US embassy cable - 05QUITO1054

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 001054 
 
SIPDIS 
 
DEPT FOR WHA/AND 
TREASURY FOR NANCY LEE AND GIANLUCCA SIGNORELLI 
 
E.O. 12958: DECL: 05/05/2010 
TAGS: EFIN, ECON, EC 
SUBJECT: MINISTER OF FINANCE ON FISCAL POLICY: AMBASSADOR'S 
COURTESY CALL 
 
REF: QUITO 900 
 
Classified By: AMBASSADOR KRISTIE KENNEY, REASONS 1.5 (B,D) 
 
See para 5 for policy recommendation. 
 
1.  (C) Summary:  In his first meeting with the Ambassador, 
Ecuador's new Minister of Economy and Finance Rafael Correa 
made clear that he intends to implement a policy far removed 
from the responsible fiscal management of his two most-recent 
predecessors.  Correa said he expects the IFIs to back off of 
the conditionality contained in the "secret agreements" his 
immediate predecessor had signed with them and hoped the U.S. 
would support continued disbursements from the IFIs.  With 
those disbursements, he said, the GOE could meet its 
financing needs.  Instead, our recommendation would be for 
the USG to use its influence with the IFIs to maintain 
conditionality and withhold disbursements until Correa and 
the GOE commit themselves to minimally responsible policies. 
End Summary. 
 
Let's Spend Some Money 
---------------------- 
 
2.  (U) Correa acceded to Ambassador's request for a courtesy 
call on May 5.  Continuing the Palacio government charm 
offensive, Correa spent most of the twenty-minute meeting 
expounding on the virtues of the "people of the United 
States," (implicitly differentiating it from the USG) where 
he received his graduate education.  When he came to 
business, Correa gave a cursory overview of the economic 
program he has outlined in much more detail in the press (see 
reftel).  He said that Ecuador, with no monetary policy, 
given dollarization, and 12% unemployment, had no choice but 
to use fiscal policy to stimulate economic growth and job 
creation.  Economic growth in the non-oil economy was weak, 
he said.  It was thus necessary for the GOE to increase 
spending. 
 
Secret Agreements 
 
SIPDIS 
----------------- 
 
3.  (U)  Necessary budget financing would be available if the 
IFIs maintained their planned disbursements, Correa said. 
However, the conditionality the IFIs had imposed on the 
previous government via such "secret agreements" as the IMF's 
"Intensified Surveillance Program" would have to be dropped, 
Correa said, echoing his denunciation in the press of the 
previous minister for ceding Ecuadorian sovereignty in 
signing these "secret accords."  Correa asked that the 
Embassy help the IFIs to understand Ecuador's circumstances 
and the need for flexibility. 
 
The Fiscal Situation 
-------------------- 
 
4.  (SBU) We are meeting with contacts in order to put 
together a series of cables on Ecuador's economic and fiscal 
situation.  Though we are not ready to make definitive 
statements about the current situation, we can share a few 
insights.  Previous Minister of Finance Maurico Yepez had put 
together the pieces for a very favorable financing situation 
for Ecuador in 2005.  In fact, with all the disbursements due 
from the IFIs and assuming continuing high oil prices, the 
GOE would have been significantly over financed.  The GOE 
intended to use the over financing to restructure debt, 
buying higher interest rate debt back.  With Correa in the 
driver's seat there is every reason to believe that the over 
financing would go directly into current spending.  In just 
one specific example, the GOE planned significant reductions 
in personnel in order to reduce budget outlays on salaries. 
Correa has announced that there will be no personnel 
reductions as, "with unemployment at 12%, reducing government 
employment would be irresponsible." 
 
The IFIs 
-------- 
 
5.  (C)  Econcouns discussed the situation with IMF Resrep 
David Yuravlivker (protect) on May 6.  Yuravlivker recounted 
that, in the meeting between he, the resreps of the IBRD and 
the IDB, and Correa, Correa had said, "Ecuador will continue 
to pay its debts to the IFIs, as long as they continue to 
disburse to Ecuador."  Asked about the IBRD's pending $100 
million disbursement (in the absence from country of the IBRD 
resrep), Yuravlivker said that he did not know what the 
intentions of the IBRD were, but, given that the 
conditionality on that loan was all fiscal responsibility, 
given that it specifically demands that the GOE continue to 
respect the Fiscal Responsibility Law and the oil 
stabilization fund (FEIREP), and given Correa's clear and 
public intention to eliminate the restrictions imposed by the 
law and the fund, he did not see how the IBRD could possibly 
justify disbursing. 
 
Comment 
------- 
 
6.  (SBU) Though this was only intended as a courtesy call, 
and most of the conversation was of a personal and 
protocolary nature, the limited substantive comments Correa 
made were fully in line with the ideas expressed in his 
statements to the press and in his publications.  (Interested 
readers of Spanish can obtain his short and worrying 2004 
prescription for the Ecuadorian economy "La Vulnerabilidad de 
la Economia Ecuatoriana" from its publisher, UNDP.)  We are 
concerned that Correa, if he continues this line of policies, 
will make short work of all that has been accomplished in the 
last five years of relatively responsible fiscal policy. 
 
Recommendation 
-------------- 
 
7.  (C)  We understand that the IBRD is on the verge of 
disbursing a $100 million budget support loan.  The loan has 
been approved by the board on the basis of confidence on the 
part of the IFIs in the fiscal responsibility of the prior 
government.  Nonetheless, the Bank does have the option of 
holding off on disbursement in extraordinary circumstances. 
We do not know what current thinking is in the IBRD on 
disbursement of this loan.  Given the danger that these funds 
will be squandered, we recommend that Washington consider 
weighing in with the IBRD to recommend that the loan be 
disbursed only on the demonstrated commitment of the GOE to 
maintain responsible policies.  We also recommend that the 
IBRD and IDB continue to look to the IMF's view of the fiscal 
decision in making disbursement decisions. 
KENNEY