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Cablegate: Constituent Assembly Eliminates Petroleum Funds, Grants

VZCZCXYZ0000
OO RUEHWEB

DE RUEHQT #0324/01 0981858
ZNR UUUUU ZZH
O 071858Z APR 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8711
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7495
RUEHCV/AMEMBASSY CARACAS PRIORITY 2975
RUEHLP/AMEMBASSY LA PAZ APR 1002
RUEHPE/AMEMBASSY LIMA PRIORITY 2541
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3482
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 000324

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR MEWENS

E.O. 12958: N/A
TAGS: ECON EPET PGOV EINV EC
SUBJECT: CONSTITUENT ASSEMBLY ELIMINATES PETROLEUM FUNDS, GRANTS
EXPANDED BUDGET POWER TO MINISTRY OF FINANCE

REF: Quito 55

1. (U) Summary: The Constituent Assembly approved a law, drafted by
the Correa Administration, that closes the petroleum reserve funds
and moves that financing on to the regular budget. It stipulates
that those resources can only be used for investment, and
establishes a broad budget requirement that current expenditures
cannot be funded by borrowing or petroleum revenue. It also gives
increased budgetary discretion to the Minister of Finance. End
Summary.

2. (U) On April 2, the Constituent Assembly approved the "Law to
Recover the Use of Petroleum Resources and Rationalize Debt
Administrative procedures." This is the second law approved by the
Constituent Assembly, following the tax reform law (reftel).

3. (U) The law has three broad objectives: bringing the petroleum
funds on to the budget, increasing the Ministry of Finance's
flexibility to take on new debt and increase the budget, and
replacing the budget guidelines in the Fiscal Responsibility Law
with a broader guideline.

Eliminating Petroleum Funds
---------------------------

4. (U) The law eliminates four "petroleum funds" and incorporates
the funds' unallocated balances into the general budget. In March,
the combined value of the funds was $1.93 billion. Revenues that
previously had gone into reserve funds will now go directly into the
general budget. Each of the funds had complex spending requirements,
which have now been deleted, although the government has stated that
it will continue to direct some of the revenues to the same purposes
as before. The new law stipulates that these petroleum revenues
must be used for investment and cannot be used for current
expenditures.

New Broad Budget Guideline
--------------------------

5. (U) The new law also replaces the broad limits on government
spending established in the Fiscal Responsibility Law. The old
guideline had been that government spending, in real terms, could
not increase by more than 3.5% of GDP per year. The new guideline
is that current expenditures cannot be financed by debt or by income
from petroleum exports.

The Debt Committee and Ministry Authority
-----------------------------------------

6. (U) The new law also modifies the requirements for the
government to take on debt and increase the budget, although the
version approved by the Constituent Assembly gives the Minister of
Finance less autonomy than had the version drafted by the
administration.

7. (U) Previously the Central Bank had to give a favorable approval
before the government could take on a new loan; with the new law, it
loses that authority. The administration had proposed that the
Ministry of Finance have sole responsibility in approving new debt,
but the Assembly instead established a Debt and Financing Committee.
The Committee consists of the President, the Minister of Economy
and Finances and the Secretary of Planning. In addition, any
minister requesting a credit will be allowed to speak before the
Committee but will not have a vote. Only debts that exceed 0.15% of
national budget will have to be approved by the Committee; lesser
amounts can be approved by the Minister of Finance.

8. (U) The new law also allows the Ministry of Finance to increase
or reduce the national budget by 15 percent without consulting
Congress. (The Assembly limited the Ministry's discretion at 15%;
the draft submitted by the administration would have given the
Ministry unlimited discretion to increase the budget.) Previously
the Ministry could modify the budget by up to five percent.

Analysts Comments in Favor and Against the Changes
--------------------------------------------- -----

9. (SBU) Former Minister of Finance Magdalena Barreiro told the
press the law will give the government greater flexibility to better
manage its resources. Jaime Carrera, economic analyst at the Fiscal
Policy Observatory, an NGO, believes that fiscal power concentrated
in the hands of one party will undermine future decisions by
Congress, and told the Embassy he feels the move replicates the

absence of controls on fiscal spending that existed during the 1970s
petroleum boom.

COMMENT
-------

10. (SBU) The new law appears to reduce the constraints on spending
established by a series of laws, notably the Fiscal Responsibility
Law, and those creating the petroleum funds. In reality, the law
recognizes and simplifies a number of practices that were already in
place. Current and previous administrations bent the intent of the
petroleum funds by issuing emergency decrees, and readily violated
the 3.5% growth gap on budget. However, previously governments had
to go through some budgetary and legal gymnastics to get around the
rules, and now they will not. It remains to be seen whether the new
flexibility will allow the government to spend more wisely, as the
government contends, or give the Ministry of Finance too much
discretion, as some critics contend.

11. (SBU) The new law does establish some reasonable budgetary
constraints: limiting petroleum revenues to investments and
requiring that current expenses be funded by current revenues.
However, we suspect that the government will work around these new
guidelines if it feels the need, just as governments had violated
the previous constraints.

JEWELL

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