Fifteen-month labor
Finally, after 15 months, Ecuador has an economic bill that, albeit with limitations and inconsistencies, approaches a different economic model from that established by President Correa. Emerging from the Correato has proven more difficult than expected for the new government, so it seeks through this bill to get the degrees of freedom to continue raising debt even above 40% of GDP – a fiscal flexibility that has raised criticism from some legislative groups because it is subject to the not-so-demanding goal of a neutral primary deficit by 2021.
The bill also aims at providing incentives for production involving the domestic private sector and attracting foreign investment, which Correa completely discouraged. In this context, the bill offers tax incentives for 15 years for new investment and authorizes the use of international arbitration instances for corporate legal disputes. These features have also been criticized by leftist political groups and those who doubt the capacity (or willingness) of the private sector to make use of these incentives.
Thus, although delayed and imperfect, a language of fiscal sustainability and private sector participation is making its debut after 10 years of obscurantism.
It is also worth noting the efforts of Foreign Trade Minister Pablo Campana to open Ecuador to the world through trade agreements that will help increase the country’s exports instead of merely resorting to import controls to balance the trade deficit. He also announced that the project of the Refinery of the Pacific, which had died in the face of corruption and miscalculations during the last government, might see a rebirth with the interest of 14 companies and three investment funds from eight countries.
The investment from a consortium will sum between $8-10 bn. This project will not only bring foreign investment but will help Ecuador to save millions in subsidies and generate better quality derivatives. The key to success will be a transparent bidding process, together with clear and well-designed pricing formulas for the domestic commercialization of derivatives that will be under the responsibility of the project developers.
The government has once again opened the debate on eliminating oil derivative subsidies, focusing on high-quality gasoline. Total subsidies might reach $1.7b this year according to Minister of Oil Carlos Perez. The subsidy of gasoline represents around 34% of the total, but high-quality gasoline is less than half and would sum around $200 million in 2018. Protests have been already announced by social groups that consider this decision a “paquetazo”.
Although eliminating subsidies makes economic and fiscal sense, focusing on such a narrow spectrum might bring a useless political fight and will not help the government solve the problem of an imminent imbalance between current revenues and current expenditures that would violate a constitutional macro-fiscal rule. In this context, an increase of the VAT next year is starting to take shape.
Thus, the question is not whether Ecuadorians will pay for the excesses of the last decade, but how they will pay for them.
Now read on...
Register to sample a report