Guillermo Lasso to govern Ecuador facing tough economic challenges

RIO DE JANEIRO, BRAZIL – Guillermo Lasso enters the Carondelet presidential palace with a warning. Ecuador’s outgoing president Lenín Moreno has conveyed to his successor the country’s state of affairs: the table will not be set.

The new president, who will take office on May 24th, will not only be dealing with a huge debt burden carried over from Rafael Correa’s administration and an economic crisis aggravated by the health pandemic, but will only have 7 months and a limited budget to close the year. In his favor, he has received signs of rapprochement from the International Monetary Fund (IMF), which should disburse US$400 million in his first month in office, and with the immediate relief in country risk after his victory in the presidential elections.

The risk indicator dropped from 1,169 to 824 points on the Monday after election day, reflecting increased confidence of international investors in Guillermo Lasso’s government plan, which had clearly advocated dollarization and collaboration with the IMF. A further drop was experienced this week with the passing of the dollarization law. It closed at 765 points, which cheapens access to financing through the issuance of sovereign bonds.

The Ecuadorian Parliament passed the law intended to guarantee the Central Bank’s autonomy from the governments in power and to bolster its reserves, which was a requirement of the IMF to maintain its program with Ecuador.

The Legislature had previously rejected the bill twice and this delayed the release of funds by the IMF, scheduled for April. When the agency’s review of the goals committed by the country is completed, it is expected to transfer US$400 million, part of the agreement reached with President Lenín Moreno in September last year for US$6.5 billion. The first US$4 billion came in 2020.

“They are very familiar with the program in operation with President Moreno,” said Alejandro Werner, IMF director for the Western Hemisphere. The Fund representative acknowledged that there have been meetings with Lasso’s team for many years, also during the electoral campaign, and that there is “an important understanding.”

The Fund’s resources will not be the only ones required by the new president in his first year in office. Ecuador will need at least an additional US$5 billion in foreign debt for this fiscal year, according to the IMF’s diagnosis, as well as another US$2.6 billion of internal indebtedness to close a year with a fiscal deficit that could reach US$6 billion.

The year 2020 closed with financing needs of almost US$14 billion, 14% of the national Gross Domestic Product, while the economy contracted by 7.8% of GDP as a consequence of the pandemic. The gap between income and expenditure that Ecuador has been dragging along for years has raised its indebtedness to US$63 billion, 63% of its annual economic turnover. In the words of the current Finance Minister Mauricio Pozo, there has never been a “worse year” than the pandemic year.

One of Lasso’s constraints for the first months of his administration will be the budget. As it is an election year, the annual accounts have been extended and, in addition, calculated with a US$3.4 billion cut compared to the budget planned by Lenín Moreno in 2020. Of the US$35.5 billion approved by the Executive – that is, after the Parliament’s rejection – only US$32 billion were executed. And this is the figure extended to this year.

In order to cover expenses, meet debt amortizations and reduce the government’s arrears with suppliers, with the Ecuadorian Social Security Institute and with municipalities and provincial governments, Lasso has anticipated that he will need to access additional sources of financing. Apart from the IMF, with whom he will have to review the fiscal deficit reduction goals, the president-elect has assured that he will knock on the door of friendly governments to secure bilateral credits, that he will go to the markets to issue bonds and that he is relying on multilateral organizations.

“We talked with the IMF and I was very clear in telling them that in our government we are not going to raise taxes nor are we going to create new ones,” said Lasso. “What we are going to do is to boost economic growth so that the Treasury has revenues from the volume of the economy,” he added.

Having an agreement with the Fund is the key to access resources from other international bodies such as the Inter-American Development Bank, the World Bank or the CAF (Development Bank of Latin America), but the IMF requires Ecuador to increase revenues and curb public spending. Last year, tax collection dropped by 12.6 % to US$12.3 billion, leaving a shortfall of nearly US$2 billion.

The conservative politician pledged before a notary during the electoral campaign that he would not raise taxes despite the fact that the program with the Fund contemplates a two-point increase in VAT, but that he would gradually reduce the tax on the remittance of foreign currency, which levies a 5% tax on money transactions abroad, until its elimination.

“Taxes must be lowered to reactivate the productive sectors,” Lasso said. His tax formula to secure additional resources includes an increase in the taxpayer base and greater efficiency in the control of tax evasion and avoidance.

Source: El Pais