Ecuador Gets $364 Million IMF Loan to Tackle Earthquake Reconstruction

Ecuador faces huge economic toll after worst earthquake in decades

Reconstruction to cost $3.3 billion, growth to contract significantly in 2016

IMF ready to continue supporting Ecuador manage economic challenges

The International Monetary Fund has approved and disbursed a $364 emergency loan for Ecuador to help the country finance relief and reconstruction efforts after one of the strongest earthquake in decades.

On April 16, Ecuador was hit by a powerful 7.8 magnitude earthquake, the worst since 1979. The most affected regions (see chart) are the coastal provinces of Manabí and Esmeraldas, but the quake was also felt in the two largest cities, Quito and Guayaquil. The damage, which left at least 675 dead or missing, more than 4,600 people injured, and 33,000 people in temporary shelters, may cost $3.3 billion to repair, according to a joint assessment by the authorities and the United Nations (Economic Commission for Latin America and the Caribbean). The country expects swift external support from international financial institutions and donors.

The disaster is expected to deepen the country’s recession and recovery efforts will be hobbled by the lack of fiscal buffers. Ecuador’s growth rate—which is largely dependent on oil and exports—had already declined from 3.7 percent in 2014 to just above zero in 2015 due to plunging oil income, U.S. dollar appreciation (the economy is fully dollarized), and limited access to international financing. According to the IMF, real GDP growth is expected to contract by about 2¼ percent in 2016—of which about ½ percent is due to the impact of the earthquake.

The country already received the money under the IMF’s Rapid Financing Instrument, which is intended to help the authorities face an urgent balance of payments need due to the severity of the earthquake. It consisted of a single, upfront disbursement with no conditionality. The loan has a grace period of 3¼ years and 5-year maturity, and an interest rate equal to 100 basis points plus the Special Drawing Right interest rate (totaling 1.05 percent as of September 7, 2016).

Swift government response

The authorities responded quickly by immediately dispatching more than 1,500 emergency personnel to the affected areas, restoring water and electricity in most of the affected regions, and providing medical care to over 31,000 people within the first two weeks. Since then, the government also set up a number of shelters, where part of the displaced population is being housed while the repair and reconstruction of housing takes place. The government expects the rest of the displaced earthquake survivors to find alternative housing solutions (for example, by renting or staying with family or friends) with the help of cash transfers.

The authorities also responded with fiscal measures to raise resources to fund the relief efforts, including a two percentage point increase in the value-added-tax rate for a year and a one-time solidarity surcharge tax on wages, corporate profits, and personal assets. At the same time, the authorities considered necessary to extend the duration of the balance of payments safeguards (import surcharges) through May 2017.

External support

The international community promptly mobilized as well. Two weeks after the earthquake, an IMF team visited Ecuador to help the government assess the economic impact and determine the associated financing needs. The country received pledges of external support for the emergency and reconstruction efforts by several international financing institutions, including the World Bank and the Inter-American Development Bank, as well as the United Nations, non-governmental organizations, and bilateral and multilateral donors.

In addition to the $364 million disbursed from the IMF under the Rapid Financing Instrument to help the country with rehabilitation and reconstruction, the authorities expect to receive an additional $360 million in the form of grants or loans in 2016. In order to ensure a transparent process, the government plans to have a separate reporting mechanism for all earthquake-related expenditures.

A long way forward

The reconstruction will likely span 2 to 3 years. While the government temporarily restored most basic services, permanent solutions will take time as the earthquake changed the composition of the soil. In some cases, this will require the relocation of entire communities and, hence, basic services as well.

The government is also working on the economic reactivation of the affected areas, which should be assisted by the reconstruction activity. However, getting the local economies back on track will take some time. The IMF stands ready to continue helping Ecuador address these current and future economic challenges.