Announcement of World Bank Assists Financial Sector Adjustment in Ecuador on December 23, 1987

FOR IMMEDIATE RELEASE '!\/orld Bank 1818 H Street,_N.W., Washington, O.C. 20433, U.S.A. BANK NEWS RELEASE NO. 88/33 Contact: Ciro Gamarra (202) 676-1217 WORLD BANK ASSISTS FINANCIAL SECTOR ADJUSTMENT IN ECUADOR WASHINGTON, December 23, 1987 -- Ecuador's program to improve the performance of its financial sector will be assisted by a quick-disbursing World Bank loan of $100 million. The loan supports the ongoing reforms, which have already achieved substantial progress, and further actions to be carried out in 1988. The large volume of subsidized credit in Ecuador has hindered efficient allocation of financial resources, monetary stability, resource mobilization from domestic sources and the development of long-term business finance. Large portfolio losses, an inadequate supervisory and regulatory framework, and the proliferation of small banks and development finance institutions have also weakened the ability of the financial sector to mobilize adequate capital and to operate efficiently. The development of the capital market has also been hampered by interest rate ceilings, tax discrimination against equity finance and the absence of an institutional framework to inform and protect investors. The government's program for financial sector improvement aims at reducing the dependence of financial institutions on the Central Bank to promote better resource allocation, greater monetary stability, and a more adequate volume of long-term business finance. Other objectives are to improve the regulatory and supervisory framework to strengthen financial institutions and to improve conditions for adjustable-rate lending, capitalization of interest and equity finance to promote capital market development. The program is expected to significantly improve the performance of the financial sector in Ecuador. Freeing of interest rates on deposit and lending instruments not funded by the Central Bank, control of the Central Bank credit growth in real terms, the increase in interest rates on credit funded by the Central Bank and the reduction in the number of separate credit lines are contributing towards the achievement of the objectives of the program. NOTE: Money figures are expressed in U.S. dollar equivalents.  - 2 - The increased flexibility of adjustable lending, market pricing of on- lending rates on loans funded by international institutions, the implementation of a low-income housing finance project, and the improvement of short-term reference interest rates are important initial steps to develop the long-term capital market. A study to identify fiscal and other factors that may discourage equity finance, included in the program, should provide the basis for further important financial policy reforms aimed at reducing business leverage. The World Bank loan will be used to finance eligible private and public sector imports, except those normally excluded under World Bank policy-based loans, such as alcohol, tobacco, and armaments. The loan will be disbursed in two tranches of $50 million each, the first upon loan effectiveness and the second after a review of the macroeconomic and financial adjustment program within six months of loan signing. The benefits expected from the program include an increase in the rate of economic growth through an improvement in the allocation of investment and capital; a more resilient financial sector through an improved framework of regulation, supervision and enforcement; and a more efficient financial sector through improved conditions for competition and financial intermediation. The $100 million loan to the Republic of Ecuador is for 17 years, including four years of grace, with a variable interest rate, currently 7.76 percent, linked to the cost of the Bank's borrowings. It also carries an annual commitment charge of 0.75 percent on undisbursed balances .. - 0 -