Fiscal déjà vu
Last November the government had to resort to a loan from Corporacion Financiera Nacional to obtain $392 million to pay public sector salaries. This is an operation that is not at all clear as it is registered as bonds in the Central Bank. Such a situation was normal during the 1990s, but it seemed to have been overcome when fiscal responsibility became the objective of the administrations before the time of Revolucion Ciudadana.
The current urgent need for liquidity has been resolved with a dramatic decline in treasury deposits, which fell to $95 million as of the beginning of December 2023 from $1080 million in December 2022. Also, international reserves are 42% lower over the same period as a result of scarce international disbursements, lower oil revenues and lower net private remittances.
President Noboa has inherited a difficult situation that requires prompt and tough decisions. He has been expeditious in sending the first urgent economic decree covering a new tax reform that is aimed—if proves to be effective—at boosting the economy, although not so much at raising tax collections to finance the fiscal deficit, which for this and the next will not be below 5% of GDP. In fact, an estimated $600 to $800 million could be raised from payments by large companies that are tax delinquents and will be exempt from paying interests and fines on their late tax payments.
But the reform will also increase tax expenditures through incentives provided to the private sector to create jobs, especially for people between 21 and 29 years old, and for foreign and national investment. Most of these benefits have potential effects that are difficult to quantify, and perhaps this is why the reform has not received a standing ovation from multilaterals. If approved before December 31st, changes to tax regulations and other bills will be effective from January 2024.
There are signs of a slowing economy as annual inflation as of November is 1.53%, with negative price changes in the last two months, and a decline in y/y credit demand growth from 15.9% in November 2022 to 9.9% in November 2023. Therefore, the initiative from President Noboa to boost the economy with this tax reform seems adequate and necessary. However, it is a lame approach if it is not accompanied with a strategy to raise immediate financing to boost liquidity. Even if the reform proves effective in attracting investment, this will not occur immediately, and the need for funds is urgent.
On the political side, there are also signs of concern. The executive cabinet is still incomplete, and important appointments are still missing in the vulnerable area of security. There have also been several changes in provincial authorities, whose offices in some cases lasted for one day.
Given the short time available to the new government, President Noboa should tread carefully his next 100 days in order to prevent what former Vice President Alberto Dahik has warned is the possibility of a crisis similar to that of 1999.
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