IMF continues support after tax cut.(economy in Ecuador)(Brief Article)(Statistical Data Included)

Despite the dire warnings expressed earlier this year that Ecuador would face the immediate cessation of multilateral aid if the country did not implement an IMF-proposed hike in the rate of VAT, from 12%, to 14%; in the end, these fears seem misplaced. Although clearly unhappy that the country's Constitutional Court decided to overrule the executive in early August, forcing it to reinstate the 12% rate from Sept. 1, the IMF has been quick to reiterate its support for President Gustavo Noboa and his attempts to spearhead the country's economic revival. Indeed, Ecuador posted first quarter growth of 4.1%, and looks increasingly on course to be one of the fastest growing countries in the region this year. In addition, the rampant inflation that brought the country to its knees in 1999, provoking a debt default, has been tamed by the country's adoption of dollarisation, with year-on-year inflation falling to 33.2% in June, from 103.7% for June 2000. Given this improving economic backdrop, the rejection of the VAT hike is no longer so salient a factor in considering the future of multilateral lending. In terms of fiscal revenues, Ecuador has already generated double the amount it was expecting from additional collection. Indeed, with the government having enforced a crackdown on tax evasion, over $300 million in excess revenues had been generated by June, more than offsetting the $70 million or so that the government would have received from the higher VAT rate. As such, it now appears that the Fund mission heading to Quito in late August will be able to conduct the third review of the country's $300 million standby arrangement in more relaxed circumstances than in previous years, with the government easily able to make up the shortfall.

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