IMF “Lending Into Arrears” In Ecuador

14 June 2000

The new IMF policy of “lending into arrears”, that is lending to countries in financial crisis with debts owing to the private sector, has been applied to Ecuador. The country has been suffering a financial crisis as foreign investors have left. Last year, the Ecuadorian government declared a default on its debt repayments including its Brady Bonds. The government has been in negotiation with the IMF on a financing programme since early summer 1999 but only now has a programme been agreed. The agreement is expected to encourage creditors to start negotiating a restructuring agreement.

The one-year programme calls for wage restraint, liberalisation of the labour market and significant increases in heavily subsidized domestic fuel prices. To offset the impact on the poorest groups, the program will also allow for substantial increases in cash payments to the poor.

The program also provides for the possibility of further increases in social expenditures in the second half of 2000 if spending targets are achieved and fiscal revenues are higher than programmed. The social impact of the crisis has been severe as the collapsed exchange rate has led to higher import costs and higher inflation. Wages have failed to keep up with the rapidly increasing costs of living.