GringoPost | Ecuador: New IMF agreement and funds for economy/finance minister resigns

Logo HTML1

Ecuador-logo HTML40

.
The Fusion Pocket Radio (Test)
.

Search HTML3

New IMF agreement and funds for economy/finance minister resigns

After signing an agreement with the IMF, the government of Ecuador received last Friday Oct. 2nd the first disbursement of $2 billion. On September 30th, the IMF approved the formal agreement with Ecuador which provides a loan of $6.5 billion for Ecuador, to be repaid over ten years with a grace period for the first four years, at an interest rate of 2.9%.

Under the agreement, the government will receive another $2 billion by the end of this year (total of $4 billion in 2020) and further funds in 2021 and 2022. Additionally the country will be tapping loans from other multilateral organizations and from China, bringing the total inflow of funds in the last three months of 2020 to $7.15 billion.

According to President Moreno, these funds will be applied towards delinquent payments owed in salaries, retirement contributions, pension payments, health care payments to doctors and hospitals as well as contributions to the IESS health care system, amounts owed to local governments, and for goods and services purchased by the government. Large government-funded construction projects have ground to a halt due to non-payment by the government.

According to official statistics, over 427,000 persons lost their jobs in the official economy between March and the first of October (AF note: the majority of Ecuadorians work in the informal economy). The private sector in total is operating at below 60% of capacity according to government data.

AF comment: You may have noticed lines outside Cuenca banks this week; as the government pays its delinquent bills in arrears, the money is flowing to private sector vendors, local governments, employees and government agencies, which in turn are paying their own past due balances. As people are receiving their salaries, they are now obtaining those funds.


In 2020 the federal government has a budget deficit (spending exceeding collections from all sources) of $8.3 billion, or 8.9% of gross domestic product. For 2021 the government expects to have a budget deficit of $2.9 billion or 2.9% of GDP. The goal is that for 2022, the budget deficit will be $600 million, or 0.6% of GDP.

The agreement will result in an increase in tax collections of all sources of $2 billion by 2022, or 2% of GDP (a substantial increase in tax burden). In addition to the cuts in salary of public servants already made this year, the government plans additional spending cuts of $500 million, or 0.5% of GDP.

The $7.15 billion to be received in the last three months of 2020 will permit expenses for 2020 to be paid, as well as provide for the healthcare and education sectors, but is not sufficient to solve all the federal government's shortfall of funds. At the end of September 2020, the government owed $3.8 billion in past due internal payments.

The government is prioritizing the following payments:

1. salaries of public servants ($300 million plus additional payments)
2. past due invoices from 17,000 small & medium businesses totaling $491 million as of July 2020
3. payments to social and child development agencies and other vulnerable groups
4. payment in full to 821 local and provincial governments of arrears; medium and large municipalities and provinces will receive government bonds instead of cash payments
5. payment of salaries and severance to more than 3,000 ex-employees of public enterprises
6. resumption of pension payments to retired public sector employees as well as tax refunds to more than 350,000 taxpayers
7. $300 million will be used in credits for the program Reactivate Ecuador (loan program)

Additionally, the government will be expanding the number of low income recipients of pensions and one time payments from 1,000,000 households to an additional 250,000 households.

Through November the government will also be paying $100 million in incentive payments to 3,000 retired teachers in the form of bonds maturing in the future. $65 million of this amount dates to 2008, 2009 and 2010.

Of the $1.4 billion owed to IESS (for both pensions and health care contributions), the IESS system is still weighing the government's offer of $400 million in cash and the rest in government bonds of five to ten years' maturity. The $1.4 billion owed represents the government's 40% share of contributions that were not made since October of 2019. (There are larger sums past due to IESS for a number of years of payments not made to the system under Correa.)

As part of the IMF's agreement, Ecuador committed itself to the following requirements:

1. achieve a public sector budget surplus (excluding financial sector) of 0.6% in 2022;
2. arrive at a debt level of less than 57% of gross national product by 2025;
3. improve the transparency of audits of the Central Bank of Ecuador and strengthen its independence;
4. develop and implement a comprehensive anti-corruption law; and
5. prepare for future governments sustainable solutions for the social security system, guarantee a more progressive tax system (higher tax rates for higher levels of income), create more transparency for government accounting, and other miscellaneous requirements.

More specifically, the FMI agreement involves a reform of the tax system, to be presented to the Assembly and approved by the second half of 2021 and to take effect in 2022.

Proposed tax reform measures include increasing the value added tax (IVA) gradually by three percentage points, from 12% to 15%, reductions in exemptions from IVA for universities, and the elimination of IVA refunds to senior citizens age 65 or older. The proposal would also make taxable the 13th and 14th extra months' salary paid (aguinaldos) in July and December by employers.

Through July of 2020, the government owed $95.5 million in income tax and IVA refunds to taxpayers.

The signed agreement between the IMF and the Ecuadorian government is publicly available online (no link was provided in the article).

Richard Martinez, the Finance Minister who negotiated both the IMF agreement and the restructuring of government debt held by external private parties, announced his resignation on Wednesday, October 7th. The new finance minister will be Mauricio Pozo, who was finance minister in 2003 and 2004 under the government of Lucio Gutierrez. Pozo will be the fourth finance minister under the Moreno administration.

The Legislature's Council of Administration put forward five motions of impeachment against former finance minister Martinez, for not making required pension payments to retirees, negligent budget management in prioritizing debt payments over pandemic emergency payments, unduly retaining funds owing to provincial and local governments, and not funding education as required by the constitution (the article only lists four but says there were five grounds for impeachment).

AF commentary: in the short term this is good news, the injection of over $7 billion into the economy by year end should provide some relief to the liquidity crisis. The crunch will come in mid-2021 when the Assembly debates what reforms to make, and in 2022 when the tax increases and spending cuts kick in. There is also discussion of increasing the taxes on gasoline, diesel and natural gas/propane in 2022. Sudden, unexpected removal of the subsidies in October 2019 triggered violent protests and a virtual shutdown of the economy for 10 days, causing substantial damage to the economy. It remains to be seen what the political reaction will be to these measures.

February 2021 is the presidential election; 14 different political parties are fielding candidates. The prefect of Azuay, Yaku Perez, recently resigned as he is a candidate for president.

https://www.elcomercio.com/actualidad/finanzas-iva-reforma-tributaria-fmi.html
https://www.elcomercio.com/actualidad/ministerio-finanzas-pagos-ecuador-atrasos.html
https://www.elcomercio.com/actualidad/programa-fmi-alza-iva-2022.html
https://www.elcomercio.com/actualidad/martinez-programa-fmi-metas-economicas.html
https://www.elcomercio.com/actualidad/lenin-moreno-anuncia-destino-credito.html
https://www.elcomercio.com/actualidad/finanzas-ecuador-inyectara-creditos-trimestre.html
https://www.elcomercio.com/actualidad/mauricio-pozo-nuevo-ministro-economia.html#cxrecs_s

Ann Fourt: annfourt@gmail.com .

City: Cuenca