The agreement with the IMF forces Ecuador to raise VAT to 15% and cut public spending

The president of Ecuador, Lenín Moreno, in a message recorded on September 23.UNTV / AP

Lenín Moreno came to power in 2017 and discovered that "the served table" that he had inherited from his predecessor in the presidency of Ecuador, Rafael Correa, was actually a debt hole much larger than that recorded in official statistics, as he denounced then.

Now, the Latin American president is half a year away from leaving Carondelet and leaves as a legacy a recently signed agreement with the International Monetary Fund that will mark the economic policy of the president who leaves the polls in 2021.

Of the $ 6.5 billion that the IMF will disburse in a 10-year loan, the first tranche of $ 4 billion will arrive this year to help weather the economic and health crisis exacerbated by COVID-19.

Another $ 1.5 billion will be sent in 2021 and the last $ 1 billion in 2022. However, the strongest adjustment measures will fall on the next government.

Ecuador has pledged with the IMF to raise the Value Added Tax by three points, from 12 to 15%, as part of a “growth-friendly” tax reform that also affects Income Tax and Corporate Tax.

The objective is to increase collection by an amount equivalent to 2.52% of the national Gross Domestic Product, that is, more than 2,500 million dollars a year.

According to the Fund, the Andean country's tax revenues are "low" compared to the regional standard, due to low rates and a limited taxpayer base.

Therefore, it recommends an "ambitious, intelligent and progressive tax reform" that also reduces exemptions and that targets the higher salary bands.

It will be structured in the last quarter of next year so that it begins to be applied in 2022, according to the IMF report.

“The duration of the 27-month program was designed to ensure that the new administration can develop its own reform plan,” defends Ceyda Oner, head of the IMF's mission in Ecuador in a statement published as an interview on the IMF's website. organism.

“In cases where the programs extend through elections, it is standard IMF practice to engage with a wide range of presidential candidates.

All the candidates we met with appreciated the Fund's support in these difficult times, ”the Fund representative added, knowing that Lenín Moreno will not seek re-election.

The two political tendencies with the greatest options at the polls are that of Guillermo Lasso's liberal right, who is trying for the third time to reach the presidency, and that of Andrés Arauz's pairing, championed by former President Rafael Correa.

Fresh money

The IMF loan allows the Ecuadorian State to immediately access fresh resources in exchange for subsequent reforms, at a time of such economic hardship that President Moreno came out this Sunday on a televised network to announce that the Government has just caught up on the payment of salaries to public officials, after months of chaining arrears.

He also said that he will settle the outstanding accounts with state suppliers, with former employees of public companies, with allocations to small municipalities and with retiree compensation.

"These payments will generate a cascade effect so that the productive wheel of the country turns again", confided the president, after confirming that the first 2,000 million dollars of the IMF were already in the public coffers and that another 650 million dollars are expected from the The World Bank, the Inter-American Development Bank, the Andean Development Corporation and China.

These new lines of credit have been reopened thanks to Ecuador reaching an agreement in August with its bond creditors to restructure $ 17 billion of sovereign debt.

The bondholders accepted a reduction of 1,500 million dollars and the easing of terms and rates.

After the renegotiation, the understanding with the Monetary Fund also revived, which had parked a previous program, signed with Ecuador in 2019, due to the country's non-compliance and the difficulties of the Moreno government in reaching internal political consensus that would guarantee the reforms ruled.

The IMF now recognizes the country's efforts to redress that situation, to reduce public spending by eliminating gasoline subsidies, and to honor its commitments to international creditors.

The agency's new loan has a 2.9% rate and a four-year grace period.

In return, it requires a policy of adjustments and reforms that will lead to fiscal consolidation and monetary stability in two years.

According to the schedule, the current fiscal gap between state revenues and expenditures reaches 8.3 billion dollars (almost 9% of GDP) and should become a slight surplus of 0.6% of GDP in 2022. For this, the multilateral asks more transparency and control in public spending and that Ecuador puts the scissors in the area of ​​wages through a reduction of jobs and lower wages.

"Not only would it safeguard public finances, but it would also help to strengthen Ecuador's competitiveness," reflects the recipe from the multilateral.