Ecuador: Little Clarity On Citizens’ Revolution
On Tuesday Risk Watchdog attended Ecuadorean President Rafael Correa’s exposition of the ‘The international economy, and the process of the citizen’s revolution in Ecuador’ at the London School of Economics. Or at least that was the title of his talk. Disappointingly there was very little description of how the citizen’s revolution is progressing in present day Ecuador, with his half hour speech more of a rant on the failings of neo-liberalism. At the end of the talk, therefore, I was left with the same question as when I entered, namely, where is his government going to find the money to fund this revolution?
If I had asked him this, I would probably have been directed to the rapid increase in Ecuador’s forex reserves since May this year, suggesting an improvement in the country’s balance of payments profile. But a little digging and this rosy outlook starts looking very shaky. For starters, this increase in dollar holdings far outpaces the recent rise in global oil prices. This is surprising, given that the previous collapse in reserves was almost perfectly correlated with oil (which comprises close to 80% of Ecuador’s total exports).
The picture becomes even more confusing when viewed in light of a report published by the central bank which shows a breakdown of reserves by composition. It is unclear why the central bank chose to attach July’s breakdown to its most recent monthly reserves report, but it does appear to give some explanation to the origins of this increase. According to the data, foreign reserves rose by US$476.8mn in July 2009, with the income coming primarily from tax receipts (US$628.4mn) and external debt outlays (US$511.3mn). If that by itself is not cause for concern, I was particularly alarmed at the expenditure side of the reserves balance, with US$928.7mn coming from the ‘central government’s net deposits’.
Can I conclude, therefore, that the government’s own fiscal accounts have now been amalgamated with foreign reserves? Well, it’s not out of the question, since Ecuador’s economy is dollarised and the central bank had its independence removed back in May. But if this is the case, what do reserve levels really indicate? Are they now a proxy for the current state of both Ecuador’s fiscal accounts and balance of payments?
Ecuador - Foreign Reserves US$mn
Unfortunately, it is impossible to check this against fiscal data, because since May this year, when Correa’s new constitution came into force and the central bank was taken over by the government, the Banco Central de Ecuador has stopped publishing fiscal data. Coincidentally, this was the same month that foreign reserves started rising (see chart), which would certainly have come as some relief for Correa, who had previously threatened to arrest anyone caught spreading rumours about the need to move away from a dollarised economy. In other words, Risk Watchdog left yesterday’s talk as much in the dark about the practicalities of the president’s socialist revolution as when I entered, although the above may help explain why Correa chose to start his speech by stating he would prefer not to focus on economic data.
