Project Information Document (PID) - World Bank



REVISED Project Information Document (PID) 31580

Project Name Fiscal Consolidation and Competitive Growth

Adjustment Loan (FCGL) II

Region Latin America and the Caribbean Regional Office

Sector Economic Policy Sector Group

Project ID PE-P083856-LEN-BB

Borrower (s) Government of Ecuador

Implementing Agency Eco. Mauricio Yepez

Ministry of Economy and Finance

Address: Ave. Amazona 3535, Atahualpa

Quito, Ecuador

Phone: 593-2-2268598

Fax: 593-2-2270348

Web: .ec

Environment Category Not rated

Date PID February 7, 2005

Project appraisal date February 9-10, 2005

Project Board Date March 10, 2005

1. Country and Sector Background

Ecuador is at a crossroads. Its stability and economic recovery are promising, but its fiscal and external positions remain vulnerable. These vulnerabilities are due to its rigid response to real or financial external shocks—typical of dollarized economies with only fiscal policy as an instrument—in a context of highly volatile and oil-dependent fiscal revenues, expansionary spending policies, and heavy debt burden. Through this operation, the country expects to work hard in strengthening conditions for sustained dollarization, including a solid fiscal position, a sustainable public debt, a diversified export structure to accommodate trade shocks and the benefits of an incoming Free trade Agreement with the U.S., a sufficient level of international reserves to accommodate capital outflows, and flexible factor markets—particularly labor and capital—to preserve the competitiveness of the nontradable goods sector, and a climate to attract investment.

2. Objectives

This adjustment operation continues to provide Bank support to the Government of Ecuador’s (GOE’s) Multiyear Program of reforms initiated by the first, single-tranche, Fiscal Consolidation and Competitive Growth Loan (FCCGL-I). The medium-term objectives of the FCCGL-II are to continue correcting and building a sustainable fiscal position, to reduce the country’s moderately high debt levels, to upgrade its creditworthiness, to improve its competitiveness, and to achieve high growth for poverty reduction. The continuity to a second stage is well justified by significant progress achieved in the implementation of benchmarks agreed with the Bank under the first operation and further actions added in the comprehensive multiyear matrix of policy reforms.

3. Rationale for Bank’s Involvement:

The proposed operation is the second stage of a Fiscal Consolidation and Competitive Growth Program. It builds upon the progress achieved from the previous FCCGL approved by the Board in May 2003. Such operation responded to the Government’s Program for Economic Restructuring and Human Development (PERHD) aimed at solving immediate liquidity problems, deepening fiscal solvency, and strengthening fiscal institutions; and supporting structural reforms—by introducing flexibility in goods and services markets and increasing the productivity of the factors of production, all essential conditions for sustaining dollarization in the medium term. In parallel to an ongoing Programmatic operation aimed at strengthening human development and social policies, and to an on-going Institutional Reform Loan aimed at reducing corruption, modernizing Customs and improving civil service, the FCCGL will provide critical support to the country’s fiscal and structural reform programs.

The proposed FCCGL-II of US$100 million has been prepared in the context of strong international support and in close collaboration with the IMF. It has benefited from an active engagement across institutional boundaries within the Ecuadorian government and at the local level. Following several months of lengthy negotiations on the type and contents of Fund support, the Government and the IMF were able to reach an agreement on a 2005 macroeconomic program designed by the Authorities and to be monitored by an Intensified Surveillance Mechanism (ISM). The macroeconomic program includes quarterly quantitative targets. The Fund transmitted to the Bank an Assessment Letter for such a Program on 29 December 2004. The Letter confirms the goal of the Government’s Program of fiscally stabilizing the economy, while supporting high-quality growth with key structural reforms under multilateral support, a policy framework that is consistent with dollarization.

4. Description:

The FCCGL-II preserves two pillars of structural reform: (a) fiscal consolidation with debt sustainability, and (b) higher economic growth with improved competitiveness and enhanced markets flexibility. Specific objectives of the loan are to: (a) support a non-discretional fiscal policy and improve tax administration; (b) reverse expansionary spending and improve budget transparency; (c) regain control of the public payroll; (d) improve public debt management and promote a simple and transparent management of the oil revenue fund FEIREP; (e) support trade reform; (f) promote competitive pricing and regulatory policies; and (g) increase labor flexibility. These objectives are complemented by a parallel Programmatic operation in the social sectors and another parallel Institutional Reform Loan in the areas of customs, civil service and procurement reform.

5. Financing:

IBRD: US$100.0 million

Total Project Cost: US$100.0 million

6. Implementation:

Ecuador has improved its record in implementing adjustment operations with the Bank. However, a single tranche approach to adjustment lending is preserved for this operation. It bases Bank support on prior actions the Government has already taken, rather than on conditions of future actions. This provides an opportunity for the Government to continue building a track record by demonstrating its commitment to reforms, and for the Bank to provide financial support aligned to the strength and pace of the Government’s reform. Implementation of the Multiyear Government’s Program would be monitored through frequent missions (every two months) and continuous supervision through videoconference technology facilities of the information system of the country office. Although supervision has mainly focused on fulfillment of policy results and benchmarks, the presence of policy reversals and the implementation of other anticipated actions have continually been assessed. Moreover, ad hoc comments to draft bills, and in situ reviews have been supported by technical assistance and advisory services carried out during supervision missions, previously requested by officials. Immediately following disbursement of the second loan, the GOE would initiate work on the actions contained in the third phase of its program. A detailed schedule of these activities and budget would be prepared with the Bank’s support at that time. Financing of these activities may be sought through the Institutional Reform Loan under preparation or, if possible, through PHRD grants to specific activities, especially in the area of budget transparency.

7. Sustainability:

The objectives of the GOE’s Program are reflected in FCCGL-I’s two main pillars, now preserved under FCCGL-II. The first is achieving fiscal consolidation through (a) a rules-based fiscal policy; (b) improved tax administration; (b) austere expenditure management with transparency and accountability, including tight control of the wage bill; and (d) prudent, rule-based, and transparent debt management. The second is promoting faster growth with competitiveness based on (a) trade reform policies, (b) solid pricing and regulatory policies to attract investment in key basic infrastructure sectors, and (c) increased labor market flexibility. The actions supported in the first stage were initial steps for laying the institutional foundations of deeper reforms that would be needed over the next several years if Ecuador is to realize its development potential. Given the weakness of the legal and institutional framework in place after years of political conflict and poor governance, the FCCGL-I necessarily emphasized process measures: it focused primarily on strategy and policy formulation; the preparation of key laws, regulations, and actions; and the initiation of institutional reforms and needed price adjustments, rather than concrete outcomes. FCCGL-II builds upon these measures, consolidates those processes and law approvals, while shifting the focus of the program toward obtaining initial and important results on the ground. It is expected that a third operation will fully materialize loan expected outcomes.

8. Lessons Learned from Past Operations in the Country/Sector:

This single-tranche approach incorporates lessons learned from previous adjustment operations, from FCGGL-I ICR, and from the Operation Evaluation Department’s 1999 Country Assistance Evaluation.

9. Environmental Aspects (Including any Public Consultation):

This Program does not trigger OD 8.60 on Environmental Assessment since it is structural adjustment loan. Therefore, an environmental rating is not required.

10. List of Factual Technical Documents:

Loan Documents for Fiscal Consolidation and Competitive Growth Adjustment Loan (FCGL I) (project identification number PE-P082739-LEN-BB and 25786-EC)

Implementation Completion Report for Fiscal Consolidation and Competitive Growth Adjustment Loan (FCGL I) (project identification number P082739 and report number 27477)

Documents associated with the Ecuador Development Policy Review (EW-P078861-ESW-BB)

11. Contact Point

Task Manager:

José R. López-Cálix

The World Bank

MSNED

600 19th Street, NW, MSN H 10-1000

Washington, DC 20433

Mail Stop H 10-1000

Phone: (202) 458-1906

Fax: (202) 522-2510

12. For Information on Other Project Related Documents Contact:

The InfoShop

1818 H Street, NW

Washington, DC 20433

Phone: (202) 458-5454

Fax: (202) 522-1500

Web:

Note: This is information on an evolving project. Certain components and implementation may be modify in the final project

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