Too much whining is not enough
Nine months have elapsed from the day Lenin Moreno took office and told Ecuadorians that “the table has not been served” as former President Correa boastfully declared. Moreno´s change of ways raised expectations for a change in the economic model as well, but on that side, to date there is nothing but disappointment. By the end of November, the government submitted to the Assembly the bill “for economic reactivation”, which proved to be just a financing instrument that raised corporate taxes and import fees.
The size of the fiscal deficit, together with the amount of public debt, is increasing people´s concerns by the day. The lack of transparency and the manipulation of figures do not contribute to anything except to add to this concern. In fact, the overall deficits of the budgets of 2015, 2016, and 2017 have been underestimated by roughly $2 bn each year. The budget for 2018 suffers from the same problem, thus, we place it at around $6.7 bn.
President Moreno is facing pressure for action at this time from a team of 20 well-known economists who have made explicit recommendations for future fiscal and external sector adjustments. He is also facing pressure from the committee appointed by the General Comptroller to oversee public debt issues. In this case, the findings and recommendations are legally binding and might carry administrative and even penal repercussions. The very well-known secret that debt-to-GDP is not the legally established 40%, if exposed by the General Comptroller, will pose not only legal but also political challenges for the government, as any solution to this conundrum should be approved by the Assembly.
Probably in preparation of the unavoidable, Moreno has announced a stabilization plan that will be launched in early March. Apparently, the plan exceeds the scope of a fiscal adjustment as it aims at “reactivating the economy, strengthening dollarization, attracting foreign investment, and creating jobs”. The title is similar to the abovementioned law. We hope the content is different – albeit there are rumors the VAT will be raised by 2% again.
With a deficit that has remained steady around 6.5-7% of GDP, even a one-time expenditure reduction of $2 bn (which could come from the austerity plan Moreno requested from his ministers) or a tax increase (which will certainly neither attract private investment nor strengthen dollarization) will be insufficient to return the country to a sustainable path.
An ongoing concerted effort to reduce the fiscal deficit by at least 1.5% per year until 2021, achieved with a serious program and not by manipulating figures, will avoid the risk of losing access to financing. Otherwise, we will continue to depend on the miracle of higher oil prices.
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