Ecuador Tries to Rise After the Earthquake
Nobody was prepared for the catastrophic event of April 16. The aftermath is still being assessed, and even though President Correa’s assessment that the resulting costs will be around $3 billion or 3% of GDP might be premature, it is clear that the reconstruction will take several years.
Minister of Finance, Fausto Herrera informed the government has some $600 million in credit lines to attend the emergency plus donations from the international community. In addition, President Correa sent for urgent approval from the Assembly a “solidarity” bill through which the government expects to raise another $1.0 billion. VAT taxes will be raised 2% to 14% for one year, equity over $1.0 million will pay 0.9% for one time also during this year, and Ecuadorians will have to donate one day of their salaries for one month to five months depending on their monthly income.
This bill comes in addition to the “fiscal equilibrium bill” that was recently approved to impose special taxes on soda and other beverages containing sugar. The government expected to raise some $300 million from this tax reform. Thus, amidst a severe crisis that has already cost 13% of consumption y/y disposable income of Ecuadorians will fall even further.
Solidarity shown by Ecuadorians with the affected population of the coastal areas has been overwhelming and is above doubt. However, many voices have risen to protest for the above economic measures and have proposed alternative paths that involve a more active participation of the private sector in the recovery task similar to those implemented by Japan and Chile. Unfortunately, given the level of polarization of the Ecuadorian society at the time, the debate was rapidly confined to the ring where the evil government or the evil opposition (depending on the side) would hardly reach an agreement.
Liquidity constraints due to falling oil revenues have forced the government to actively seek financing in the absence of any other plan or economic program. Public debt has risen 7% of GDP since 2014 reaching close to 37% of GDP this April. The largest creditors are China whose loans sum $8395 million followed by IESS whose debt is close to $8 billion.
On the side of the external sector, the balance of trade deficit by February is $234 million higher y/y despite import controls. Export preferences from the EU towards Ecuadorian products end this year. The hopes from the export sector are placed on the trade agreement with our main non-oil trade partner, but the government has still to decide what to do with those import controls that stand in the way of this agreement.
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