A prosperous 2020?

Luis Fierro Carrión (*)
@Luis_Fierro_Eco

Ecuador's per capita income fell by 2% in 2019, and will fall again by 1.3% in 2020, according to the projections of the International Monetary Fund (IMF). GDP per capita has been contracting in real terms since 2014, with a cumulative fall of 7.3%.
As a result, the poverty rate, which had dropped from 36.7% in 2007 to 21.5% in 2017, has begun to rise again, reaching 23.2% in 2018. Unemployment is rising, from 3.8% in 2014 to a projected 4.8% in 2020. Most worrying is that the adequate employment rate has been reduced from 45.5% in 2014 to 38.5% in 2019.
This economic contraction and social deterioration is generating frustration and political instability, as evidenced in the October protests against the elimination of gasoline subsidies.
The main reason for this economic contraction is the fall in international oil prices. The average price of Ecuadorian crude fell from $ 84 per barrel in 2014 to $ 35 per barrel in 2016, and projected values ​​of $54- $56 in 2019-2020.
However, the need for economic adjustment was exacerbated by its delay. Instead of immediately reducing public spending (which had reached 44% of GDP in 2014), the Correa government began to incur massive public deficits, reaching 8.2% of GDP in 2016. Public debt (internal and external), which stood at 27.1% of GDP in 2014, quickly doubled, reaching 44.6% of GDP in 2017, and a projected level of 50.1% of GDP in 2020.
The indebtedness included the issuance of international bonds, at high interest rates (compared to our neighbors, Colombia and Peru); indebtedness with China, also with onerous rates, and sometimes tied to projects of Chinese companies; oil presale, with Asian companies; “pawning” part of the gold reserve; use of the reserves of the Central Bank of Ecuador (BCE), through the issuance of internal bonds and the delivery of 'assets' to the BCE; use of IESS reserves, through the issuance of internal bonds; taking of the pensions of some institutions; and the suspension of the 40% contribution of the State to the social security pensions. Several of these forms of indebtedness were unconstitutional or illegal.
By the time Correa handed Lenin Moreno the supposed 'served table', the BCE’s net international reserves (NIR) were negative at -3,293 million dollars (that is, there was a gap in the reserves, which could affect financial stability).
The calamitous fiscal and financial situation in the country led the Government to seek an adjustment program with the IMF. In exchange for financing in soft terms of the IMF for $ 4200 million, and multilateral banks for $ 6000 million, Ecuador promised to reduce its fiscal deficit, recover the NIR, and adopt structural reforms.
The initial goal was to improve the fiscal situation by 5% of GDP (improvement of about $ 5400 million), and a recovery of the NIR (to positive levels). More recently, the Fund reduced the fiscal consolidation target to 3.9% of GDP. Fiscal goals have been achieved, but only thanks to a severe contraction of public investment. The public wage bill has not been reduced, although a reduction of 0.3% of GDP is anticipated in 2020. It will be essential to reduce fuel subsidies, which will be attempted through better targeting.
An economic recovery could be achieved by:
-An increase in the price or volume of oil exports.
-Expansion of mining production (gold began to be exported from a concession).
-Increase in the prices of raw materials (which seems unlikely, given the recessive trends in some countries).
-Increased private investment (which is hindered by high labor costs in Ecuador, compared to Colombia and Peru; legal uncertainty; and bureaucratic obstacles for entrepreneurship in Ecuador). A labor reform that creates incentives to generate employment would be welcome, as well as reforms that facilitate the creation of companies.
-Expansion of energy efficiency, greater generation of renewable energy, greater use of public transport (for which there is international concessional financing).
-Increase in productivity, as well as greater value added of exports.

(*) Translation of opinion column published on January 6, 2020 in Diario “El Universo” of Ecuador

https://www.eluniverso.com/opinion/2020/01/06/nota/7677411/prospero-2020