Ecuador passes public finance law

Ecuador passes public finance law

Economy & Policy Fixed Income Ecuador Latin America

Ecuador’s National Assembly approved on Saturday a new public finance law that puts limits to public spending and public debt and creates a fiscal savings fund, the government said in a press release. 

“The public finance law seeks to secure fiscal sustainability, more organized public finances and greater transparency,” César Litardo, head of the assembly, said in a tweet after the bill passed.  

The law puts a 5% cap on increases in the public budget; previously the Finance Ministry could increase the public budget by 15%. It also creates a savings fund to mitigate fiscal risk. Yearly allocations to the fund will be of up to 3% of the national budget. It gives the Finance Ministry the authority to buy oil and mining insurance to hedge price fluctuations. It also creates a stabilization fund that will be funded when income from mining and oil production are high. 

The new law passed with 72 votes in favor, 63 against, two blank votes and no abstentions after four days of negotiations 

In late 2019, the government failed to pass a package of economic laws that included this public finance law, suggested by the IMF under an extended fund facility arrangement. The extended fund facility arrangement was cancelled and is being substituted by a new program that is currently being negotiated. 

The law is “an important show of commitment that may open discussion of an IMF program,” Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York said in written response to questions from LatinFinance. However, “the timing to relaunch a formal IMF program is not opportune since Ecuador cannot commit to pro-cyclical austerity measures while there is questionable solidarity for medium term economic reform,” she said.