How different will be 2019 from 2018?
Ecuador will close year 2018 with a dismal GDP y-o-y growth of 1% and perspectives for 2019 are not more encouraging.
Economic transition from the Socialism of the 21st Century to a more sustainable model, will take place later than sooner due to an excessively cautious economic policy and to a lack of consistency between words and actions from President Moreno.
The government has taken steps in the correct direction, regarding subsidies to be implemented next year, but most of the necessary reduction in this year has come from public investment which is precisely behind this pale growth and leaves a small space for further reduction next year.
On the other hand, it has taken only baby steps in controlling the increase in salaries of public servants that represent 57% of current expenditures and 41% of the total accounting only the central government and no other public entities.
The goal set for the primary deficit under the economic law approved last July, was also in the right direction but insufficient to reduce the debt ratio to the 40% of GDP in less than 10 years. The overall fiscal balance is falling but at 4% of GDP it is still too high to support the mentioned decrease in debt. Moreover, in a recent document from IMF with recommendations to the Ministry of Finance, they advocate for a lower debt/GDP ratio.
In the same document, the IMF also makes specific recommendations to increase institutional strengthening and transparency as well as accuracy in budget information and reporting. Additionally, there are recommendations to review and guarantee financing needs of the education and health sectors as well as legal transfers to the Social Security.
All of the above cannot be achieved without taking more robust approaches to the reduction of the size of the non-financial public sector as well as probably increasing the VAT tax together with an overall rationalization of the total tax structure (i.e. reduction of the outflow tax) to avoid an impact on production.
The government was expecting to receive $10,000 million from the IMF in the event an agreement is signed. That money cannot be used to close financing gaps, but will help to cope with the concerning problem of the Balance of Payments strengthening dollarization. However, it looks that $4,500 million will be most probable if the government decides to structure a program with softer commitments than the ones expected by the Fund.
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