February 21, 2019 / 6:23 PM / a month ago

Ecuador to increase foreign reserves, revamp tax under IMF deal

QUITO, Feb 21 (Reuters) - Ecuador will increase its foreign reserves, optimize public spending and make tax changes during the next three years to comply with a $4.2 billion financing deal with the IMF, Finance Minister Richard Martinez said on Thursday.

President Lenin Moreno on Wednesday announced the deal with the International Monetary Fund, which gives the Andean country the chance to get a further $6 billion in loans from other multilateral institutions.

Ecuador is grappling with a large fiscal deficit and heavy external debt. But the country hopes to strengthen its dollarization, reach a fiscal surplus and improve employment figures under the deal, Martinez said.

“It’s an unprecedented deal because its structure allows the willingness of different multi-lateral organizations to converge,” Martinez told reporters. “And it aims not just to solve a fiscal problem but toward structural reforms.”

The accord is subject to approval by the Washington-based lender’s executive board.

“During the next three years the government won’t be required to go to the international market for financing,” the IMF’s Alejandro Werner said. “The accord provides a network of security and tranquility.”

The government will start a tax “simplification” project to increase revenues, Martinez said, and seek legal reforms to bolster the central bank.

Basic services will not be affected, he said, and privatizations are prohibited. The country will receive an initial $4.6 billion of the loans this year, Martinez added.

Ecuador’s sovereign bonds surged last week after the IMF confirmed it was engaged in formal talks with Moreno over a possible financial arrangement.

The OPEC nation’s debt grew under former leftist President Rafael Correa. Moreno earned Correa’s support during the 2017 election campaign, but has implemented more market-friendly economic policies since taking office.

Moreno has begun to implement an austerity plan that includes layoffs of workers at state-owned companies and cuts to gasoline subsidies. He also plans to find a private operator for state-run telecoms company CNT and other state-owned firms.

On Wednesday, Moreno said most of the money would be dedicated to “social investment,” citing a rising number of police officers and promising retirees they would not lose out on an annual bonus.

Skepticism of the IMF runs strong in Ecuador and throughout Latin America, where many blame Fund-imposed austerity policies for economic hardship. (Reporting by Alexandra Valencia; Writing by Julia Symmes Cobb; Editing by Helen Murphy and Dan Grebler)

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