By Luis Fierro
Carrión (*)
On May 11,
Norway's sovereign wealth fund decided to liquidate 3% of the fund's value, to
support the government's efforts to combat the COVID-19 pandemic and boost
economic recovery.
That withdrawal of
3% of the value was equivalent to 37 billion dollars. This is so because the
fund has accumulated a value of 1.18 trillion dollars. It is the largest
sovereign wealth fund in the world; it is followed by SWFs from China (China
Investment Corporation), Abu Dhabi, Kuwait, and Saudi Arabia, all with more
than $ 500 billion in assets at the end of 2019.
In Latin America,
some countries have stabilization and savings funds, but with much smaller
amounts. For example, Chile has an economic and social stabilization fund ($
14.7 billion) and a Pension Reserve Fund ($ 9.4 billion). Other countries with
smaller funds include Peru, Brazil, Mexico, Trinidad and Tobago, Colombia, and
Bolivia (all linked to the export of natural resources). Venezuela
had a substantive fund, but with its protracted crisis it has vanished.
In the case of
Norway, the fund has the official name of “Global Government Pension Fund”, and
was created in 1990 to save the oil income that the Nordic country was
receiving; The objective was to reduce the volatility of tax revenues due to
the fluctuation of oil prices in the international market. A secondary
objective was to reduce the macroeconomic impact of oil revenues, which in
other countries (including Ecuador) has generated the so-called “Dutch
disease”, in which the productivity of other economic sectors was affected.
The "Tiny
Funds" in Ecuador
In Ecuador, apart
from the international reserves, there were some attempts to create a
stabilization or savings fund:
• In 1998, the
Petroleum Stabilization Fund (FEP) was created to accumulate the surpluses of
oil revenues above the budget.
• In 2002, the
“Fund for Stabilization, Social and Productive Investment, and Reduction of
Public Debt” (FEIREP), a trust managed by the Central Bank, was created.
• Later, in 2005,
at the initiative of then Minister Correa, the FEIREP was transformed into the
“Account of Productive and Social Reactivation” (CEREPS); 20% of its income
went into a “Savings and Contingency Fund” (FAC), apart from the unused CEREPS
balances at the end of the fiscal year. The FAC had among its specific
objectives to be able to attend natural disasters and other emergencies.
• In 2006, the
“Ecuadorian Investment Fund in the Energy and Hydrocarbon Sectors” (FEISEH) was
created, fed with the income of Block 15 (after the declaration of expiration
of the Occidental oil contract), as well as the Eden-Yuturi fields and Limoncocha.
Between these “tiny funds”,
as then President Rafael Correa derogatively called them, savings equivalent to
12.1% of GDP were accumulated (https://flacsoandes.edu.ec/web/imagesFTP/9431.WP_018_CGiraldo_01.pdf ). Apart from this, the balance of public debt was
reduced.
During the
Constituent Assembly, an Organic Law was approved in 2008 for the “Recovery of
the Use of State Petroleum Resources and Administrative Rationalization of Debt
Processes”. In practice, it meant the elimination of these funds and
facilitating the contracting of additional debt.
Oil revenues
and fuel subsidies
During the decade
of Correa's government, the country had oil revenues for a total of $95,581
million (35% of all oil revenues in the history of the country, in real terms,
according to a study by Alberto Acosta and John Cajas, “A Wasted Decade”).
Between 2007 and 2016, the non-financial public sector had total revenues of $ 283
billion.
Notwithstanding this massive level of income, not only were the
savings and contingency funds eliminated, but the net international reserve was
left in negative terms; and Correa bequeathed a total public debt of about $ 60
billion.
Of the total oil
revenue, about $ 23 billion (a quarter) was used for fossil fuel subsidies.
This subsidy is very regressive, as more than 50 % benefits the two quintiles
with the highest incomes: apart from which a significant part of the subsidy
escapes by contraband. The subsidy also encouraged fossil fuel consumption,
with adverse effects on climate change, health, pollution, etc.
After a failed
attempt in October 2019 to eliminate subsidies for extra gasoline and diesel
(the subsidy for super gasoline had previously been eliminated), on May 19 the
President issued Decree 1054, which establishes a new market price system for
extra gasoline, extra gasoline with ethanol and diesel. A “price band” system was
established, taking into account the cost of fuels, the marketing margin, plus
a monthly variation limit of +/- 5%.
In the initial
period of application of this new price system, the result was that the
price decreased, given the significant drop in the international price of
crude oil and derivatives in international markets. Thus, the retail price of
extra gasoline (including the commercial margin) decreased to $ 1.75 per
gallon, and the price of diesel decreased slightly to $ 1 per gallon.
The Ministry of
Economy and Finance will design the “necessary compensation instruments as a
consequence of the application of the price band system”. Minister Martínez
indicated that the government is analyzing social protection mechanisms in the
event of sustained growth in the prices of gasoline and diesel. There is a preliminary proposal to increase the Human Development Bonus cash transfer
program by $ 10 and compensate the most vulnerable in the event of an increase
in public transport tickets. Another alternative is to subsidize public
transport (either to users or carriers).
Laws approved
by the Assembly
In the laws
approved by the Assembly, the Solidarity Law or COVID-19 and the Law on Public
Finances, there are two aspects to highlight regarding the issue of oil
revenues.
On the one hand,
the possibility of contracting insurance to hedge the risk of lower oil prices
is introduced, as the Mexican government has regularly done (Minister Martínez
argued that previously he did not have the legal backing to do so, which will
now be made possible by a provision of the Public Finance Regulation Law).
On the other hand,
a Fiscal Stabilization Fund is created again, from income from the
exploitation and commercialization of non-renewable natural resources (oil,
gas, mining) that exceed what is contemplated in the annual public budget.
Obviously, with
current prices, it will not be possible in the short term to accumulate resources
in the fund, nor to contract a price insurance, but the reform is designed for
the future, so that, if another pandemic, natural disaster or abrupt fall in
the prices of exports occurs, Ecuador has a financial “cushion” – a cushion that
the Correa government took away from us.
(*) This is an
English translation of the article published by “Revista Gestión” on May 23, 2020.
The author is an economist
from the Catholic University of Ecuador (PUCE), with graduate degrees from the
University of Oregon and the University of Texas at Austin. He was a staff
member of the IDB from 1997 to 2013, and Representative of Ecuador to the IMF
in 2006. Advisor on climate finance and development issues. Personal opinions.
