According to the International Monetary Fund (IMF), reporting on its 2005 Article IV Consultations with Ecuador, legislation passed early in this decade has led to improvements in the transparency of fiscal policy. The laws, passed in 2002, are the Fiscal Transparency, Stability, and Responsibility Law and the Organic Control Law, both of which are supplemented by accompanying regulatory changes. Also contributing to improved transparency has been the reactivation of the World Bank-financed integrated information system known by the acronym SIGEF. In 2005, however, the World Bank and the Inter-American Development Bank issued a Country Financial Accountability Assessment (CFAA) that spoke of a "culture of secrecy" that continues to plague Ecuador's handling of the national budget and disclosure of public expenditure. Weak Congressional oversight has led to the public perception that the Ecuadorian government's commitment to transparency is poor and that there is insufficient government accountability for its spending policies. The 2007 IMF's Executive Board's Article IV discussions noted positive developments and encouraged the adoption of a formal medium-term fiscal framework. While Ecuadorian authorities are tackling some issues related to fiscal transparency, the information publicly available is not sufficient to rate Ecuador's compliance with the IMF's Code of Fiscal Transparency. A formal assessment conducted by the IMF in 2004 has not been published as of June 2008.

General Overview

In association with the Inter-American Development Bank (IDB), the World Bank (WB) published a 2004 "Country Financial Accountability Assessment Report" (CFAA) that investigated Ecuador's public financial management practices, identified weaknesses, and recommended areas where improvements could be implemented, including the area of public-sector transparency. This assessment was also associated with a joint IDB/WB Public Expenditure Review and a Report on the Observance of Standards and Codes (ROSC) for Fiscal Transparency by the International Monetary Fund (IMF). As of May 28, 2008, the IMF's fiscal ROSC had yet to be made public. The report mentioned the 2002 passage of Ecuador's Fiscal Transparency Stability and Responsibility Law and the Organic Control Law, along with their supporting regulatory frameworks. The report also noted that the government of Ecuador had "reactivated the reform of the integrated financial management information system" (Systema de Gestion Financiera, or SIGEF) in order to enhance operational efficiency, improve accountability, and promote transparency (p. iii). Additional reforms were also in the works.

According to the CFAA, prior to the new legislation, the 1977 Organic Law of Financial Administration and Control provided the legal framework covering government finance administration, and was considered to be groundbreaking in the region. However, in 1992 the legislature began passing "special purpose" laws in a political battle pitting "pro-poor" interests against pro-fiscal-discipline concerns that undercut the 1997 Law's effectiveness and resulted in a highly fragmentary legislative framework vis-à-vis fiscal policy and transparency. One effort to reduce the confusion of the government's financial management system was the development of the SIGEF, an IT approach to "promote accountability and transparency in public financial management" (p. iv). However, the WB/IDB assessment found that this system disclosed some fundamental shortcomings and made specific recommendations to remedy them. The CFAA also looked at public financial management practices and operational procedures. The report found that the government's budgetary focus on in-year financial discipline and austerity without long-term policy consideration was problematic.

The report specifically noted that budget transparency and credibility was compromised by "the practice of making in-year adjustments to approved budgets without clear rules and guidelines" (p. iv), as well as the overall rigidity of the budget process. In addition, it was noted that "expenditure control is not exercised on budgetary commitments, causing floating debt to accumulate" (p. iv). Also noted was understaffing of the Accounting Under-Secretariat, along with inadequate training and inappropriate IT resources. This has led to "a lack of confidence in the consistency of budget performance, accounting and financial reporting, and their usefulness in promoting transparency and accountability" (pp. iv-v). The report also found that internal audits are insufficient to the needs of line-ministry fiscal management. The Supreme Audit Agency is legally endowed with operational and financial autonomy, but according to the CFAA it has made full use of this independence. As of 2004, there had been no external audits covering either the execution of the budget or the central government's consolidated financial statements. The Congress has not traditionally engaged in rigorous budget or public financial oversight, but the CFAA remarked upon more recent efforts to step up the Congressional oversight activities. Still, progress in this regard is hampered by the unavailability of timely public expenditure data and the complexity of the budget process.

The CFAA offered a number of specific recommendations to redress the identified shortcomings, couching these in the form of an "action plan." First, the report recommended that the complex body of existing law be consolidated, simultaneously repealing any contradictory or obsolete elements. This would be preliminary to a medium-term goal of drafting a wholly new Organic Law. The CFAA suggested that this new law "should lay down principles, leaving the procedural details to be established in regulations" (p. vi). The regulations should address budget comprehensiveness, be adequately detailed to include data on management and performance, elaborate specific procedures for in-year allocation adjustments, institute appropriate internal controls over the use of public funds, and establish appropriate oversight and audit mechanisms. The SIGEF system should be revamped and upgraded to address currently unaccommodated reporting needs and render it more efficient and consistent with modern communications and reporting needs, and more closely coordinate the accounting and information technology aspects of the system. Budget practices need to be more closely coordinated to improve internal consistency, and the Treasury should be given access to the Central Bank of Ecuador (BCE) databases on the government's financial transactions. The Accounting Secretariat should implement a capacity-building program to address staffing, training, and resourcing shortfalls, as should the internal audit units of the line ministries. The Supreme Audit Agency should actively assume the responsibilities embodied in its mandated autonomy and independence, and begin conducting ex-post financial audits and special examinations, including increased focus on the auditing of the line ministries, the central government's consolidated financial statements, and the annual budget. Congress should also actively assume its oversight role over the spending of public funds, particularly through strengthening the Congressional Finance and Budget Committee. The CFAA also suggested that the government upgrade its internet presence to make it more user-friendly.

The most recent year for which there is a publicly accessible IMF report on its Article IV Consultations is 2005 (the report was released in 2006). In this report, the IMF recommended the drafting of new fiscal legislation, arguing that this would send a strong institutional signal of commitment to fiscal responsibility and sustainability. In the words of the report, such a law "should incorporate greater transparency in the fiscal rules... and stronger accountability of the Minister of Finance" (p. 19). The report noted that Ecuadorian authorities were working to eliminate the confusion of regulatory inconsistencies in the legislation relating to fiscal policy. The report included an appendix containing a statement by the then Minister of Finance, who spoke of his intent to "strengthen fiscal transparency and expenditure management." The minister spoke of plans aimed at improving governance and transparency and to enhance accountability for the use of public funds. While the IMF staff applauded this statement, concern was expressed at the apparent intent to assign a significant role to the public banks, noting that they have not shown themselves to be strong in the areas of administration and governance.

In the Public Information Notice (PIN) published at the conclusion of the IMF's Executive Board's meeting on the 2007 Article IV consultations between the IMF and Ecuador, it was noted that the Ecuadorian government is embarking on a broad strategy to tackle persistent poverty, which requires sound fiscal polices to gain the required fiscal capacity for a successful implementation of these policies. The IMF's Directors lauded the government's plans to attack structural weaknesses in the fiscal area, such as legislation intended to improve tax administration to reduce oil revenue dependence. Overall, the IMF encouraged better spending policies to safeguard macroeconomic stability and recommended the adoption of a formal medium-term fiscal framework "to help reduce the risks of procyclical and unsustainable policies, and to transparently identify the path to achieve the authorities' medium-term rule of a zero non-oil current deficit."

The IMF's Directors applauded the Ecuadorian authorities for measures introduced to increase the quality of spending, such as improvements to the public financial management system, upgrading the capacity of the public investment system and comprehensive reform to the state-owned oil and electricity companies. The move to make the cost of fuel subsidies more transparent in the budget was also viewed positively by the IMF Board, "as a step toward developing a strategy and timetable for the elimination of these subsidies, which will be important to make space for better-targeted spending to reduce poverty."

Ecuador's fiscal and monetary policies are strongly affected by the country's adoption of the U.S. dollar as its official currency, which took place in 2000 following financial crises in the late 1990s. As an IMF 2006 "Selected Issues" report notes, dollarization has removed the monetary and exchange rate policy from Ecuadorian control, which makes it especially important to create a strong fiscal policy framework. The report notes that, following dollarization, Ecuador has shown stronger fiscal performance, but suggests that factors other than dollarization may be responsible for this improvement. Improved performance has been only modest at the level of the central government, which has faced liquidity constraints as a result of having few financing options. This has led, in turn, to a drop in the creditworthiness of the country. Reporting in 2004 in an article on the Privacy International website, Osorio and Costar noted that Ecuador passed the Organic Law on Transparency and Access to Public Information in 2004. This expands citizens' rights for information from the government and from such agencies as are publicly owned or provide public services. According to the law, the government is required to be proactive in providing information to the public, but allows for some exceptions. For instance, the Armed Forces may withhold information from the public. The law states that all public institutions and other organizations that receive government monies are required not only to respond within 10 days to citizens requests, but to publish information by means accessible to the public. In particular, the agencies have one year to set up web sites listing bylaws, regulations, plans, directories, staff salaries, services provided, collective bargain contracts, budgets, auditing results, contracts, acquisitions, credits, and loans, among other reports.

Andres Tobar and Maria Dolores Almeida, writing for the 2006 Open Budget Index (OBI) of the International Budget Project's Open Budget Initiative, accorded Ecuador a rating of 31% and a descriptive assessment of "minimal openness." The OBI tracks seven key budget documents, including the following: Pre-Budget Statement, Executive Budget Proposal, Citizens' Budget, In-Year Reports, Mid-Year Review, Year-End Report, and Auditor's Statement. The OBI ranking is based in part on the number of these documents produced and made publicly available, and in part on the content of the reports produced. Ecuador produces neither a citizen's budget nor a mid-year review of any kind, and while it does prepare a pre-budget statement and an auditor's report, these are not disclosed to the public. The executive's proposal provides only 36% of the information deemed necessary by the OBI to enable the public to comprehensively understand the financial activity of the government. The OBI report also noted that Ecuador does not afford citizens a chance to participate in public budget hearings.

The Principles

Clarity of roles and responsibilities.

II

The 2005 CFAA by the World Bank and the IDB noted that Ecuador needed to create a clear legislative framework that "systematically integrates and regulates public financial management" (p. 6). The traditional basis for Ecuadorian financial management and accountability is the 1977 Organic Law of Financial Administration and Control, which has since been augmented by the 2002 passage of two new laws. These are the Fiscal Transparency, Stability, and Responsibility Law and the Organic Control Law, and they are supplemented by appropriate enabling regulations. The new legislation was necessitated by the practice, beginning in the 1990s, of passing "special purpose" legislation that undercut the "systematic and integrated approach to financial administration and government control" embodied in the 1977 law. The special purpose laws often superimposed contradictory rules, making the legal framework fragmentary and highly complex.

The CFAA also noted that in-year allocation adjustments are made "without clear rules and guidelines" (p. 12). Budgetary practices such as the procedures by which funds are released by the Treasury have led to "the perception that the budget is a tool for the Ministry of Finance itself, rather than one that helps spending ministries to plan and commit expenditures in support of their goals and programs" (p. 12). While acknowledging that any budget may require in-year adjustments to allocations, the CFAA observes that this can be achieved with greater transparency through the specification of "an adjustment mechanism that relates the adjustment to the budget priorities in a systematic and transparent manner" (p. 12). However, the report does not directly address Ecuador's compliance with this principle.

Open budget processes

NC

Andres Tobar and Maria Dolores Almeida, writing for the 2006 OBI of the International Budget Project's Open Budget Initiative, accorded Ecuador a rating of 31% and a descriptive assessment of "minimal openness." The OBI tracks seven key budget documents, including the following: Pre-Budget Statement, Executive Budget Proposal, Citizens' Budget, In-Year Reports, Mid-Year Review, Year-End Report, and Auditor's Statement. The OBI ranking is based in part on the number of these documents produced and made publicly available, and in part on the content of the reports produced. Ecuador produces neither a citizen's budget nor a mid-year review of any kind, and while it does prepare a pre-budget statement and an auditor's report, these are not disclosed to the public. The executive's proposal provides only 36% of the information deemed necessary by the OBI to enable the public to comprehensively understand the financial activity of the government. The OBI report also noted that Ecuador does not afford citizens a chance to participate in public budget hearings.

The 2005 CFAA found that Ecuador's legislature participated only limitedly in the budget debate and the oversight of budget execution. This has had the effect of leaving the government unaccountable for its use of the public funds. It further noted that there was little information made available to the public with regard to the budget process. In 2003, however, the government inaugurated a Transparency Plan that specifically aimed to improve the dissemination of public finance information and had begun to work with nongovernmental organizations on developing a new approach to issues affecting budget transparency. In 2004, the Ecuadorian legislature requested the Supreme Audit Agency to review the budget statements for the years 2000 through 2003. This was the first time the consolidated financial statements and the annual budget execution reports had ever been subject to independent audit. The CFAA noted that Ecuador's limited legislative involvement in the oversight of public financial management is not unusual for the region. On a scale of 1 to 100, the CFAA found the highest regional score for such involvement topped out at 51. Nonetheless, Ecuador's performance is significantly lower, rated by the CFAA at only 26. The CFAA noted that the Congressional inability to carry out its oversight responsibilities led to laxity on the part of government agencies in reporting their use of public funds, leading to significant reporting time lags and the failure to publish information on budget execution. This situation was further exacerbated by what the CFAA termed "a culture of secrecy" (p. 32) that it said has come to surround both the national budget and public spending.

This situation has led to the perception that Ecuador's public financial management is not transparent and the government has only limited accountability for both its allocations and expenditures of public funds. In addition, the failure to disclose the draft budget means that there is no public feedback on the process. According to the CFAA, "given the lack of openness and explicit debate in Congress with regard to competing economic policy alternatives, it is difficult to prevent decisions that are systematically biased against the poor" (p. 32). This has led to substantial fiduciary risk, and undermines transparency, accountability, and efficiency in the budget process. The classification system employed in the budget process is outdated; records of revenues and spending are not prepared or disseminated; there is no timely, centralized information available for cash and treasury management; and there is a lack of publicly available budget information. The CFAA adds that "a weak internal control environment contributes to operational inefficiency and a lack of accountability and stewardship in the use of public funds" (p. 32), and notes that there is an inherent weakness in the mechanisms available to ensure the scrutiny of public finances.

The CFAA notes that the Constitution requires that the government prepares its budget in the context of a development plan, and this requirement is buttressed by the provisions of the 2002 Fiscal Transparency, Stability, and Responsibility Law, which requires that the president submit a four-year budget plan that covers his elected term of office. This plan must include any policy goals and strategies. The CFAA adds that the law requires that "the National Planning Office... determine sectoral priorities, as well as the programs and specific projects which should be included in the National Budget" (p. 11). This latter requirement has, however, not been successfully implemented, and the president's statements of objectives and strategies have been largely descriptive in nature. The CFAA also found that the SIGEF's inadequacies have resulted in the failure to produce timely expenditure information, noting that "delays up to four months are typical" (p. 13). While the Ministry of Economy and Finance has data regarding the funds actually transmitted to recipient institutions, it may face lags of several months before getting actual expenditure data and reconciliation information. The CFAA adds that, "in light of the weak commitment controls and the ensuing accumulation of floating debt..., it could be argued that the reported figures do not reflect the extent of the Government's economic activity, since there is the risk that commitments have been made but not reported in the actual expenditures, and a corresponding risk of misstatement in financial report" (p. 13).

Public availability of information.

NC

The Special Data Dissemination Standard website of the IMF discloses that Ecuador first subscribed to the Standard in 1998 and currently meets the specifications for coverage, periodicity, and timeliness. The most recent published IMF Article IV Consultation report released in 2006 and covering the year 2005, states that Ecuador's statistical regime shows shortcomings in a number of areas: fiscal accounts, labor market data, and balance-of-payments are singled out for specific mention. Ecuador was reported to have requested an updated data ROSC to be conducted for 2007, replacing the last data ROSC, which was issued in 2002.

The CFAA found that there was "a culture of secrecy" (p. 32) regarding Ecuador's national budget and public spending, giving rise to the perception that there is no transparency to Ecuador's public financial management and that there is no government accountability. The CFAA noted that this situation is not uncommon in the region. According to the report, when rated on a scale of 1-to-100, legislative participation in budget oversight for the region tops out at a score of 54. For Ecuador, the score is much less positive, peaking at a score of only 12 (p. 32). This situation is exacerbated by the lack of public involvement in the process, given that there is no public dissemination of the budget draft, the failure to publish a budget execution report, and the lack of any procedure by which the public might enter into the budget process.

Reporting in 2004 in an article on the Privacy International website, Osorio and Costar noted that Ecuador passed the Organic Law on Transparency and Access to Public Information in 2004. This expands citizens' rights for information from the government and from such agencies as are publicly owned or provide public services. According to the law, the government is required to be proactive in providing information to the public, but allows for some exceptions. For instance, the Armed Forces may withhold information from the public.

Independent assurances of integrity.

NC

The 2005 CFAA notes that the Constitution provides for the regulation of internal and external controls over the use of public funds. This is supported by reforms passed in the 2002 Organic Control Law. This Law expanded the authority of the Supreme Audit Agency to cover the audit and control of public entities, particularly with regard to establishing compliance with the principles of public financial management. According to the CFAA, the Law requires the Supreme Audit Agency to ensure that "public employees render accounts about the exercise of their roles, utilization of resources under their control, and the results achieved" (p. 27). In addition, the Agency must ensure compliance with assigned duties and objectives and must coordinate with other agencies and institutions involved in external control. However, the CFAA found that a provision in the law may encourage conflicts of interest during ex-post audits because of the way it handles ex-ante control of public procurement. Nonetheless the CFAA found the Supreme Audit Agency to be appropriately empowered to fulfill its external audit function with regard to the central and decentralized government and the line ministries. The Agency operations also extend to private entities that receive state support and entities engaged in delivering services to the public that receive 50% or more of their revenues (from all sources) from the state. The audit procedures are consistent with international standards, but the CFAA noted that the actual financial audits of line ministries and others may be "limited in scope, depth, and frequency" (p. 29).

The CFAA noted that the SIGEF has helped to reduce the confusion regarding administration and public finance in Ecuador, but found fault with some aspects of the program. The report cited a "lack of commitment controls during budget execution" (p. 38), in addition to other design problems in the system, including the scattered distribution of databases and inconsistencies across a variety of platforms. Also criticized is the inadequacy of staffing, training, and resourcing for the Accounting Undersecretariat, which the CFAA found to be unable to properly promote fiscal transparency. The CFAA complained about the "major disconnect between accounting and budgetary information in the SIGEF system" (p. 16) as well. According to the report, the internal control and reconciliation features of the system are not employed, and timeliness in reporting on interim budget execution and year-end financial statements has not been achieved. This has led to a lack of confidence in the accounting reports and to an inhibition of transparency. The CFAA also cited an, as yet unpublished, IMF ROSC which "found that academic standards, licensing requirements, and monitoring of professional obligations need to be raised in order to ensure compliance with ethical standards and improve the quality of professional work" (p. 16).

The CFAA also cautioned that the ostensible independence of the Supreme Audit Agency is compromised because the selection of its Controller can be politicized. The fact that auditing is largely conducted manually has limited the number of audits performed. The redirection of resources to special examinations and other uses have limited the capacity for conducting financial audits. According to the CFAA, "no consolidated year-end financial statements have been validated by external audit certification" (p. 27). The CFAA adds that "there are no norms, methodology, procedures, or practices for internal control or for staffing of internal audit units, and implementation of internal auditing norms and procedures is weak" (p. 25). Taken together, these circumstances have led to low public trust in the country's financial management and fiscal control. The CFAA noted that the Supreme Audit Agency has begun reforms aimed at redressing these deficiencies. Some legislative reform has recognized the need for ex-ante controls, concurrent controls, and ex-post controls, but implementation was deemed ineffective by the CFAA. The CFAA reported that the Supreme Audit Agency initiated an attempt in 2003 that was aimed to create a "systematic framework to oversee the functions of internal audit units" (p. 26). As yet, however, this project is still in the planning stages. However, none of the reports directly addresses Ecuador's compliance with this principle.