US embassy cable - 04QUITO2333

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, Economy 
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