The next government to be elected on October 15 will have to pay the central bank 1,937 million dollars, between January 2024 and May 2025, for the debt generated by the regime of Rafael Correa to the central bank, which reached as much as 8,300 million dollars. But this debt also has an unclear origin, as it comes from the creation of money that Correato made between 2014 and 2017.

In addition, the said debt is characterized by a rather high maturity, especially between 2023 and 2026, which causes fiscal difficulties for the central government and a high economic price for the state. The administration of President Lasso has already begun to pay this debt, and by December of this year, 2.026 million dollars will be paid, in order to comply with the provisions of the Law on Defense against Dollarization.

The data was revealed by the director of the Central Bank, Guillermo Avellán, in an official publication published this Wednesday, September 20. Avellán explained that during the government of former President Rafael Correa, the authorities of the Central Bank of Ecuador (BCE) found a way to provide “funding to the central government”.

This financing mechanism intensified after the drop in oil prices at the end of 2014, reaching a maximum amount of $8.339 million delivered to the Ministry of Economy and Finance (MEF) and public banks by October 2017. The most interesting thing is that this amount could be delivered, despite the level of international reserves ( IR), on average, of 4,000 million dollars.

Therefore, the question immediately arises from where the funds to finance the central state come from? Avellán’s answer is that “the administration at the time resorted to a mechanism known as central bank balance sheet expansion or money creation.”

In accounting terms, this mechanism consisted of approving funds to current accounts belonging to the MEF and public banks within the ECB, and in exchange received securities or bonds issued by the aforementioned entities. In other words, “The ECB created money by lending more than $8.3 billion to MEF and public bank accounts, mostly receiving securities that could not be immediately converted into liquidity.” This mechanism is called “balance sheet expansion because it increases both the level of assets and liabilities within the institution,” he said.

He also recalled that once the credit is delivered to the central government, this financing causes a short-term reduction in international reserves, as part of the funds credited to the MEF eventually leave the Ecuadorian economy, mainly due to an increase in imports, due to an increase in public consumption and aggregate demand. Therefore, the financing granted to the MEF caused a decrease in the level of liquidity of the ECB, which was shown during the years 2015 and 2017, which was compensated by a significant increase in external debt that tried to cover the decrease in reserves with payments from abroad.

In addition, this financing mechanism implied in that period the application of commercial and financial restrictions, such as protective measures for foreign trade, taxes on the outflow of foreign currency and the domestic liquidity coefficient, in order to limit imports, the outflow of funds abroad, and thus an even greater reduction of Reserves .

Avellán detailed the consequences of what he calls the “balance sheet expansion trap”:

These days, the last two presidential candidates: Daniel Noboa (National Democratic Action) and Luisa González (Citizen Revolution) said they would take money from the Reserve, in a process that would be similar to what Correato has already done. The difference, however, is that it is now prohibited by the Defense Against Dollarization Act.

Avellán commented that it was worrying that the presidential candidates had publicly announced their intention to continue financing the central government from the ECB. In this sense, he said, it should be taken into account that there is still a current debt of more than 6.575 million dollars. He also warned that this could create consequences and risks for dollarization.