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Cablegate: Ecuador's Economic Program

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 QUITO 002333

SIPDIS

SENSITIVE

DEPT FOR WHA/AND
DEPT FOR EB/IFD/OMA
TREASURY FOR G. SIGNORELLI

E.O. 12958: N/A
TAGS: EFIN ECON ENRG EC
SUBJECT: ECUADOR'S ECONOMIC PROGRAM


Sensitive but Unclassified.

1. (SBU) Summary: Minister of Economy and Finances Mauricio
Yepez told Ambassador on August 23 that the GOE had covered
its financing needs for 2004 and is now planning for 2005.
The GOE would carry out significant reforms this fall,
including ending the subsidy of household gas and a reform of
the electric sector. Ecuador would, however, need
International Financial Institution (IFI) assistance next
year, and hoped for U.S. support for an IMF "comfort letter,"
after the reforms were carried out, to allow the IDB and the
IBRD to disburse funds. Yepez said he would be in Washington
the first week of September, and asked for help setting up
appointments at State and Treasury. End Summary.

Financing 2004
--------------

2. (U) At his request, Yepez met with Ambassador to discuss
the Occidental Petroleum case (septel) and the GOE's economic
program. Yepez started by stating that the GOE has covered
its financing gap for 2004. To a great extent, the gap has
been covered by using resources in the petroleum fund
(FEIREP, by its Spanish acronym) to buy back debt from the
Social Security Fund, and then placing debt back into Social
Security from the central government. However, this
operation has not substantially affected debt maturing in
2005, making that a difficult year for Ecuador.

Three Major Reforms
-------------------

3. (U) Yepez noted that an IMF team was presently in Quito
reviewing Ecuador's plans, and particularly its 2005 budget.
He had proposed to the Fund three major reforms for this
fall. First, as part of the budget, oil revenues would be
re-categorized and treated as investment income which should
be re-invested, rather than current revenue to be put into
current expenditures. He characterized this change as a
back-door way of breaking some of the current pre-assignment
of revenues and giving the GOE more budget flexibility.

4. (U) Second, Yepez said the GOE would raise gas prices in
November. With petroleum prices as high as they were, the
gas subsidy would otherwise cost the GOE more than $300
million, and the budget would be impossible finance. He said
that President Gutierrez was fully behind this proposal,
which has always been considered politically impossible. He
would announce the gas price on one day, Yepez said, and
Gutierrez would announce a package of social measures the
next day to alleviate the burden on the poor. Ambassador
offered to coordinate, and suggested that an announcement of
already planned USG assistance (such as already planned
Medretes) might be made simultaneously to help soften the
blow and support the government.

5. (U) Finally, the GOE would propose electric sector reform
geared to encouraging private investment in generation. This
reform was already with the President and would be sent to
Congress within days, he expected.

Support from the IFIs Needed
----------------------------

6. (SBU) Between the elimination of the gas subsidy and
continued high oil prices, Yepez said, the GOE would be
within reach of filling the financing gap for 2005. However,
it would need support from the IFIs to make it the last few
meters. The GOE was not receiving IFI budget support this
year, and was making substantial payments on its IFI debt.
Net, Ecuador would retire some $400 million of IFI debt in
2004. The Ministry of Finance had reviewed all planned
borrowing from the Institutions for the coming years and cut
it back to a bare minimum. Any project which did not
demonstrate clear and substantial returns was being rejected.
However, some budget support would be necessary.

Comfort From the IMF Sought
---------------------------

7. (SBU) Of course, in order to get support from the IFI's
some kind of arrangement would have to be reached with the
IMF. The GOE did not need and was not seeking funding from
the IMF. It understood, as well, that the Fund would be
reluctant to sign another agreement with the GOE until
Ecuador was able to show that it is capable of carrying out
significant reforms. However, Yepez said he hoped the IMF
could issue a comfort letter to the Banks toward the end of
this year on the basis of a sound fiscal plan, passage of a
significant electric sector reform, and the elimination of
the gas subsidy. Discussions with the IDB suggested that it
would release some $100 million on the basis of such a
letter. Ecuador would approach the IBRD for a similar
amount. With this funding, Ecuador could make its payments
in 2005.

8. (U) Yepez said he intended to travel to Washington the
first week of September, and asked Ambassador to help set up
appointments with officials in the Departments of State and
Treasury. He said that September 3 would be ideal for
appointments, but he would also be available on September 7,
if necessary.

Action Request
--------------

9. (U) Request State and Treasury schedule meetings at an
appropriate level for Yepez.
KENNEY

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