Creating Fiscal Space for Poverty Reduction in Ecuador: A Fiscal Management and Public Expenditure Review (World Bank Country Study)

Ecuador's impressive fiscal performance of 2003 is encouraging, but fragile. Several structural bottlenecks could impede fiscal discipline and recovery, which is a pre-condition to develop a poverty reduction agenda. Tax earmarkings and exemptions and an expansive payroll and pensions bill have reduced to a minimum the available fiscal space for development needs. Reversing poverty trends is critical for the country's stability, and this can only be achieved with well-targeted, effective and efficient pro-poor programs. The status quo is not an option for poverty reduction. Preserving a sound fiscal position and deepening positive social outcomes is well within reach. Among the country's many strengths are: a prolonged oil windfall; the existence of and compliance with fiscal rules; decreasing arrears that should fully disappear in 2004, substantive progress on social outcomes despite decreasing budgets; and a series of on-going reforms on budget management. If reforms are to succeed, they have to be pro-poor. Ecuador's fiscal stress and poor budget management is deeply rooted in a governance system benefiting the elites, be it reflected on pro-rich subsidies, especially on basic infrastructure; off-budget operations that prevent transparency and foster corruption, or regressive transfers to subnational governments explained by party politics. The challenge for the Government is to provide more effective, efficient, sustainable and equitable assistance to the poor. Annotation. Ecuador's impressive fiscal performance of 2003 is encouraging, but fragile. Several structural bottlenecks could impede fiscal discipline and recovery, which is a pre-condition to develop a poverty reduction agenda. Tax earmarkings and exemptions and an expansive payroll and pensions bill have reduced to a minimum the available fiscal space for development needs. Reversing poverty trends is critical for the country's stability, and this can only be achieved with well-targeted, effective and efficient pro-poor programs. The status quo is not an option for poverty reduction. Preserving a sound fiscal position and deepening positive social outcomes is well within reach. Among the country's many strengths are: a prolonged oil windfall; the existence of and compliance with fiscal rules; decreasing arrears that should fully disappear in 2004, substantive progress on social outcomes despite decreasing budgets; and a series of on-going reforms on budget management. If reforms are to succeed, they have to be pro-poor. Ecuador's fiscal stress and poor budget management is deeply rooted in a governance system benefiting the elites, be it reflected on pro-rich subsidies, especially on basic infrastructure; off-budget operations that prevent transparency and foster corruption, or regressive transfers to subnational governments explained by party politics. The challenge for the Government is to provide more effective, efficient, sustainable and equitable assistance to the poor Creating Fiscal Space for Poverty Reduction in Ecuador is part of the World Bank Country Study series. These reports are published with the approval of the subject government to communicate the results of the Bank's work on the economic and related conditions of member countries to governments and to the development community.Ecuador's impressive fiscal performance of 2003 and 2004 is encouraging, but fragile. Several structural bottlenecks could impede fiscal discipline and recovery, which is a pre-condition to develop a poverty reduction agenda. Tax earmarkings, multiple exemptions, an expansive payroll, and growing pension bills have reduced to a minimum the available fiscal space for development needs. Reversing poverty trends is critical for the country's stability, and this can only be achieved with well-targeted, effective and efficient pro-poor programs. The status quo is not an option for poverty reduction.Preserving a sound fiscal position and deepening positive social outcomes are well within reach. Among the country's main strengths are: a prolonged oil windfall; the existence of and compliance with fiscal rules; substantive progress on social outcomes despite decreasing budgets; and a series of ongoing reforms on budget management. Ecuador's fiscal stress and poor budget management is deeply rooted in a governance system benefitting rent-seeking elites. The challenge is to provide more effective, efficient, sustainable, and equitable assistance to the poor. "Preserving a sound fiscal position and deepening positive social outcomes are well within reach. The challenge is to provide more effective, efficient, sustainable, and equitable assistance to the poor."--Jacket