Dynamics of Ecuadorian External Debt in the Face of Fiscal and Oil Shocks: A Vector Autoregressive Approach (1995-2024)

Abstract

External debt sustainability is a critical factor for dollarized economies dependent on commodities, as high debt service directly limits public investment in social sectors such as education and healthcare. This study analyzes the determinants of external debt in Ecuador during the 1995–2024 period, evaluating its response to accelerations in the budget deficit, agricultural GDP, and oil prices. A Vector Autoregressive (VAR) model in second differences was employed to ensure stationarity and address structural breaks. Diagnostic tests validate the model's stability and the absence of heteroscedasticity. Empirical results reveal that the budget deficit is the primary determinant of short-term debt acceleration, demonstrating strong fiscal inertia. Paradoxically, growth in agricultural GDP is associated with debt increases, suggesting the sector's high dependence on external resources. Oil price volatility acts as a transitory stabilizer but does not resolve structural imbalances. The study concludes that domestic fiscal discipline is more decisive than external shocks, emphasizing that debt reduction is essential to safeguard the state's capacity to fund social development and university research.