Sunday, November 02, 2008

Ecuador Wary of IMF Lending

Worldwide Borrowing Binge, Lining Up at the IMF” Barrons.com
Correa destaca oportunidad para formar nuevo sistema financiero regional” El Comercio
Ecuador to Grow Up to 5% in 2009, Won't Use IMF Lines (Update1)” Bloomberg.com
Un riesgo país de 27.00 puntos hace imposible que Ecuador pueda emitir deuda” El Comercio

During the boom in commodity prices several Latin American regimes, such as Brazil and Argentina, diverted billions of dollars in government earnings to pay off their debts to the International Monetary Fund (“IMF”) and other official lenders before those debts were due, claiming these pay-offs “freed” them to pursue “independent policies.”

Now the IMF is one of the few institutions right now that has liquidity, and most likely will start to parcel out that liquidity as this crisis deepens. IMF programs are explained in greater detail in a prior UICIFD blog post, IMF Provides Countries With A Generous New Tool to Combat Crisis.

However, some of the more “leftist” Latin American countries, including Bolivia, Ecuador, Argentina and Venezuela, are against IMF "meddling" and so will try to avoid it. One of the most ardent opponents of IMF loans and their attached conditions is Ecuador President Rafael Correa. He has called the IMF and the World Bank “the biggest reason for the Latin American disaster, the reason that Ecuador has not grown in the last 20 years.” In 2000, for example, the IMF loaned millions to Ecuador, but in exchange Ecuador had to demonstrate “a firm commitment to reining in the fiscal deficit and curbing the state's role in the economy.” Since attaining the Presidency in 2006, Correa has stated that debt payments to the IMF and other institutional lenders would be suspended if making such debt payments meant sacrificing newly-implemented social programs. A prior UICIFD blog post addresses this and other Correa policies.

President Correa has repeatedly called for a “Latin American” approach to economics, lamenting that “there are still too many people with a colonial mentality in Latin America, too many people that speak Spanish but think in English.” Yet Ecuador, like most countries, needs to be able to borrow. Currently, the risks that investors perceive in Ecuador make issuing bonds too expensive, if not impossible for the country. Correa has been encouraging area leaders to help build a regional financial structure that will better serve the needs of countries like Ecuador. For now, Correa plans to turn to "friendly countries" like Russia, China, Venezuela and Iran, for additional funding instead of to the IMF. Whether such funding lines will remain open to Ecuador in light of falling oil prices remains to be seen.

Ecuador’s leaders remain hopeful despite the global financial crisis. Ecuadorian Economy Minister Pedro Paez predicted 4 percent to 5 percent in economic growth in 2009 on investment opportunities in the country. According to Paez, "The infection is outside, in the United States." This would be a big change from 2007, when Ecuador's economic growth reached only 1.87, the slowest growth rate in Latin America, according to the country's central bank. Credit rating agency Standard & Poor's is skeptical, stating that Paez’s growth forecast isn't realistic given the decline in oil prices and changes to the constitution and mining and banking laws. Minister Paez reiterated Correa’s stance toward the IMF, stating that "due to ideological reasons, while these entities maintain their attitudes, I believe it is healthy to keep a distance."

Questions

1)Brazil has pressed the IMF for years to provide loans free of conditions to countries with strong political economies. As explained, loan conditions are a primary reason Ecuador is rejecting IMF assistance. Should the IMF eliminate conditions on its loans in times of crisis?

2)Where should Ecuador turn for financing when needed?

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