Ecuador’s government presented a Letter of Intent to the International Monetary Fund (IMF) on March 1, 2019, which was made public on March 21. This official document details all the actions and conditions a national government is willing to accept and apply in order to obtain the IMF loan. It is based on that and two documents from the IMF staff report for the 2019 Article IV Consultation. This article summarizes the four main grievances as the new IMF deal takes into effect in Ecuador.
Recipe For Disaster? Ecuador Set for Reforms with IMF Deal
The Ecuadorean economic authorities will perform a comprehensive tax reform in the first half of 2019. The design will build on the recommendations of a recent IMF technical assistance mission. These will include:
Elimination of the Foreign Exchange Tax (ISD), a tool that has been determinant in the control of capital flight thus protecting the stability of dollarization in Ecuador. According to Ecuador’s Internal Revenue System (SRI), in 2018 the state obtained US$1.2 billion just from this tax alone. Most of it coming from large transnational firms and large private economic players that move capital out of the country. By eliminating the tax, the flow of capital will be free, which means money will leave Ecuador in large amounts.
Another change will be the increase of indirect taxes instead of those that directly tax wealth, transferring the burden to low and middle classes. For example, the sales tax is an indirect tax, which means that regardless of whether person is rich or poor they all pay the same percentage. While a direct tax is income tax, which depends on how much that person earns.
Private sector companies and upper-class sectors of society will benefit from such a reform, even though the measure is unconstitutional as it violates article 300 of the 2008 Constitution, which requires the state to prioritize direct and progressive taxes.
Timeline: Expected by the end of August 2019
Does a #MinimumWage help workers? Check out why an overly generous wage may prompt employers to cut #jobs: https://t.co/P8DKepWVXm #BackToBasics pic.twitter.com/L0eNd63XMA— IMF (@IMFNews) March 28, 2019
As Minister of Finance and Economy Richard Martinez said an “urgent” labor reform will take place. Flexibility and deregulation will benefit employers at the cost of employees’ rights or, as the IMF has sugar-coated it, “reducing labor market rigidities and improving competitiveness.” The rationale behind this is that by allowing for less-rigid labor contracts there will be an “increase in female labor force participation and youth employment opportunities.”
In the private sector, there will be an increase in the probation period- currently three months- prior to an open-ended contract. After the probation period, the employee becomes entitled to significant protections including severance payments. The reform, as companies have asked, would extend this period to two years. Also, in order to reduce hiring and firing costs by eliminating severance payments for workers that voluntarily resign. By creating labor precariousness, wages will go down as more workers have to compete against each other for fewer rights and positions.
Yet, this is just the beginning. President of the Ecuadorean Business Committee and Chamber of Commerce of Quito Patricio Alarcon said Monday that the 40 hours five-day week contract must change. Representing the business guild, Alarcon proposes to fit the 40 hours in three and a half days, so that the worker “can use the rest of the time to get another job.” Another proposal is to extend those 40 hours into Saturday, meaning workers would have a six-day work week so that employers don’t have to pay extra hours.
Women will be more affected by these reforms as the deal says “the introduction of less rigid labor contracts will particularly benefit women who prefer to work part-time or temporary jobs, which will increase their participation in the labor market," which only shows a misogynistic state assuming what women want in the workplace.
The public sector will receive a similar treatment. The government has promised to reduce public workers’ wages, as they consider them higher than those in the private sector. Ecuador employs approximately half a million workers in this sector, and by December 2018 there were more than 70,000 public servants who work under the modality of occasional services, according to the Ministry of Labor. A group that will be directly affected as the government has assured that they will not renew occasional service contracts and only renew half of the contracts in the public sector that expire, except those in social-areas.
The Ecuadorean government projects an increase in the unemployment rate from 3.7% in 2018 to 4.7% in 2020.
Timeline: No date set yet
URGENTE | Defensoría del Pueblo del Pueblo presenta acción de acceso a la información pública en la que solicita a @FinanzasEc entregue información referente al acuerdo alcanzado con el Fondo Monetario Internacional. @Lenin @Presidencia_Ec pic.twitter.com/MFMoG25Fko— DefensoríadelPueblo (@DEFENSORIAEC) March 25, 2019
Following one of neoliberalism's paradigms, public spending will be reduced. This comes as neoclassical theory says a large state is bad for the economy. And even though this can be historically and mathematically disproven, Ecuador will go ahead and apply austerity measures, which will include:
Reduction in public spending on capital, goods and services as components of an expenditure reform, which goes in hand with the aforementioned downsizing of the labor wage bill. This, as the agreement intends, ends the financing of the State budget by the Central Bank, thus limiting the decision-making capacity regarding public policies and budget distribution, which will result in consolidating dependence on creditors especially in a country like Ecuador that does not have a currency issuing Central Bank.
In other words, the state can’t finance the public sector, so infrastructure projects, social spending, and public expenditures have to come from outside, creating an unhealthy dependence on foreign debt. To compensate the interest payments the initial debt creates it will be necessary for the state to increase the number of new loans and credits, generating a process of cumulative indebtedness. This process sooner or later ends up in a new crisis in the balance of payments, which was the situation that pushed the need for the IMF deal in the first place.
The IMF expects a drop in the country's growth in 2019 of -0.5 percent of GDP.
Timeline: Expected by the end of May and June 2019
As austerity measures progress, citizens will feel the costs of life being affected. This happens as deregulation of capital flows are incorporated, imports will increase. According to a 2018 report from Ecuador’s Central Bank, the total trade balance in that year closed with a deficit of US$514.5 million, US$603.7 million less than the result obtained in 2017 which registered a surplus of US$89.2 million. Thus money, a limited commodity in Ecuador, leaves the country.
In order to maintain cash in the economy, the IMF’s conditions create a self-induced recession. As the internal consumption of goods and services are affected by the measures, tax collection decreases as well. While the government tries to lower public spending, the budget deficit keeps growing due to the fact that the drop in public revenue is bigger than the reduction in expenditure. Because Ecuador cannot opt to print more money, dollarization is at risk.
To fund the dwindling state coffers, more debt has to be acquired, and at the same time, public services companies (water, electricity, transportation) will be privatized, in a format known as a concession, as the Letter of Intention reads. This process will make the services more costly and private companies who own the services will pass those costs to the public.
Also, the cost of living will also be affected by the elimination of oil subsidies. The government is committed to increasing industrial diesel costs. This will generate higher transport and productions costs, thus affecting the final price for consumers and reducing the competitiveness of local companies. In 2018, Moreno ordered the reduction of gasoline subsidies meaning a rise in the price from US$1,48 to US$1,85 per gallon. Oil subsidies in Ecuador will be reduced from 3.5 percent of GDP registered in 2018 to 1.4 percent of GDP by 2021. This would mean a reduction of about US$2.1 billion.
The government is also pursuing the privatization of the Ecuadorean Institute of Social Security (IESS) because it has committed to the "optimization of the non-financial public sector." In addition, they will use this money from workers' insurance to deposit them in the Central Bank, increase the reserves in billions of dollars and take the money to foreign banks. As private banks will be permitted to take out of the country without restrictions.
Timeline: Expected by end of 2019 towards 2021