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### Viewing cable 08QUITO324, CONSTITUENT ASSEMBLY ELIMINATES PETROLEUM FUNDS, GRANTS

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08QUITO324 | 2008-04-07 18:58 | 2011-05-02 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

`

    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

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