IFIs Latin American Monitor
Thu Aug 02 2007
In a historical international event, the Ecuadorian government launched a new public debt audit commission. This is an unprecedented event since the task will be given full State support and involvement. The decision is part of a debt policy which has been implemented by Rafael Correa’s administration since the beginning of his presidential term in January 2007.
The Commission for a Comprehensive Audit of Public Debt (CAIC, in Spanish) has the role fulfilled by the Special External Debt Audit Commission (CEIDEX, in Spanish) from April to December 2006 as prior background. In its final report, CEIDEX suggested the need to institutionalise external debt research, treatment and control by putting forward some indications regarding irregularities that should be delved deeper into.
Based on this work and on the diagnostic that debt poses a large burden on the government budget, the CAIC mainly aims at "auditing background information, studies, economic, financial, social and technical feasibility ratings and other documents used to support loan applications; the amounts of loans as well as increases and extensions; the economic, financial and commercial terms both agreed and applied; the actual use of borrowed resources, etc.".
The work to be carried out by this commission – which comprises the period 1976-2006 – will report on the legitimacy of the Ecuadorian internal and external debt. Its findings would determine the debt policy to be applied by President Rafael Correa, who is willing to undertake a restructuring process this year regarding the country’s liabilities with a view to reducing their burden on the budget and allocating increased resources to social sectors.
On July 23, in Guayaquil, President Rafael Correa together with the then Economy Minister, Ricardo Patiño, set up the functions of the commission. That was probably one of the last public activities of Patiño as ministry head, since two days later he was to be replaced by Fausto Ortiz, and appointed as new Minister for the Coastal Region. This cabinet change was due to the vote by Congress to censure Patiño over breach of the law.
However, Ortiz expressed his support for the transparency process at the Economy Ministry and assured he would maintain the external debt management promoted by his predecessor. Patiño laid special emphasis on a substantial reduction of the debt-GDP ratio, aiming at decreasing it from 37 per cent of the government budget in recent years to 12 per cent by 2010. By 2008, the government intends to reduce debt payment to 17 per cent of the budget. On repeated occasions, Patiño argued that Ecuador "will not pay the external debt considered as illegitimate", in view of which Ortiz stated that he is looking forward to the results of the commission in order to express his opinion on the subject.
The commission has a one-year term, to be renewed at the discretion of the Economy Minister, to investigate individual credit agreements, including bilateral loan contracts and Paris Club agreements, bond issuances and multilateral loans, which will be analysed based on legal, economic and social and environmental impact considerations.
The commission comprises national and international experts in the field of debt, economics, law, and socio-environmental problems from the public sphere and civil society, which reinforces the historic nature of the initiative. The commission is made up of: a) four representatives of State institutions related to indebtedness, monitoring functions and the defense of national interests: the Economy Minister or his delegate; the State Procurator-General, or his delegate; the Civic Corruption Authority or his delegate; and the Auditor General (as advisor); b) six representatives of social organisations and their respective substitutes (with previous work on debt issues): Hugo Arias, coordinator of Jubileo 2000 Red Guayaquil and member of CEIDEX; Aurora Donoso, member of Ecological Action and the Institute for Third World Ecological Studies; Ricardo Ulcuango, former deputy of the Republic and former Vice-President of the Confederation of Indigenous Nationalities of Ecuador (CONAIE); Franklin Canelos, member of the Latin American Council of Churches (CLAI) and of Ecuador’s Debt Group; Karina Sáenz, economist, member of Jubileo; César Sacoto Guzmán, economist and lawyer, professor at the University of Guayaquil; and c) three representatives of international civil society organisations working on the issue of debt and their respective substitutes: Gail Hurley, representative of the European Network on Debt and Development (EURODAD), with headquarters in Belgium; María Lucía Fatorelli, Tax Auditor of Brazil’s Finance Ministry and Coordinator of the Citizen Debt Audit/Jubilee South Network-Brazil; and Oscar Ugarteche, economist, professor at the Autonomous University of Mexico and technical advisor of the Commission on Economic and Financial Crimes of Peru’s National Congress. Among the above-mentioned substitutes, it is worth highlighting the presence of international experts Alejandro Olmos, of Argentina, Jurgen Kaiser, of Germany, and Eric Toussaint, of the Committee for the Cancellation of the Third World Debt (CADTM), based in Belgium.
Ricardo Patiño, as Economy Minister, gave key support to this initiative and laid emphasis on its "comprehensive" character. "This will not be a simple financial audit of the debt" (...) "we will consider all relevant legal, political and economic factors which have led to the accumulation of illegitimate debt in Ecuador. The audit commission must also consider social and environmental damages to local populations caused by debt. Debts which are found to be illegitimate must not be paid. Debts which are legitimate must be reimbursed", he said.
The commission, which has administrative autonomy and is adscribed to the Economy Ministry, will meet from time to time and will provide progress reports to the Minister of Economy and the Ecuadorian public.
The commission has been divided into four "sub-commissions" to facilitate the audit process, being a first group responsible for financial and economic analyses, a second group for the social and environmental area and a third one for legal issues. Meanwhile, the debt has been divided into: bilateral, multilateral, bonds and commercial debt and domestic debt.
The Economy Minister pointed out that he will make all relevant documents available to commissioners in order to support the investigation process. Ricardo Patiño said that he had already written formally to some banks and multilateral institutions to request additional documentation. He also acknowledged that in the likely event that the commission fails to audit all debt contracts, it will start by working on those contracts with alleged irregularities.
Creditors remain expectant of the findings of this commission and fear, since Correa’s coming to power, that Ecuador would resort to "rather unfriendly" formulas to advance in its external debt reduction programme, including the option of capital cuts or unilateral moratorium – a proposal made by the current president during his electoral campaign.
For President Correa, "this is the first time a Latin American government promotes the creation of an external debt audit commission, having the other experiences (Argentina and Brazil) been part of civil society". Correa is full of expectations with regards to the work of this commission, and he would still have to make his final position known in case the existence of an illegitimate debt was publicly acknowledged. Ecuador has so far fulfilled all commitments and has even paid-off its debt to the International Monetary Fund ahead of schedule.
According to data from the Economy Ministry, Ecuador’s total public debt outstanding amounted to $13.24 billion in June 2007, accounting for 30.13 per cent of GDP. Of this figure, 10.36 billion are external debt, mainly owed to international credit institutions.
The bilateral debt amounts to 1.73 billion, being Spain, Italy, Japan and Brazil the main creditors. Only half of the amount of the total bilateral debt involves original loan contracts, being the rest the result of successive Paris Club renegotiations, commonly referred to as Paris Club V, VI, VII and VIII. The terms and conditions of the renegotiations will also be subject to close scrutiny by the commission to clarify - and make transparent to the people - the details of each one of the decisions made.
* Presidential resolution (pdf format - Spanish language)
* Ecuador launches historic debt audit commission, by Eurodad
* Debt: Ecuador at a historic turning point, by CADTM
* About the report of the Ecuadorean Special External Debt Audit Commission (CEIDEX), Interview with Hugo Arias, Jubileo 200 Red Guayaquil