Elections in Ecuador: Two opposite options

By Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_Eco

On Sunday, April 11, Ecuador will go to the polls to choose between Andrés Arauz, candidate of Correísmo; and Guillermo Lasso, candidate of the CREO-PSC alliance (with the support of other political forces).

These are two diametrically opposed alternatives, in almost all aspects.

While Arauz said in his proposal on "good de-dollarization" that he will raise the Tax on Currency Outflow (ISD) to 27%, and that the Central Bank would grant a "fixed quota" for importers (creating a market distortion, as he himself recognized in his 2009 Master's Thesis); Lasso proposes to eliminate the ISD. Apart from this exchange control (unique in a dollarized economy), Arauz would probably increase tariffs or collect safeguards on imports again.

The correista bloc in the Assembly also proposed to deliver a “universal basic income” in “electronic currency”; candidate Arauz later rejected that proposal and said, instead, that a $ 1,000 bond would be delivered to 1 million families by taking resources from the reserve of the Central Bank of Ecuador. It should be mentioned that these correspond to the reserve of private bank deposits held in the Central Bank; that is, ultimately, it is the depositors' money. Currently, the international reserve does not cover all commercial bank deposits, which is why there is a gap of nearly $ 7 billion between the assets and liabilities of the Central Bank (the Moreno government began to reduce this gap inherited from Correa, but with the pandemic it has increased again).

In more general terms, Lasso's proposal focuses on the generation of productive employment, and he even proposed increasing the monthly minimum wage to $ 500 (from the current $400); while Arauz focuses on the delivery of cash transfers, even at the risk of further reducing the net international reserve, and therefore putting dollarization at risk.

Arauz's pre-announcement that he will increase the ISD to 27% could possibly lead to an outflow of currency in anticipation of this measure.

Lasso has proposed to lower five taxes, while Arauz proposes to increase the income tax and create a wealth tax. Arauz would bet on strengthening a State-centered model, including increasing public spending; while Lasso would seek to strengthen the private sector.

Lasso proposes reducing income tax for companies that create at least 10 jobs.

While Lasso has said that he would strengthen dollarization, Arauz talks about the emission of "electronic currency" and using the resources of the international reserve. By refusing to lower public spending and investment, Arauz will maintain a high deficit and continue with the aggressive public indebtedness process that began in 2014 under Correa; it is likely that his fiscal policy, his proposal to raise the ISD, the potential use of the BCE reserves and the issuance of electronic money would lead to Arauz not receiving the outstanding disbursements from the IMF for $ 2.5 billion. Lasso has said that he would seek to reduce the deficit.

On issues that interest the young and progressive voters of Hervas and Yaku Pérez, such as mining, oil exploitation and the protection of water sources, Lasso's position is closer to the voters of Pérez and Hervas than the practice of Correísmo, which expanded oil and mining extraction, even in places of great biodiversity and environmental vulnerability such as the Yasuní National Park (manipulating the Electoral body under its control for the purpose of thwarting a plebiscite against oil exploration in the Yasuni). Lasso proposes to maximize environmental prevention in mining and oil production, including prior consultation of affected communities.

This extreme extractivism during the Correa decade even led to the murder of several indigenous activists who were opposed to the oil and mineral exploitation, such as Bosco Wisuma, Freddy Taish, José Tendentza, three of the 35 unsolved murders of the Correa government (others include 15 journalists and people who denounced corruption , such as General Jorge Gabela, Quinto Pazmiño and his wife, journalist Fausto Valdivieso, among others).

Correísmo also faces accusations and sentences of corruption, including Rafael Correa, Jorge Glas, ministers Carlos Pareja Yanuzelli, María de los Ángeles Duarte, Ricardo Patiño, Walter Solís, Vinicio Alvarado, Fernando Alvarado, Alecksey Mosquera, María Duarte, Raúl Carrión , Ramiro González and Viviana Bonilla, the Legal Secretary Alexis Mera, the Comptroller Carlos Polit, the assembly members Cristian Viteri and Esperanza Galván, the president of the Central Bank Pedro Delgado, the directors of the IESS María Sol Larrea and Iván Espinel (as well as former IESS President Ramiro González), the director of Petroecuador, Álex Bravo, the Secretary of Intelligence, Pablo Romero, the Secretary of Communication Carlos Ochoa, and the Presidential advisor Pamela Martínez, among others. Of these, 8 were imprisoned, and the rest are at large. It is estimated that the amount of resources lost to corruption reached $ 35 billion.

Arauz has mentioned that he will seek to have the sentences against Correa and other members of his government annulled.

Lasso has never been criminally charged, and, despite the fact that the Correa government investigated his alleged participation in the banking crisis of 1999, he was never accused. Eduardo Valencia, who led the investigation, found presumptions of guilt of Juan Falconí Puig and Pedro Delgado in the embezzlement of the CFN that occurred in 1999-2000, but they were never charged or separated from their positions in the Correa government; Delgado fled to his “son's wedding” in Miami in 2012 and never returned.

Arauz affirms that virtual platforms are natural monopolies, and that is why they must be considered public utility goods, as happened when they turned the right to communication into a public service. This proposal would be aimed at controlling virtual platforms and their users.

The two government plans could be strengthened in terms of environmental issues, sexual and reproductive rights, identity issues, the prevention of animal abuse, and gender and diversity approaches, among other topics of interests of the Millennial and Gen Z voters.

(*) This is a translated and expanded version of the column published in Diario “El Universo” on March 5^th, 2021.

https://www.eluniverso.com/opinion/columnistas/dos-opciones-opuestas-nota/

The image shows the original version of the article by Andrés Arauz on "good dedollarization".

Ecuador: Agreement with the IMF and the presidential candidates

By Luis Fierro Carrión

Twitter: @Luis_Fierro_Eco

On Sunday, February 7, the first round of the elections will take place in Ecuador.

Whoever assumes the Presidency will have to decide whether to continue the Agreement with the IMF (and therefore receive the outstanding disbursements of $ 2.5 billion), suspend it, or to try to renegotiate it.

Although the first two disbursements made in 2020, for $ 4,000 million, did not have significant conditionality (it required an increase in the coverage of the human development bond to 250,000 additional families, as well as to approve reforms to anti-corruption laws); disbursements for the new government will imply a significant fiscal adjustment of 5% of GDP.

The program seeks an increase in tax revenue of 2.5% of GDP (about $ 2.5 billion), along with a reduction in spending of a similar magnitude. With this, it would be expected to reduce the deficit of the non-financial public sector from $ 7.3 billion in 2020 to $ 2.9 billion in 2021.

A 3% value-added tax (VAT) increase is suggested; as well as an increase in personal income tax (PIT) of 5% for income above $ 27,000 per year (and 3% for income below $ 27,000).

The IMF Report (Staff Report) published on December 23 mentions that the three main candidates (Lasso, Arauz and Pérez) have indicated that they might push for fiscal reforms, but it is not clear if any of them have committed to increase VAT or the income tax. The IMF held meetings with Guillermo Lasso, Andrés Arauz and César Montúfar (Yaku Pérez did not agree to meet).

Lasso has said that he will cut taxes, despite a deficit of 7% of GDP; Arauz and Pérez have indicated that they will seek to renegotiate the Agreement, while Arauz has specifically said that he plans to increase current public spending and investment, which would be contrary to the required fiscal adjustment. It would be unlikely that under these circumstances the new disbursement of the Fund would take place, which would worsen the financial gap of 7.7% of GDP expected for 2021. Arauz has also mentioned that he would propose an annual wealth tax of 2%.

The candidate who appears fourth in the average of polls, César Montúfar, has said that he would not approve an increase or a reduction in the Value Added Tax (VAT), but that, if he would be in favor of increasing the progressivity of the income tax, and likewise reduce the exemptions from said tax. He has also proposed a 1% wealth tax for net assets over $ 400,000 (excluding primary residence).

Regarding spending reduction, Lasso mentions the “reduction in the size of the State”. Larger cuts both in personnel costs and investment would be complicated, since they have already been greatly reduced. Public investment has decreased from 8% of GDP in 2018 to 6.1% of GDP in 2020, and a further reduction to 5.4% of GDP is anticipated in 2021. This includes investment in the oil sector, of about 1.5% of GDP, which is required to maintain the current oil production levels.

Public sector salary spending has dropped from $ 10.3 billion in 2018 to $ 9.6 billion in 2020, and is expected to remain at levels close to $ 9.6 billion in 2021-23. Some 50,000 public employees have already been dismissed.

According to Table 6 of the Staff Report, the net effect of the increase in the number of families that receive the cash transfer and the increases in VAT and IR rates would be to increase income in the first 3 deciles, maintain similar income in deciles 4-7 , and reducing incomes in deciles 8-10 (and a reduction of the Gini coefficient, an indicator of inequality, to pre-pandemic levels).

The IMF report estimates that one and a half million people fell below the poverty line due to the pandemic (and that the poor have increased from 30 to 38% of the population).

The Fund recommends continuing efforts to facilitate job creation (allowing more flexibility in working hours, part-time hiring, etc.).

The IMF also suggests continuing the reduction of diesel and gasoline subsidies initiated by Correa and Moreno. The gasoline subsidy would be practically eliminated, and the diesel subsidy would drop from $ 965 million in 2019 to $ 739 million in 2021.

With these efforts, total public debt could fall from 66% of GDP in 2020 to 56.6% in 2025 (without crossing the critical threshold of 70% of GDP).

Another commitment is to increase the independence and autonomy of the Central Bank, and to prevent financing from the ECB to the government (Arauz has announced contrary policies).

Arauz plans to increase the so-called "foreign currency outflow tax" to 27%, which will actually prevent the entry of investment resources. He proposes a "creative monetary policy" to create "electronic money" without any endorsement. These policies also would be contrary to IMF recommendations.

Ultimately, it is likely that, with Arauz or Pérez, the program with the IMF will be suspended, which would lead to an increase in “country risk”, an increase in the interest rate to which Ecuador would have access in international markets. .

The bond restructuring opened a four-year window of lower principal payments (apart from the principal reduction in 2020). The risk would be that a new government begins to borrow again (via bonds or bilateral loans from China), which would put the sustainability of the debt at risk. Similarly, if the program with the IMF is not maintained, the remaining $ 2.5 billion will not be received, which could aggravate arrears in payments to suppliers, salaries, etc.).

Source:  IMF Staff Report published on December 23, 2020.

https://www.imf.org/en/Publications/CR/Issues/2020/12/23/Ecuador-First-Review-Under-the-Extended-Arrangement-Under-the-Extended-Fund-Facility-and-49980

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