The International Monetary Fund risks having to renegotiate its second multi-billion dollar loan in Latin America in as many years following Ecuador’s presidential election.
The candidates who likely advanced to a runoff vote in the Andean country, Andrés Arauz and Yaku Pérez, have both criticised the tax increases and spending cuts required as part of a US$ 6.5-billion loan signed with the lender last year. Their comments are reminiscent of remarks made by President Alberto Fernández, who began talks to restructure IMF loans after sweeping to power in 2019.
At more than US$ 50 billion in total, loans to Argentina and Ecuador represent the bulk of the IMF lending in Latin America. The twin shocks of Covid-19 and a collapse in oil prices are ravaging the Andean nation of 17 million and stirring popular resentment against the Fund, whose demands have fallen afoul with millions of citizens grappling with rising unemployment and poverty.
“This is a very tough moment for the IMF,” said Michael Shifter, President of the Inter-American Dialogue and a professor at Georgetown University. “The IMF is trying to stabilise economies and trying to provide support, but also demanding that there be certain reductions in public spending. It’s a tough sell under any circumstance, but especially now, it’s a hard case to make.”
Ecuador’s loan was agreed to last year by outgoing President Lenín Moreno as part of plans to restructure the nation’s bonds and finance its budget. The Fund has already disbursed US$ 4 billion.
Arauz, who is a protege of former leftist president Rafael Correa and won the first round with about 32 percent, criticised the IMF loan last year but told investors this month he’d be willing to work with the Fund, according to Torino Capital LLC which organised the call. His campaign declined to confirm his comments.
Perez, who represents the indigenous party Pachakutik and is leading by a slim margin in the vote count as runner-up with 20 percent, has rejected routine talks with the lender.
Sitting down
IMF recommendations for loan recipients have long proved politically controversial. Broadly, the Fund tells its 190 countries to spend what they can to address the health and economic crisis, and for those in Latin America to use fiscal space, if they have it, to help provide relief.
But the organisation’s largest programmes are conditioned on nations presenting longer-term debt sustainability plans, which sometimes must be achieved through unpopular austerity policies.
The IMF is open to sitting down with whoever wins in Ecuador to analyse the new government’s priorities, the Fund’s Western Hemisphere Director Alejandro Werner said in an online briefing on Monday. The lender is always willing to modify its programmes if the changes lead to consolidating fiscal and financial balances in order to achieve economic stability and growth, Werner said.
Werner said that popular backlash against IMF programmes in both Ecuador and Argentina stems in part from slower economic growth in the past five years after a plunge in commodity prices, compared to the prior decade.
The IMF seeks to “negotiate with authorities in different countries economic programmes that resolve, or have a high probability to resolve, the fundamental problems that face these economies, but also to accommodate the priorities of different governments,” Werner said.
New challenges
In Latin America, those challenges now include the Covid-19 pandemic’s rising healthcare costs, as well as lost income from a plunge in regional tourism. Costa Rica last month became the latest nation to turn to the IMF, reaching an agreement on a US$ 1.75-billion, three-year loan.
That pact, which features a promise by the nation to reduce its fiscal deficit, awaits IMF board approval. The plan was revised after an initial tax hike proposal sparked protests.
In Ecuador’s case, both presidential candidates will have to appeal to moderate voters ahead of the April 11 runoff, Finance Minister Mauricio Pozo said in an interview. Without the IMF, the eventual winner will struggle to raise the nearly US$ 8 billion needed to balance the country’s budget this year.
“They will likely begin to tone down their speech and, in that sense, try to calm investors,” he said.
related news
by Eric Martin, Bloomberg