Journal of Business and entrepreneurial

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The socioeconomic impact of Ecuador and its

relationship with the International Monetary Fund

during Covid-19

El impacto socioeconómico del Ecuador y su relación con el Fondo

Monetario Internacional durante el Covid-19

Jorge Cedeño León

Angie Sánchez Erazo

* *

ABSTRACT

The economic impact generated by the pandemic has hurt the

financial sector in all countries, and we can say that the epidemic

has strongly affected the economy of Ecuador at an

unprecedented speed and severity. In Ecuador, due to Covid,

there are already registered business closings, more

unemployment, lack of supplies, famine, among other factors.

The current objective is to seek the collaboration of an-

International Organization (IO), such as the International

Monetary Fund (IMF), which does everything in its power to

ensure that Ecuador, a country affected by this pandemic, has a

Rapid support through emergency funding, policy advice and

technical assistance. With this article it is possible to know what

are the mechanisms that the Ecuadorian state should adopt and

use to improve, reopen and increase its economy during and

after this world catastrophe caused by the Covid-19, therefore,

the study of this article is carried out within the following types

of research, Descriptive, Analytical and Bibliographic.

Key words: Decrease, economy, impact, mechanism,

pandemic.

* Master. Universidad de Guayaquil (UG), Guayaquil, Ecuador,

jg_cedeno@hotmail.com https://orcid.org/0000-0002-7493-0863

* * Universidad Internacional de la Rioja (UNIR), Guayaquil, Ecuador,

Guayaquil-Ecuador, ag.serazo@hotmail.com, https://orcid.org/0000-

0003-4050-7298.

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RESUMEN

El impacto económico generado por la pandemia ha perjudicado al sector financiero de todos

los países, y podemos decir que la epidemia ha afectado fuertemente en la economía del Ecuador

a una gran velocidad y gravedad sin precedentes. En Ecuador a causa del Covid, ya se registran

cierre de empresas, más desempleos, falta de insumos, hambruna, entre otros factores.

Actualmente se tiene como objetivo, buscar la colaboración de un Organismo Internacional (OI),

como es el Fondo Monetario Internacional (FMI), que hace todo lo que está a su alcance para

garantizar que Ecuador, un país afectado por esta pandemia, tenga un rápido apoyo a través de

financiamiento de emergencia, asesoramiento sobre políticas y asistencia técnica. Con el

presente artículo se permite conocer cuáles son los mecanismos que deberá adoptar y utilizar

el estado ecuatoriano para mejorar, reaperturar e incrementar su economía durante y después

de esta catástrofe mundial provocada por el Covid-19, por ende, el estudio de este artículo se

realizó dentro de los siguientes tipos de investigación, Descriptiva, Analítica y Bibliográfica.

Palabras clave: Decrecer, economía, impacto, mecanismo, pandemia.

INTRODUCTION

COVID-19 is an epidemic caused by a virus and is known worldwide as "coronavirus".

Therefore, it was determined that, in order to avoid the spread of the disease, the states

should apply certain restrictions such as the temporary closure of borders, schools and

shopping centers, in order to avoid crowds and further contagion.

The commercial disruption caused by the virus had an impact on emerging markets. The

financial damage is evident in all countries, including Ecuador, compared to the increase

in new and unexpected infections and the containment measures adopted by

governments.

It is important to mention that China was the first country to feel the full impact of the

disease, likewise the economic impact of the pandemic is strongly affected in Ecuador,

where economic policies have caused an unemployment rate in recent weeks.

The global economic recovery is limited, but it remains discouraging for society because

it indicates that restrictive measures are not helping to contain the epidemic and pave

the way for economic recovery. Today, the International Monetary Fund (IMF),

establishes mechanisms and strategies to generate liquidity in countries, where their

economy has declined drastically.

Beyond the management of the health crisis, all governments, including Ecuador, are

discussing shock measures to deal with the subsequent situation. As the objective is to

recover the economic activity as soon as possible, the proposals revolve around the

liquidity of companies and workers, as well as to keep the dollarization of the Ecuadorian

state active.

To this end, various fiscal measures are proposed, such as a reduction in some taxes and

a moratorium on the payment of certain taxes; and monetary measures, with the

opening of credit lines guaranteed by the State to facilitate the financing of working

capital.

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Ecuador facing a new economic cycle post COVID-19. Ecuador in 2019 achieved a Gross

Domestic Product (GDP) growth of 0.3% (second quarter). A situation that expresses

the weakness of recent years within a particularly complex context, which showed a

generalized economic slowdown in several sectors, completing four consecutive years

of low growth.

By 2020, domestic demand was expected to decline, accompanied by low external

aggregate demand and more fragile international financial markets. This sluggish

momentum reflects structural and cyclical factors. On the structural side, potential

growth remains constrained by low investment, slow productivity growth, poor

infrastructure quality and education.

Since the cyclical, growth has been held back by slower global growth, commodity prices,

high economic policy uncertainty, economic rebalancing in some economies and social

unrest in others.

Meanwhile, the International Monetary Fund (IMF) warned about the economic situation

that Covid-19 would bring, following a national strike that caused financial destabilization

to Ecuador and its prospects of lower growth.

COVID-19, makes clear the health consequences globally. The virus is inflicting

enormous and growing human costs around the world. To protect lives and enable

health systems to cope, it has been necessary to resort to widespread isolation,

containment and lockdowns to slow its spread.

The healthcare crisis is having a severe impact on economic activity. As a result, the

economy is projected to suffer a sharp contraction of -3% in 2020. In the baseline

scenario, in which the pandemic is assumed to dissipate in the second half of 2020 and

containment measures can be phased out, trade is projected to reopen moderately or

under restrictions, the global Ecuador economy is projected to grow by 5.8% in 2021,

as economic activity normalizes thanks to the support provided by public policy

incentives (IMF. World Economic Outlook. WEO, April 2020).

To better understand the crisis that has been caused by COVID-19, such as the

alteration of this landscape in international relations and globalization. "The crisis has

posed a challenge to major international organizations, involves the greatest global

economic turbulence in many years, perhaps since World War II, and has profoundly

altered perceptions about the practice of politics, or the legitimacy of representation,"

they explain in the document.

This scenario has generated great distrust and social apprehension among the

population, affecting communication, the management of public freedoms and other

unknowns that will remain to be seen in the coming months.

On the other hand, a first report on the effects that COVID-19 could potentially have

on poverty is presented in the country. In the research, scenarios of poverty figures

were constructed based on the results of the National Survey of Employment,

Unemployment and Underemployment. This input considers that the poverty line, the

monetary value of a basic basket of goods and services for a person for a given period,

remains at USD 84.82 for poverty and USD 47.80 for extreme poverty.

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The contraction of the economy and the suspension of activities affects a large part of

the population that will see their income decrease (or not be received), which in turn

will cause these people (and their households) to remain or become part of the

population living in poverty, generating the expansion of the conditions of inequality in

the country.

Currently, the percentage of poverty in Ecuador is 25% and according to the study

conducted by the UTPL experts, it could increase to 27% or 29% if household income

decreases by 5% or 10%, respectively, due to the economic crisis caused by the

pandemic. Even so, it is considered that a precise estimate of the social and economic

impact of the pandemic is complex, due to the fact that its duration is unknown.

For example, in the first stage of the sanitary emergency due to the coronavirus, losses

would total US$ 6,000 million, according to the Minister of Foreign Trade, Iván

Ontaneda. To make this calculation, Ontaneda considers that 70% of the productive

apparatus is paralyzed. Meanwhile, the Ministry of Finance foresees a loss level of US$

4,300 million. The figure considers some USD 2.5 billion less from oil revenues and a

drop in tax collection of USD 1.8 billion. "The economy could decrease by more than

4% of the Gross Domestic Product (GDP)", assured Minister Richard Martinez on

national TV last April 12.

As stated on the IMF website, in the fact sheet "The IMF: Basic Facts" (April 30, 2015),

the International Monetary Fund was created in 1944, following the Bretton Woods

Conference and with the aim of ensuring compliance with the rules of the new

International Monetary System, which arose as a result of the conference, in order to

guarantee international monetary stability. The so-called Bretton Woods system (also

known as the gold-dollar standard) was based on a system of fixed exchange rates and

convertibility between gold and the dollar.

The role of the dollar in the new system was a response to the hegemonic position of

the US after World War II. Despite the remarkable success of the system for more than

two decades, the growing imbalances of the US economy (public and current account

deficits) and its relative loss of importance in the global economic concert, progressively

weakened the dollar, until in August 1971 the US government was forced to declare the

non-convertibility of the dollar with respect to gold and put an end to the gold-dollar

standard.

The main functions of the IMF from its inception until 1971 were:

"To set the rules of the International Monetary System.

"Provide financial assistance to member countries in the event of balance of payments

imbalances and conditional on adjustments.

"To act as an advisory body to the governments of the member countries.

With the demise of the Bretton Woods system, the IMF had to reconvert itself and

adopt a new role on the global economic scene. From 1982 onwards, the external debt

crisis of the developing countries gave it a new role.

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The IMF became the lender of last resort at the international level, conditioning the

granting of loans and lines of credit to indebted countries in exchange for the adoption

of strict structural adjustment plans, which included economic liberalization measures

and sharp reductions in public spending.

Since the 1990s, after the fall of communism, the IMF has played an important role in

providing support and technical assistance in the transition to a market economy in many

former planned economy countries. During this period, the IMF has also intervened in

the financial crises that have plagued different countries and regions of the world: Mexico

(1994), Southeast Asia (1997-1998), Russia (1998), Argentina (2001), Greece (2010).

However, all these actions have generated strong criticism of the IMF, which has been

accused of excessive rigor and orthodoxy in its approaches and of excessively prioritizing

the interests of borrowers over those of the population of the countries subject to

adjustment plans and programs.

the fundamental activity of the IMF lies in confirming the durability of the international

numerary ordinance; that is to say, the method of international disbursements and

exchange typology that allows countries (and their populations and companies) to make

adjustments among themselves. (Batallanos Enciso, Umeres Leiva, & Gamarra Gonzales,

2020).

As of 2012, the IMF revised its functions, incorporating into these a greater commitment

of its actions to economic growth and job creation in member countries, as well as

helping to rebuild the financial safety nets (budget balance, low levels of public debt, high

levels of international reserves) of low-income countries. (Batallanos Enciso, Umeres

Leiva, & Gamarra Gonzales, 2020).

For all this, the IMF performs tasks in the area of surveillance, financial assistance and

technical assistance. (Batallanos Enciso, Umeres Leiva, & Gamarra Gonzales, 2020)

"Surveillance: in order to continue the perseverance and to cover itself risk in the

universal monetary mode, the IMF sends checks to the leaders of the countries, as well

as to the financial and economic subject, local and planetary, through an express rule of

review. (Batallanos Enciso, Umeres Leiva, & Gamarra Gonzales, 2020).

The IMF manages aid to the subject countries and observes governments that uproot

the occasion, tame the fragility to exchange and mutual instability and embellish the life

plans. It also transmits regular calculations on the world landscape, the negotiating

markets and on the trend of the auditing stock exchanges, imprisoned as a wheel of

instructions on the territorial configurations. (Batallanos Enciso, Umeres Leiva, &

Gamarra Gonzales, 2020)

"Financial assistance: The IMF provides financing for the correction of balance of

payments problems (conditional on the adoption of certain adjustment programs by the

countries). Since 2008, financial support instruments have been expanded and improved

to respond to the needs generated by the global financial crisis. (Batallanos Enciso,

Umeres Leiva, & Gamarra Gonzales, 2020).

"Technical assistance: The IMF offers technical assistance and illustration to help

participating countries to strengthen the experiences of pregnancy and annihilation of

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effective policies in the following areas: secondary policy and delegation, investment

mandate, monetary and exchange governments, supervision and regulation of financial

and monetary courses, legislative and related frameworks. (Batallanos Enciso, Umeres

Leiva, & Gamarra Gonzales, 2020).

The management of the IMF is in the hands of the Managing Board, but the highest

authority of its organizational structure is the Board of Governors, which is composed

of a governor and an alternate governor for each member country, generally from the

Central Bank or the Ministry of Finance. (Batallanos Enciso, Umeres Leiva, & Gamarra

Gonzales, 2020).

The Board of Governors meets once a year on the occasion of the Annual Meetings of

the IMF and the World Bank. The 24 governors form the International Monetary and

Financial Committee (IMFC) and generally meet twice a year. The IMF is accountable to

the governments of its member countries (188 in 2015). (Batallanos Enciso, Umeres

Leiva, & Gamarra Gonzales, 2020).

The day-to-day operations of the IMF are overseen by the Executive Board, which has

24 members and represents all member countries. This work is guided by the IMFC and

supported by the IMF staff. The Managing Director is the IMF's chief of staff, chairs the

Executive Board, and is assisted by four Deputy Managing Directors. The current

Managing Director is Christine Lagarde (France). (Batallanos Enciso, Umeres Leiva, &

Gamarra Gonzales, 2020).

The voting system used in the IMF is that of weighted voting, based on the participation

of each country in the quotas (see Table 2, p. 114, of Tamames, R. and González, B.,

2010). Decisions are taken by a majority of 85% of the votes, which gives the US de

facto veto power over major decisions. (Batallanos Enciso, Umeres Leiva, & Gamarra

Gonzales, 2020).

Main Instruments To carry out its activities, the IMF has a wide range of financial services

(see Table 5, pp. 120 and 121 of Tamames, R. and González, B., 2010). To do so, it

requires resources, either in the form of Special Drawing Rights (SDRs) or those

obtained through member countries' quotas. (Batallanos Enciso, Umeres Leiva, &

Gamarra Gonzales, 2020).

"SDR: The IMF issues an international reserve asset known as Special Drawing Rights

that can supplement the reserve assets of member countries. Total allocations amount

to about 204 billion SDRs (approximately $280 billion). IMF members may also engage

in voluntary exchanges of SDRs for currencies among themselves. (Batallanos Enciso,

Umeres Leiva, & Gamarra Gonzales, 2020).

"Resources: The primary cause of the IMF's financial demands are the shares of the

member countries, which in normal processes measure the relative position of the

countries in the world resource. (Batallanos Enciso, Umeres Leiva, & Gamarra Gonzales,

2020).

Currently, quota resources amount to about SDR 238 billion (about US$ 327 billion). In

addition, the IMF can supplement quota resources by borrowing. The New

Arrangements to Borrow (NAB), which were extended in 2011 and can provide

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additional resources of up to SDR 370 billion (about $515 billion), are the main

supplement to quotas. (Batallanos Enciso, Umeres Leiva, & Gamarra Gonzales, 2020)..

MATERIALS AND METHODS

Among the sectors analyzed by the Chamber of Industries of Ecuador during the sanitary

emergency, commerce registered the worst numbers in years. Mobility restrictions to

curb contagion and the panic of consumers due to the high risk of contagion of the

pandemic have generated that about 70% of the businesses remain closed. According to

data collected by the Chamber of Commerce, around 7,700 businesses have been closed

since the beginning of the quarantine.

If restrictions continue, the commercial sector faces a decrease in sales of more than

USD 14.5 billion. This will require an injection of capital into the economy in order to

achieve an economic reactivation that will benefit the country and both domestic and

foreign trade.

Faced with the pandemic, all countries, including Ecuador, have promoted measures to

curb contagion, such as mandatory social isolation and the suspension of economic

activities, in order to protect the health of the population. However, these measures

have had some consequences, such as an increase in state expenditures to meet needs,

over and above budgetary allocations; the contraction of the economy and economic

losses in small and medium-sized enterprises due to their closure due to mobility

restrictions, and the adaptation of security measures to protect the health of citizens,

which will reduce their income, which in turn will cause these people to remain or

become part of the population in poverty, generating the expansion of the conditions of

inequality in the country.

Analyze the management of credits granted by international organizations, which causes

indebtedness to the country, and the feasibility of applying the money borrowed to

domestic trade and the economic reactivation of small and medium-sized enterprises,

which are the most affected sector.

Analyze the impact of the slowdown in the world economy and the fall in exports, as

well as the decrease in the value of oil and the effect of these factors on the country's

economy.

The article is framed in a descriptive study, through the collection of data on the use of

security measures and restrictions, allowing to describe the economic and legal effects

that are implemented in each of the countries that adopt the application of economic

reactivation proposals before the COVID-19 in Ecuador.

Information was collected from different sources such as books by experts in

international trade, experts in international law, and magazine articles analyzing the

global economic slowdown.

RESULTS

Ecuador has received several loans from the IMF, such as the one in 2016, where the

IMF approved a credit without conditions in favor of Ecuador for US$ 364 million. It was

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granted considering that Ecuador faces an urgent need for its balance of payments, after

the earthquake that occurred on April 16 and has caused damage to infrastructure,

housing and the agricultural sector, especially in the provinces of Manabí and Esmeraldas.

The disbursement, which was made immediately, is equivalent to 37.5% of Ecuador's

quota in the IMF. The loan is provided under the Rapid Financing Instrument (RFI), which

has no conditions and was offered to the country, the interest rate is 1.1% per annum

with a term of five years, but with three years and three months of grace.

In 2018, the International Monetary Fund program gives the Ecuadorian government

access to $ 4.2 billion in financing, to be disbursed over three years. Last year, the IMF

disbursed $ 1.4 billion. For this year, the organization is expected to disburse $ 1.1

billion, as long as it meets the goals established by the multilateral organization.

In 2020 there will be a total of five loans for the health emergency due to Covid-19, in

order to obtain these loans Ecuador must comply with the requirements demanded by

the IMF, such as:

1. Creation of the financial commission: to revise the administrative decree

447 in order to signal the work of the wealthy commission, determining as very

little the following key compendium: to detail the members of the commission

that includes the minister (of deficiency and finances), the vice ministers and the

undersecretaries. to outline the maneuvers and tasks, including the action of

coffer. to require the production of a concrete committee.

2. Improvements in social pensions: knowledge and humbug of a weaving

design to realize beginnings of the remunerated persons of the charitable flyers.

to accelerate the colophon of the mutual copy improved with the stay of the

crew of the end and in reciprocity with the cosmopolitan banking entity.

3. Improvement in computer styles: to update the computer regimes to line

of the central supply to sip the unfailing changes to collect report on the debts

in the deep districts of the central authority.

4. Financial plan: a negotiating procedure, which will accompany the ritual of

accepted to be offered to the regional club, as a modular unit to distribute the

composition of the admitted with the availability of valuable.

5. Reforms to the Coplafip: presence to the official crowd of the examined

amendments to the organic symbol of planning and business audits.

6. Plan for the payment of arrears: submit to the IMF's private sector a file of

liquidation and surety of ignorance based on quarterly and annualized data on

the behaviors of budgets to be gratified and delays.

7. Reform for independence of the central bank: promotion to the patriotic

assembly, in consultation with the working class of the fund, of the probed

reprimands to the official framework of the substantial banking of ecuador (bce).

8. Transparency of asset declarations of high-level public officials: assume

and implement a regulation to improve the existing online publication of asset

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declarations of high-level public officials, expanding the amount of information

provided.

9. Budget changes: adopt a single budget for current (permanent) and capital

(non-permanent) expenditures that includes expenditure ceilings (overall and by

category) in consultation with fund staff.

10. Improve reporting (end-June): the ministry of finance issues guidelines to

non-financial public sector entities (nfpS) that establish strict reporting

requirements for all nfpS entities on quarterly and annual data on the stock of

accounts payable and arrears, and on the stock of financial assets and liabilities.

11. Central bank audit committee: establishment by the ecb of an audit

committee, composed of non-executive directors of the ecb board, which

includes at least one member with accounting experience.

12. Audit Charter: Approval of an internal audit charter by BCE's new audit

committee, which establishes the mandate, independence, authority and

objectivity of the function. (UNIVERSIDAD TÉCNICA DE AMBATO & Carrasco

Morales Repository, 2020)

DISCUSSION

In conclusion, we can determine that for this year after the present world chaos

generated by Covid-19, it is estimated that the IMF will continue to maintain support

programs, such as economic loans to Ecuador, with the objective of reopening trade and

improving economic income. We must be clear that Covid 19 is such a serious and

dangerous pandemic that it will take approximately a year and a half to have a vaccine.

Since the world economy is already depressed, not to mention the economy of third

world or developing countries, the economic debacle will continue to torment all the

countries of the world and therefore the citizens of the world.

CONCLUSIONS

That the unemployment rate will continue to grow worldwide and famine will increase

in many countries of the world. That small businesses and innovations will disappear

due to lack of products due to lack of liquidity due to lack of customers. That there will

be no money in financial IOs such as the IMF that will be able to pay for the credits

required by countries with tremendous illiquidity and galloping delinquency.

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Batallanos Enciso, E., Umeres Leiva, N. A., & Gamarra Gonzales, J. C. (2020). The World

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http://repositorio.unsaac.edu.pe/handle/UNSAAC/4140?show=full

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