IMF agrees to new loan but says Ecuador needs to end fuel subsidies, reduce spending if it expects more

Dec 19, 2022 | 34 comments

Although the International Monetary Fund says Ecuador has made economic progress in recent years, it says more remains to be done if the country is to receive IMF loans in the future. IMF director Kristalina Georgieva made the comments Friday when she announced the release of $700 million to the country’s Finance Ministry.

“Ecuador has made significant advancements in managing its budget and debt obligations but some major issues are unresolved looking to the future.” Georgieva said.

IMF Director Kristalina Georgieva

Chief among those issues, the IMF said in a statement, was the reduction and elimination of fuel subsidies. “The money needed to sustain the subsidies amounts to more than $2.5 billion annually, money the country badly needs to provide social services and maintain a healthy balance sheet,” it said. It pointed out that consumers in “most of the world” pay 500% more for LP gas than Ecuadorians and 200% to 300% more for gasoline.

The IMF says the government must work to improve the economy so its residents can afford to pay market rates. “We understand the social and political pressure applied by some sectors but the answer to poverty is not to provide subsidies but to improve the standard of living for all people.”

When Ecuador announced reductions in the gasoline subsidy in recent years, nationwide protests forced it to backtrack. “The government must find a way, through dialog and social programs, to reduce the subsidy expenditures,” the IMF advised.

In a visit to Quito two weeks ago, Georgieva and members of the IMF Board of Directors told Ecuador Finance Minister Pablo Arosemena reduction of the fuel subsidy and new austerity measures will be needed if Ecuador is to continue receiving IMF support. “Public spending on salaries must be contained,” the IMF said. “We are particularly concerned that the 2023 budget includes an increase of $792 million for salaries, meaning a total obligation of $9.9 billion. This represents 38% of all annual public spending, five times more than the investment in public works.”

The IMF also advised Arosemena that the government’s contracting practices must be improved. “The current system allows for corruption and means some contractors of essential products and services are not paid on time, which often means the interruption of receipt of those products and services. The percentage of payments to contractors in arrears is not sustainable,” the IMF said. It added that contracting problems within the country’s public health and Social Security health care systems are “especially extreme.”

In his response, Arosemena said that the government is making progress to correct problems and abuses within its budgetary process. “This government inherited years of abuse and neglect and these problems have proven difficult to correct,” he said. “We are in full agreement with all IMF recommendations and continue to work to achieve them.”

According to Arosemena, Ecuador will receive the $700 million IMF disbursement by December 31.