposition, leading to political instability, as seen during the administrations of Lenín Moreno and Guillermo Lasso. President Daniel Noboa’s administration must navigate these turbulent waters carefully to maintain economic progress and social harmony. The success of the credit to Ecuador hinges on striking a delicate balance between necessary fiscal reforms and maintaining public support, ensuring the intended benefits reach the most vulnerable and foster sustainable growth.

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