A STEP FORWARD

Following an accord with the IMF, the Central Bank of Ecuador (BCE) is set to enjoy more autonomy.

THE BCE IS BECOMING MORE INDEPENDENT in its governance as a result of a series of fiscal reforms supported by the IMF. The IMF inked an extended fund facility (EFF) agreement with the government of Ecuador in 2019, by virtue of which some USD4.2 billion will be paid to the South American nation in the form of loans to alleviate some of Ecuador’s economic woes. Ecuador, in return, has promised to carry out monetary reforms in line with the IMF’s agenda meaning a reduction in public spending, an increase in privatization, and a decrease in its capital outflow tax. By July 2019, around USD900 million of the promised loans had been delivered, with the remainder scheduled for disbursement over the next three years—subject to Ecuador’s compliance with the IMF’s expectations as outlined in the agreement. The IMF will make sure at regular intervals whether “the government has sufficiently lived up to its commitments under the agreement,” according to a statement by the fund. Among other things, the IMF is keen to see that the BCE regains its autonomy—a quality valued by democracies and regarded as an important indictor by international financial institutions. The independence of the central bank was undermined during the term of former President Correa, as a result of the central bank’s extensive involvement in the financing of the government. Sources familiar with the matter claim that BCE may have financed the government to the tune of as much as USD6 billion, sidestepping common banking procedures. Verónica Artola, general manager of BCE, expressed hope in early 2019 that BCE would regain its lost autonomy in the current administration, though she did not explain in detail what policy changes will result in greater independence, aside from the government’s general willingness. President Lenín Moreno, who came to office with promises of reform, is willing to comply with the central bank’s demand and secure the IMF’s financing package. In October 2019, President Moreno announced a series of reforms paving the way both for the restructuring of the central bank and strengthening the dollarized foundations of Ecuador’s economy. And, the dollarization project is—to a greater or lesser degree— tied to the financial reforms, so much so that Christine Lagarde, the IMF’s managing director at the time of the accord, hoped the

measure would “put dollarization on a stronger footing, and, over time, encourage growth and job creation.” In the larger scheme of things, dollarization, too, can indirectly enhance the functionality and status of the central bank in the country. Steve Hanke, a Johns Hopkins University economist, believes that “half-baked local currencies” issued by central banks is a major challenge for many Latin American countries. A thorough dollarization of the economy will make it simply impossible for the government to view BCE as a last resort for borrowing and forestall pressure on the central bank to print currency to finance the government—which will automatically add to the bank’s autonomy. BCE shares some duties in the governance of the banking sector with another body, the Superintendency of Banks (SB), which as a technical entity is more in charge of auditing and monitoring the nation’s financial system rather than policy making. Nevertheless, the body requires some degree of autonomy to perform its supervisory functions, and it is expected that the reforms will have an impact on the SB, as well. Although the IMF-recommended reforms and the following austerity measures sparked protests in October 2019, and a possibility of the IMF and government updating their agreement, there is hope that as much as USD6 billion of loans can be secured from other international institutions, including the World Bank and the Inter-American Development Bank (IDB).