Sour Drink
Q1 and Q2 GDP shrinkage, of -0.1% and -0.3%, confirmed widespread fears that Ecuador is in recession. No one was surprised. But officials have been slow to react, only recently talking about economic adjustments they admit might be a “sour drink for the population.”
Minister of Finance Fausto Herrera announced last week that the 2016 budget would be at least $6 billion less than the initial 2015 budget.Spending cuts to match lower revenues will come from lower public investment in new projects, and the completion of long-awaited hydroelectric projects.This will not only release the need for high further public expenditure and financing, but might also save the government some $750 million in subsidies, according to official information.
President Rafael Correa also announced that “finally, subsidies to the rich will be eliminated.”The government will raise the price of premium gasoline at state gas stations, from $2 to $2.30 per gallon, and will eliminate the subsidy on diesel fuel for international transportation companies, and for vehicles with foreign license plates.The 40% subsidy on jet fuel will also be reduced, for a total additional savings of $300 million.
These are steps in the right direction.But more should be taken. The size of the bureaucracy should be reduced.According to reporter Martin Pallares, more people work for the presidency in Ecuador than for the White House.And nothing has been said about the ongoing construction of a complex of buildings for public officers, at a cost that makes the $60 million of savings from the gas price increase insignificant.Not to speak of the extravagant decision to send one of the two presidential airplanes to pick up Uruguayan President Tabare Vasquez, for a meeting with Venezuelan President Nicolas Maduro and Colombian President Juan Manuel Santos.
Better late than never, the government has started a dialogue with the private sector, to discuss joining forces to sustain investment and create employment.The initiative was led by former ambassador to the United States Nathalie Cely, who was abruptly dismissed last week. Two of the key requests from business are stronger efforts from the government to sustain dollarization, and the permanent filing of the bequests and surplus value tax reforms.
Correa put those reforms to rest during the visit of Pope Francis in June, to stop the massive protests they produced.But he is insisting on them now.Though he admits the government will back dollarization, he misses no opportunity to declare that management of the crisis would be much easier without it. These contradictions and the lack of true austerity signals from the government make people nervous -- reflected in the fall of bank deposits by 17.3% since December 2014. Maybe stronger positive steps will be taken soon, if rumors that the government is seeking IMF backing are confirmed.
Now read on...
Register to sample a report