Ecuador has benefited from exceptional revenues in recent years as a result of high oil prices and favorable economic environment. However after the oil and commodities boom of 2007-2008 that accounted for half the GDP share in 2008, the global economic crisis and falling oil prices cut down the contribution to less than 30% GDP in 2009. With the oil prices rising slowly but steadily, revenues are expected to increase slightly in 2010. This trend will push the non financial public sector (NFPS) into a deficit of 1.7% in 2010. However the risks of oil prices further declining could widen the fiscal deficit and make the government more reliant on other sources of financing such as bilateral and multilateral loans, and foreign reserves.
The fiscal pressures that dominated much of 2009 will continue in the medium term. Fiscal deficits are expected to average 7% of the GDP every year for the next five years. The pressure may force the Ecuadorian government to abandon dollarization and substitute the USD with a weaker domestic currency. The advantages of adopting such a fiscal policy are to increase export competitiveness and to take pressure off the balance of payments. Also it would give a short term boost to local currency revenues, while increasing domestic spending. On the other hand, a weaker currency may potentially increase the rate of inflation.
Ecuador Economic Structure: The Road Ahead
The major roadblocks to Ecuador’s establishing a viable medium term fiscal policy are volatility, uncertainties and depletion of oil resources. Although the present government has enforced laws to ensure more spending discretion, the lack of proper policy framework could resist such change. Ecuador’s oil funds could potentially solve a few problems that are affecting the country’s fiscal policies.
Firstly, the trend to engage in unsustainable spending in times of growth has resulted in less than expected investments in key sectors such as energy and hydrocarbons. Postponing investments in these sectors will induce further strain on the fiscal policy. Therefore, earmarking funds for these sectors could be an option.
Secondly, adopting a Chilean style structural fiscal target could be a reasonable medium term objective without putting too much pressure on the earmarking of funds on key industrial sectors.
Thirdly, hedging or insuring funds against oil price volatility could be an option. Qatar did it successfully in 2009. Finally, establishing guidelines to ensure more accountability in oil funds distribution will help the budgetary system to be more transparent.