Source:
Eurodad
Mon Apr 09 2007
The report gives an overview of the evolution of Ecuador’s debt, starting from the expansion of indebtedness in the aftermath of the "oil boom" in the seventies and going through the structural adjustment policies promoted by the IFIs and the rescheduling and restructuring of the external debt during the nineties. The report calls for the implementation of a central unit that manages on a unified basis the national policy on debt and it also calls for an audit of the Ecuadorian debt.
The analysis of Ecuador's external debt from 1976 to 2006 by the Special Investigation Commission (CEIDEX)
Following concerns raised by the high levels of indebtedness of the country, the Ecuadorian government requested the implementation of a special commission in charge of a number of measures related to debt: analysing the legitimacy of the external debt, analysing the social and economic impact of debt rescheduling, checking the implementation of projects and giving recommendations for defining new responsible indebtedness policies. The final report, which was published at the end of February 2007, reveals the main reasons for the current debt situation in Ecuador, a country which still uses 22% of its budget on debt service -one of the highest levels in the region.
The report gives an overview of the evolution of Ecuador’s debt, starting from the expansion of indebtedness in the aftermath of the "oil boom" in the seventies and going through the structural adjustment policies promoted by the IFIs and the rescheduling and restructuring of the external debt during the nineties. One of the main reasons for the debt accumulation in Ecuador comes from the progressive dismantling, from the eighties on, of the State’s role in planning the development financing policies and the proliferation of a number of non-connected management units all with responsibilities related to debt. This lack of regulation opened the door to speculative operations that contributed to increasing the burden of the debt.
For these reasons, and in order to redevelop a sovereign policy on debt after thirty years of absence, the report calls for the implementation of a central unit that manages on a unified basis the national policy on debt. It also calls for an audit of the Ecuadorian debt. It is likely that the new Correa government, very proactive on this issue, will push this issue forward. This summary provides a short overview of the report.
The origin and the expansion of the debt
Following the 1970’s oil high prices, Ecuador’s private and public financing policy basically relied on external indebtedness. In 1978, a change in the Ecuadorian constitution set a milestone on the country’s debt policy. The Parliament was pulled out of the national debt policy, leaving the door wide opened to corrupt practices from some politicians that were, at the same time, active in the financial arena. Some other changes related to monetary policies and the legal framework were also implemented during the same period, which substantially increased private sector irresponsible lending and speculation.
Following successive devaluations during the early 80’s, the private sector entered in a deep financial crisis. In order to tackle it, the government launched the "sucretisation" process, basically consisting of buying back private sector debts transforming thus the private debt into a public one. After the "sucretisation", the amount of the debt was multiplied by 6,rising from US$1650 million to US$7500 million.
A significant part of all those legal reforms (such as the decree recognising unpayable debts, the issuing of state bonds aimed at buying private debts or the 1994 law promoting the establishment of financial entities and thus flexibilising the legal framework among others were pushed by the IFIs, in order to ensure the debt repayment.
Refinancing the public external debt...
With the weakening of the legal and constitutional framework, Ecuador’s level of indebtedness continued to rise during the 90’s by issuing Brady and other bonds. In 1993 the state issued US$909 million bonds, which at that time amounted to the entirety of the country’s debt with external financiers.
In 1994, a new decree allowed for the issuing of new bonds and new agreements with external banks.
...and rescheduling it
In the aftermath of the financial crisis of 1999, the government launched a new rescue operation, through a new decree in 2000, which basically consisted of exchanging "Brady" and "Eurobonds" with "Global" bonds with an interest rate of 10 to 12%. Two years later, a new law on so-called accountability and fiscal transparency was approved. This ensured debt repayment through oil revenues. This way, the repayment of old speculative originated debts was definitely ensured by the State.
The proliferation of development project management unities
In the context of deregulation and the weakening of the legal framework that was promoted by the IFIs, a huge number of non-connected management departments emerged that did not really act in coordination with the government. Bad management practices and malfunctioning of the overall system were compounded by the absence of an efficient monitoring and planning body which subordinated national standards to multilateral rules. Moreover, the onerous conditions imposed on the country (not considered as poor enough to benefit from loans on more favourable terms) considerably increased the burden of the debt.
The burden of debt in the Ecuadorian budget
The external debt accumulated by Ecuador between 1976 and 2006 amounts to $29.976 million, most of which was contracted with multilateral institutions and external banks. On average, $388.6 million are annually used to pay external debt service (not including multilateral debts). Over the last 30 years, this amounts an average of 22% of the Ecuadorian budget, one of the highest levels of the region. It is mostly from the 80’s, under the structural adjustment programmes, that the budget devoted to debt servicing increased, rising from 11.4% in 1981 to 21.7% in 1982 and attaining some peaks of 37% in 1995 or 31% in 2001. These figures are to be compared with social expenses, suffering from a chronic under-financing in the national budget. Despite the constitutional obligation of devoting 30% of the budget to education, it has only been respected one year, in 1980, and the real average level are around 10%, whereas health receives no more than 5% of the national budget. Since 1976, Ecuador has paid more than $35 000 million on debt service (of which almost 50% comprises interest) and still has to pay $10 000 million on capital.
Towards an audit of Ecuador’s debt
In conclusion, and as a direct consequence of the State’s malfunctioning, the commission had to deal with contradictory figures and had difficulties in finding reliable information. In order to ensure a reliable and sustainable debt management, the commission calls for the implementation of a central body in charge of planning, monitoring and managing debt policy.
As a second step, the report calls for the implementation of a special commission in charge of leading an audit process on all the loans contracted by Ecuador, in order to identify responsibilities and irregularities at national and international level. In this regard, and as a further step, the commission also calls for the set up of an international Tribunal in charge of sovereign debt arbitration processes on the basis of an international financial code.
Over the next few weeks, civil society organisations will meet in Quito, Ecuador to discuss how they can support the next phase of a comprehensive audit process. The Correa Government has already stated that it will put its full weight behind an official audit of the public debt burden, staring with comerical debt and key multilateral creditors.
Related Information:
About the report of the Ecuadorean Special External Debt Audit Commission (CEIDEX), interview with Hugo Arias
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