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Under Ecuador's former president Rafael Correa, public expenditure and debt skyrocketed. Here capital Quito. (Photo: Patricio Mena Vásconez)
Thursday, July 26, 2018
Perspectives

Ecuador: Economic Policy Changes


Will Ecuador’s new economic bill meet expectations?

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Ecuador’s National Assembly in June approved a fast-track economic bill which, among other provisions, seeks to encourage companies to boost investments in the country and also paves the way for the government to receive additional revenues through a tax amnesty. Which components of the measure are most important? What is the outlook for Ecuador’s economy under the new measures? Will businesses increase investments in the country in the months ahead? How well is President Lenín Moreno managing the economy?

Daniela Chacón Arias, Quito city councilor: The new economic bill seeks to increase investments and pave the way for reducing the high debt that Rafael Correa’s government left. During his 10 years as president, Correa excessively increased public spending and illegally modified rules to acquire more debt than legally permitted. Economic analysts consider that reducing the national debt to levels below 40 percent of gross domestic product would take a long time—between seven and 10 years. But the new bill relies heavily on tax amnesty as a mechanism to obtain short-term liquidity, and it does not establish specific measures for reducing public spending, which is crucial to achieve fiscal stability and economic growth. It is positive and necessary for the country’s economic health that the bill prioritizes fiscal stability and recognizes the private sector as the engine that moves the economy and creates employment. Nevertheless, if public spending is not controlled, these measures will be insufficient. We cannot continue to rely on tax amnesty but at the same time allow acquisition of more debt, as this bill does. What will to happen after 2021? Low productivity must also be addressed for Ecuador to be more competitive worldwide and for employment sources to be expanded. Moreno has focused more on political reform, which is necessary, but Ecuadoreans have yet to see if this bill will achieve all the marvelous things the president has promised it will do.

Francisco X. Swett, former Ecuadorean minister of finance, member of Congress, and central bank president: One law, and a very imperfect one at that, is not sufficient to undo the damage that the Correa administration inflicted upon the economy. Ecuador requires omnibus legislation to reverse its current circumstance, including the adoption of fiscal best practices, public credit management, tax code simplification and reform, revamping social security, building a new structure of revenue sharing, doing away with customs tariffs and protectionist practices, and eliminating the myriad agencies and regulations that seem to exist for the sole purpose of negating competitivity. The law, as approved by the National Assembly, is similar to other ‘investment incentives’ that were approved during Correa’s tenure (the Production Code is a good example) and came to naught. There is the usual intent to carry out social engineering initiatives, while leaving out the core issues, of which the most immediately pressing is the total lack of liquidity of the end-of-June figures that show rising current spending, insufficient income, a collapsed investment program and scary cash balances. All normal financing channels are clogged or maxed out, whether they be the bond market, domestic borrowing or tax revenues; therefore, the only route left is to go the IMF way, complemented with multilateral financing. The tax remission program will yield some $500 million over a two-year period, and the investment incentives are the type of medicine that is tried-but-not-true because the framework of legal security and guarantees remains inadequate. Moreno has proved himself to be more adept at sniping at his predecessor than in providing a sense of direction to the economy.

Ramiro Crespo, president of Analytica Securities in Quito: The bill aims to achieve fiscal adjustment through pro-business policies and has five pillars: 1) fiscal discipline as state policy; 2) strict adherence to international commitments; 3) institutionalization of efficiency and transparency in public management; 4) sustainable social policies; and 5) enhancement of public-private partnerships. If everything goes as planned, the economic bill is expected to generate $584 million in additional tax revenues this year, while exceptions and other tax incentives would reduce revenues in 2019 and 2020. On the expenditure side, the authorities expect to cut disbursements by $2 billion, although they recognize that some expense categories are going to exceed their original budget, for a net reduction in total spending of $1.27 billion in 2018. Unfortunately, such advances are likely to fall short. According to official figures, the government foresees financing needs of $11.3 billion this year, an amount that is extremely high even for Ecuador. The country has been maneuvering with financing needs north of $10 billion for several years, but it is currently under a different set of circumstances, including market access, lower interest rates and a lower overall debt burden. Failing to secure total financing needs would result in the under-execution of the fiscal budget and further accumulation in arrears with private-sector suppliers. A lack of external financing would also create liquidity issues in the domestic financial market as happened in 2015-2016 in the aftermath of the oil price meltdown.

Vicente Albornoz, dean of business and economics at the Universidad de Las Américas in Quito: Despite low oil prices and falling public income, in March 2017, the month before Lenín Moreno’s election, public expenditure in Ecuador reached record heights (never had the government spent so much money in the month of March). But the fiscal deficit also reached a mind-boggling level, because 51 percent of public spending was financed with new debt. This indicates the dire state of financial affairs Ecuador was in when Moreno took office 14 months ago. Reining in the deficit should have been Moreno’s main economic policy aim from the beginning of his term, but he could only address the issue after a resounding victory in last February’s referendum, which freed him from the yoke placed on him by his predecessor, Rafael Correa. Lowering the public deficit has only been a priority for the government since mid-May, when a new finance minister was sworn in and when a fast-track economic bill was sent to the legislature. The bill is still in its approval process, and it may become law in mid-August. The bill points in the right direction when it restores the central bank’s independence and limits investors’ financial responsibility when a company goes bankrupt. Its weakest point may be that it is the fifth tax amnesty in a decade, something that looks like a reward for serial tax dodgers.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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