Monday, August 08, 2005

Help the PEOPLE ??? FU says The Wolf and His World Bank

World Bank set to suspend loan after Ecuador changes oil fund

By Hal Weitzman in Quito
Published: August 5 2005 03:00 | Last updated: August 5 2005 03:00
The World Bank could signal as early as today that it is in effect suspending $400m in loans to Ecuador, in response to the country's restructuring of an oil stabilisation fund.

The bank has made no official response, but is preparing a reply to a letter sent this week by Rafael Correa, Ecuador's finance minister, to Paul Wolfowitz, head of the bank, asking why Mr Correa was left empty-handed last week in Washington, where he had expected to receive a $100m (€81m, £56m) loan as part of the bank's fiscal support programme for Ecuador.

In an interview with the Financial Times, Mr Correa said that by denying the loan at the last moment, the World Bank had broken a contract with the Andean country.

"This is an offence for Ecuador. A loan had been approved and was in place and they are cancelling it, completely outside any ethical or legal principle, because we changed a law," said Mr Correa. "We are a sovereign country. Nobody can punish us because we are changing our own laws."

The oil stabilisation fund, which had been designed to use the profits from oil revenues primarily to pay off debt, was reformed last month so that only half of the amount previously set aside for debt reduction would be dedicated to that purpose, while social spending would be increased.

Mr Correa said that Ecuador had kept to its agreement with the bank, which stipulates that 70 per cent of the oil stabilisation fund should have been used to pay down debt until September 2004.

It is understood that the bank will respond by arguing that the policies and objectives that its loans were designed to support have been at least partially reversed, making it highly unlikely that the government will fulfil the goals of the loan programme.

Although it will leave open a small window for further negotiations, the bank's letter is likely to indicate that it is in effect suspending the current fiscal loan programme, which had been due to disburse a further $100m next year. It may also suspend a parallel scheme of $200m in loans for social programmes.

Mr Correa said the bank's change of policy had been entirely unexpected. "We were never told until last week that the Feirep law [restructuring the oil stabilisation fund] was a problem. The country has been misled. This was not the right way to act."

Communications between the bank and Ecuador's new government - which took power following the ousting of Lucio Gutiérrez in April - have been far from exemplary. However, the bank's refusal did not surprise emerging market analysts, who had been warning that multilateral lenders may view the restructuring of the oil stabilisation fund with alarm.

Mr Correa said Ecuador could not be intimidated by the bank. "They can keep their money," he said. "Ecuador is not for sale."

He said the denial of the loan would not leave the government with a budget shortfall, since although it created a possible funding gap of $50m in the $7bn budget for this year, it was unlikely that the government would make all its planned expenditures.

Mr Correa also confirmed he expected Venezuela to buy a total of $300m in Ecuadorean bonds as part of a debt-restructuring policy, although he said the initial amount might be closer to $150m. He said he had not yet received responses from other possible lenders, including China.


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