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Gallardo tries to woo IMF despite uncertainty on tax reform.

QUITO -- Finance Minister Jorge Gallardo traveled to the United States to meet with IMF officials to seek fund approval for the government's economic plan even as Congress sought to undo key elements.

Gallardo hopes an accord will prompt the IMF to release $48 million out of a total of $150 million still expected from the fund. But, in order to get the money, Gallardo must convince the IMF that the increase in the value added tax (VAT) from 12% to 14% will stick.

The IMF froze the payments after Congress rejected an increase in the VAT. Legislators failed to override a presidential veto of the measure, which allowed the increase to take effect. Since then, however, there have been four separate attempts to reverse the tax increase and at least one more is pending. Some lawmakers have even gone so far as to try to draft a proposal that would ask the Constitutional Tribunal to renounce its authority on this one question.

The tax is due to take effect June 1, but the cases before the tribunal will likely remain pending for at least another month and a half, creating uncertainty about the course of the economy.

If the tax hike is approved, the budget deficit is expected to be about $249 million this year, funded in part by $90 million from Interamerican Development Bank and $151 million from the World Bank. If the tax increase is shot down, however, the deficit would rise to $375 million, which would exceed IMF targets and create problems for Ecuador's effort to renegotiate its debts with the Paris Club. Those talks were frozen after Congress rejected the tax hike the first time.

To gain IMF support, Gallardo has implemented an austerity program. From a $3.97 billion budget, he plans to cut $239 million in spending. Most of the money will come out of government operations and the deferral of some investments.

Gallardo also will tout the benefits of the new heavy oil pipeline. The government is expected to approve the environmental license for the project despite complaints the line will cross a nature preserve. Officials say the $1.3 billion pipeline is too important to delay over questions about the route. Officials expect the project to lead to additional investments in the oil industry of $2 billion over the next year and a hall help boost employment and lead to substantially higher oil revenues starting in 2002.

Gallardo also is betting the signs that demand is beginning to pick up will convince the multilaterals that they must back the government. Banking deposits also are up, from $3.27 billion in December 1999 to $4.3 billion at the end of March. Inflation also is coming down moderately and was 5% in March.
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Title Annotation:Ecuador
Publication:America's Insider
Article Type:Brief Article
Geographic Code:3ECUD
Date:May 17, 2001
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