President Lenin Moreno last night, 10 March, announced an emergency package of measures designed to boost government revenues by USD 2.25bn. Moreno cited the impact of the global COVID-19 outbreak together with the oil price drop as reasons for the package. Ecuador’s country risk premium had already risen significantly before this week’s oil price developments as International Monetary Fund (IMF) disbursements are on pause amid uncertainty over the future of key reforms required under the 2019 Extended Fund Facility (EFF) agreement. The reform outlook remains in doubt, while the measures announced yesterday shy away from any structural reforms because the government is too weak to consider anything beyond palliative measures as it limps towards 2021.
The measures encompass USD 1.38bn in spending cuts; a 0.75% increase in corporate income tax; additional (and temporary) tax hikes on public servants; and a levy on luxury vehicles. The tax measures will require approval by the National Assembly. In addition, USD 2bn in external financing from an as-yet unnamed creditor has apparently been secured at what the government says is below regular market rates. Notable for its absence was any adjustment on fuel subsidies, hardly a surprise given the problems that arose last October when the government attempted to eliminate them. However, the government will continue its efforts to find a way to better target subsidies (more details on this could be forthcoming in a couple of weeks). Another political taboo – an increase to VAT – was also not included in the package.
The government simply cannot afford to impose painful adjustments after last year’s unrest even though the economy is highly exposed to the oil price drop. The Confederation of Indigenous Nationalities of Ecuador (Conaie) has already announced that it is on notice following yesterday’s announcements. This year’s budget is based on an oil price assumption of USD 51 per barrel, and of course Ecuadorean crude sells at a discount of around seven dollars to WTI. Not only that, but the strengthening USD has negative consequences for export competitiveness versus the country’s peers, while it also affects the trade balance by making imports cheaper. The spread of COVID-19 would obviously further complicate the situation; Ecuador currently has under 20 cases.
In an effort to meet IMF requirements, Moreno announced that the Organic Budget Code (public financial management and fiscal framework) will be sent to the National Assembly as an urgent, 30-day bill. However, the government’s lack of a majority following the break-up of a short-lived alliance with opposition parties, divisions within the governing Alianza Pais (AP) party, and the onset of electioneering ahead of the 2021 presidential and legislative votes will all continue to hamper broad agreements. At best, the bill will follow the path of the recent tax reform i.e. if it passes, it will undergo extensive dilution. Meanwhile, the central banking reform remains pending. In view of Moreno’s domestic difficulties, the IMF has shown flexibility but further delays and dilution, together with any worsening in the economic situation, are likely to raise the prospect of a program renegotiation.
