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Ecuador Fiscal Policies
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Figure 14. Foreign Debt, 1975-89
The Ecuadorian public sector, comprising the central
government, state enterprises, and autonomous agencies operating on
a national scale, expanded rapidly during 1972-77. Public-sector
expenditures, adjusted for an average annual inflation rate of 14
percent, swelled about 65 percent during this period. Such
increases were made possible because of the boost in revenue
derived from a rise in international oil prices and the expansion
of oil exports, especially during the 1972-74 period, when
petroleum revenues rose as a proportion of GDP from 2 percent to
8.4 percent. Meanwhile, revenues from nonpetroleum commodity
exports declined from 18.7 percent of GDP in 1972 to 13.8 percent
in 1975. In effect, the government substituted the taxation of oil
for the taxation of other traditional products.
This policy caused no harm until 1975, when the volume of
petroleum exports began to moderate and oil revenues declined
relative to GDP. As the gap between public revenues and
expenditures widened, budget deficits became the norm, and the
government resorted increasingly to foreign borrowing as a
substitute for declining tax revenues from nonoil products. Between
1976 and 1979, the foreign debt more than quadrupled; after 1979
the rate of borrowing decelerated, but still the foreign debt had
doubled by the end of 1986
(see
fig. 14). In 1983, as foreign banks
reduced the amount of credit available to the government, unpopular
austerity measures were adopted to help reduce the public-sector
deficit.
The oil bonanza encouraged the government to undertake two
deficit-producing policies. First, the government used about 50
percent of total public revenues from oil exports to subsidize
domestic consumption of such items as food products, electricity,
and gasoline and other oil derivatives. Government subsidies to
consumers reached a peak of 10 percent of GDP in 1981. Second, the
government increased substantially its public-sector employment and
public capital expenditures. Although the labor force increased at
an average annual rate of only 2.8 percent between 1970 and 1984,
public-service employment rose at an average annual rate of 7
percent during the same period. A moderate expansion in public
capital expenditures during the 1974-82 period contributed to
improvements in the transportation and utility infrastructure and
also in water and sewerage systems. During this period, public
capital spending increased from 7.3 percent of GDP to 10.1 percent
of GDP. Overall government revenue, however, had declined by 1
percent of GDP between 1973 and 1982. The public-sector deficit in
1982 represented 7.5 percent of GDP, most of which was financed by
foreign borrowing.
The sharp drop in the international price of petroleum in 1986,
followed a year later by a US$700-million loss of oil revenue in
the aftermath of the March 1987 earthquake, generated increased
foreign borrowing by the government, reduced debt-service payments,
and induced the government to print money to make up for revenue
shortfalls. To help keep inflation down to 32.5 percent in 1987
(about a 5-percent increase over 1986), liquidity was restricted in
the private sector by raising bank reserve requirements. This
policy made it difficult to acquire a commercial loan during the
second half of 1987.
Although oil production reached near-record levels of 310,000
barrels per day following the repair of the Trans-Ecuadorian
Pipeline in August 1987, international crude oil prices remained
low, averaging about US$17.70 for that year. The government's
failure to raise domestic energy prices or reduce spending in other
areas contributed to a fiscal deficit approaching 12 percent of
GDP.
Real GDP improved 8 percent in 1988, mainly as the result of
increases in crude petroleum exports. The government's deficit
reached about 12 percent of GDP. The government controlled the
fiscal deficit by doubling domestic fuel prices, eliminating wheat
import subsidies, and increasing electricity rates by 40 percent
for household users and 60 percent for industrial users.
In 1989 the fiscal budget totalled US$1.4 billion, of which 49
percent was financed by oil export revenues and most of the
remainder through taxes. About 38 percent of expenditures went to
meet foreign debt payments after April, 10 percent for internal
investment, and the balance to meet internal debt payments and
current government expenditures. During 1989 the Borja
administration accelerated efforts to curtail public spending, but
the deficit, 10 percent of GDP, was still too high to be fiscally
sound. The government continued its tight money policies,
sustaining high interest rates and strict credit requirements,
especially for noncorporate consumers.
Data as of 1989
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