Mountains in Ecuador

Ecuador Fiscal October 2019

Ecuador: President Moreno announces tax reform as government struggles to alleviate fiscal challenges

In a bid to shore up public finances in accordance with its IMF-program, on 18 October President Lenín Moreno proposed a package of tax reforms, including a new tax on corporations earning more than USD 1.0 million, a tax on plastic bags and cigarettes, along with a simplification of the tax system. The changes have been proposed in light of the decision to reverse the cuts to fuel subsidies, aimed at saving around USD 1.3 billion per year, after 12 days of intense social unrest in the capital that followed the announcement that the subsidies would be removed. The protests themselves struck a huge blow to the economy, costing it USD 2.3 billion in lost output, according to estimates from the Industrial Chamber of Guayaquil. While reinstating the subsidies have, for now, quelled the uproar and negotiations are underway to amend the fuel subsidy policy, the government’s new measures are unlikely to plug the budget shortfall, raising uncertainties of how the IMF program will pan out. What’s more, Moreno’s hand has been weakened to push through more tough, unpopular reforms.

External financing conditions have improved on the back of rising oil prices. Nevertheless, the government is struggling to cut spending and is unlikely to meet its overall fiscal target for the year. Since April, the fiscal balance has steadily deteriorated, swinging to deficit in June. In July, the 12-month rolling deficit came in at 1.8% of GDP, notably above the IMF’s target of a surplus. Meanwhile, as the one-off increase from the tax amnesty diminishes, revenue is likely to drop in the second half of the year. Moreover, the tax reform is expected to boost revenues less than expected compared to fuel subsidies, thus underlining the challenges to restoring fiscal discipline.

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