VZCZCXYZ0000
OO RUEHWEB

DE RUEHQT #0324/01 0981858
ZNR UUUUU ZZH
O 071858Z APR 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8711
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 7495
RUEHCV/AMEMBASSY CARACAS PRIORITY 2975
RUEHLP/AMEMBASSY LA PAZ APR 1002
RUEHPE/AMEMBASSY LIMA PRIORITY 2541
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 3482
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 000324 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: ECON EPET PGOV EINV EC
SUBJECT: CONSTITUENT ASSEMBLY ELIMINATES PETROLEUM FUNDS, GRANTS 
EXPANDED BUDGET POWER TO MINISTRY OF FINANCE 
 
REF: Quito 55 
 
¶1. (U) Summary: The Constituent Assembly approved a law, drafted by 
the Correa Administration, that closes the petroleum reserve funds 
and moves that financing on to the regular budget.  It stipulates 
that those resources can only be used for investment, and 
establishes a broad budget requirement that current expenditures 
cannot be funded by borrowing or petroleum revenue.  It also gives 
increased budgetary discretion to the Minister of Finance.  End 
Summary. 
 
¶2. (U) On April 2, the Constituent Assembly approved the "Law to 
Recover the Use of Petroleum Resources and Rationalize Debt 
Administrative procedures."  This is the second law approved by the 
Constituent Assembly, following the tax reform law (reftel). 
 
¶3.  (U) The law has three broad objectives:  bringing the petroleum 
funds on to the budget, increasing the Ministry of Finance's 
flexibility to take on new debt and increase the budget, and 
replacing the budget guidelines in the Fiscal Responsibility Law 
with a broader guideline. 
 
Eliminating Petroleum Funds 
--------------------------- 
 
¶4.  (U) The law eliminates four "petroleum funds" and incorporates 
the funds' unallocated balances into the general budget.  In March, 
the combined value of the funds was $1.93 billion.  Revenues that 
previously had gone into reserve funds will now go directly into the 
general budget. Each of the funds had complex spending requirements, 
which have now been deleted, although the government has stated that 
it will continue to direct some of the revenues to the same purposes 
as before.  The new law stipulates that these petroleum revenues 
must be used for investment and cannot be used for current 
expenditures. 
 
New Broad Budget Guideline 
-------------------------- 
 
¶5.  (U) The new law also replaces the broad limits on government 
spending established in the Fiscal Responsibility Law.  The old 
guideline had been that government spending, in real terms, could 
not increase by more than 3.5% of GDP per year.  The new guideline 
is that current expenditures cannot be financed by debt or by income 
from petroleum exports. 
 
The Debt Committee and Ministry Authority 
----------------------------------------- 
 
¶6.  (U) The new law also modifies the requirements for the 
government to take on debt and increase the budget, although the 
version approved by the Constituent Assembly gives the Minister of 
Finance less autonomy than had the version drafted by the 
administration. 
 
¶7.  (U) Previously the Central Bank had to give a favorable approval 
before the government could take on a new loan; with the new law, it 
loses that authority.  The administration had proposed that the 
Ministry of Finance have sole responsibility in approving new debt, 
but the Assembly instead established a Debt and Financing Committee. 
 The Committee consists of the President, the Minister of Economy 
and Finances and the Secretary of Planning.  In addition, any 
minister requesting a credit will be allowed to speak before the 
Committee but will not have a vote.  Only debts that exceed 0.15% of 
national budget will have to be approved by the Committee; lesser 
amounts can be approved by the Minister of Finance. 
 
¶8. (U) The new law also allows the Ministry of Finance to increase 
or reduce the national budget by 15 percent without consulting 
Congress.  (The Assembly limited the Ministry's discretion at 15%; 
the draft submitted by the administration would have given the 
Ministry unlimited discretion to increase the budget.)  Previously 
the Ministry could modify the budget by up to five percent. 
 
Analysts Comments in Favor and Against the Changes 
--------------------------------------------- ----- 
 
¶9. (SBU) Former Minister of Finance Magdalena Barreiro told the 
press the law will give the government greater flexibility to better 
manage its resources.  Jaime Carrera, economic analyst at the Fiscal 
Policy Observatory, an NGO, believes that fiscal power concentrated 
in the hands of one party will undermine future decisions by 
Congress, and told the Embassy he feels the move replicates the 
 
absence of controls on fiscal spending that existed during the 1970s 
petroleum boom. 
 
COMMENT 
------- 
 
¶10. (SBU) The new law appears to reduce the constraints on spending 
established by a series of laws, notably the Fiscal Responsibility 
Law, and those creating the petroleum funds.  In reality, the law 
recognizes and simplifies a number of practices that were already in 
place.  Current and previous administrations bent the intent of the 
petroleum funds by issuing emergency decrees, and readily violated 
the 3.5% growth gap on budget.  However, previously governments had 
to go through some budgetary and legal gymnastics to get around the 
rules, and now they will not.  It remains to be seen whether the new 
flexibility will allow the government to spend more wisely, as the 
government contends, or give the Ministry of Finance too much 
discretion, as some critics contend. 
 
¶11.  (SBU) The new law does establish some reasonable budgetary 
constraints:  limiting petroleum revenues to investments and 
requiring that current expenses be funded by current revenues. 
However, we suspect that the government will work around these new 
guidelines if it feels the need, just as governments had violated 
the previous constraints. 
 
JEWELL