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Lasso’s proposals for the economy of Ecuador

Former conservative 65-year-old banker Guillermo Lasso will assume the presidency of Ecuador in May amid a severe economic crisis exacerbated by the covid-19 pandemic.

Lasso aims to stimulate the economy by increasing foreign investment and boosting oil production, the most important export product of the South American nation.

During the campaign he promised to generate two million Job positions and expanding the agricultural sector through low-interest loans.

But with a country deeply in debt and with few resources in the fiscal coffers, its economic agenda is likely to be an uphill road.

The president-elect will take over a bankrupt country, a fragmented Congress and strong social discontent.

In a dollarized economy, with little ammunition to meet its electoral promises, Lasso will probably face an avalanche of demands from the population in a country polarized between Correism and anti-Correism.

These are three of the biggest economic problems that the new president of Ecuador will face.

1- The chronic challenge of financing

The economy of the oil country was already in crisis due to low oil prices and a high level of indebtedness when the coronavirus outbreak broke out in 2020.

It had structural problems (such as a permanent fiscal deficit since 2009) that led to the president Lenin Moreno to impose painful measures of austerity as part of the conditions of a loan of US $ 6.5 billion approved by the International Monetary Fund, IMF, of which US $ 4,000 has already been disbursed.

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One of those measures was to end the fuel subsidy, a decision that generated a social outbreak in late 2019 that forced President Moreno to back down.

The new president will inherit the toughest part of the IMF’s requirements, which includes a fiscal reform to achieve the equivalent of 2% of GDP in new income.

The great challenge will be how to implement economic adjustment in the midst of a crisis that last year caused an economic contraction of 7.8%.

And Lasso will take up the challenge without a majority in the Legislative Assembly, with a third of the population in poverty and close to five million Ecuadorians earning less than the basic salary.

While the Ecuador’s public debt is around 63% of Gross Domestic Product (about US $ 63,000 million) and the fiscal deficit exceeds 7%, the country faces the great challenge of financing a high level of public spending.

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“The indebtedness is enormous for a country like Ecuador that has a high country risk, the debt service is very expensive and the fiscal expenditure is gigantic,” Vicente Albornoz, dean of the Faculty of Economics and Administration of the University of the America (UDLA).

In the last decade the weight of the debt has grown year by year and despite negotiations with international creditors, the doors of the international financial market are practically closed.

Without new sources of financing available and with a high country risk close to 1,200 points, Lasso will have to cut public spending if you want to access more funds from the IMF or other multilateral organizations.

Or go into debt with China, which has not closed its doors, but charges high interest or oil guarantees.

One way to reduce the deficit is to lower spending and raise taxes, but just as in Ecuador it was impossible to eliminate the fuel subsidy, it would not be easy to reform the tax system either.

2- Dependence on oil

Ecuador depends on oil. In 1998 a barrel of crude was sold at US $ 7 a barrel and in 2008 it soared to US $ 117.

It was like winning the lottery, but unfortunately we spent every penny, “says Albornoz.

“We not only spent all the money, but we also got into debt.”

Then there was another cycle of oil bonanza between 2010 and 2014 but, since there were no savings, those profits were spent to the same extent that petrodollars entered the country.

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In those years the former president Rafael Correa (who is convicted of bribery), increased fiscal spending and distributed a part of the benefits of the oil boom in aid for the most vulnerable sectors.

Resources from crude oil accounted for about a third of tax revenues.

Starting in 2014, a period of lean cows began. The economy began to roll downhill, indebtedness increased even more and the pandemic ended up turning stagnation in a devastating crisis.

Currently, both a barrel of WTI oil, which is traded in the US, and Brent (in the UK) are around US $ 60.

As the world economy recovers, expert projections are that in the future the price of crude should show an upward trend, giving the Ecuadorian economy a break. But that remains to be seen.

3 – The economic management of social demands

In Ecuador, one in four children under the age of 5 suffers from chronic malnutrition, according to Unicef. Poverty reaches 35% of the population and although formal unemployment is barely 6%, a large part of the population lives from underemployment (in precarious conditions).

In recent years, the cost of living has risen as much as that of the oxygen tanks that are now sold in the informal market to help the victims of the pandemic.

The country has deflation (or negative inflation of 0.8%) because there is very little consumption and people usually buy only the essentials.

And although the minimum wage is US $ 400, higher than in other Latin American countries, the cost of living is also high.

In a country with squalid fiscal coffers, with serious difficulties in increasing social spending, without the possibility of borrowing in the financial market and with the IMF imposing an adjustment on it in the midst of the crisis, Lasso will have to overcome many barriers.

In this context, a potential social outbreak could put the new government in check if it does not find a quick way to finance its electoral promises.

What does Lasso propose?

Faced with such a complex scenario, Lasso told BBC Mundo that he wants to promote alliances between the public and private sectors to attract both local and foreign investment.

“The global oil sector will see the invitation that Ecuador will make to come and invest in joint venture contracts,” he said on campaign.

And he added that it will respect the contracts in the formal mining sector “by processing environmental licenses with greater agility, to generate more tax revenues.”

Regarding the agreement with the IMF, Lasso has indicated that he will respect the pact, except in one point.

“We are not going to ignore the agreement with the International Monetary Fund. What we are not going to do is to raise VAT“said Lasso, clarifying that the fiscal accounts can be put in order without increasing the consumption tax.

Even the candidate assured during the campaign that it will be even “bolder” than the goals set by the IMF.

“They talk about reducing the deficit, I talk about reaching zero deficitBecause the day Ecuador reaches a zero deficit there will be no more debt. “

To obtain resources, Lasso proposes to double oil production, incentives for foreign investment, reduce both the public spending such as the size of the state and fighting corruption.

The big stone in his shoe is that he has only a four-year mandate to implement his agenda.

International investors and analysts welcomed Lasso’s triumph as good news.

“Public debt will follow a sustainable path and will probably boost the country’s dollar sovereign bonds in the short term,” said Nikhil Sanghani, Emerging Markets economist at Capital Economics consultancy.

While the investment bank Credit Suisse, based in Zurich, Switzerland, points out that “a good part of its economic program is focused on creating conditions for the entrepreneurship, less regulation and more efficient processes. “

During his campaign Lasso offered to raise the minimum wage to US $ 500 per month, deliver a salary of US $ 210 to housewives and “urgently assist 300,000 families who feel hungry.”

By delivering these and other benefits, you will likely have a hard time matching your promises with fiscal discipline.

It is a fine line that the next president of Ecuador will have to walk in order to carry out his economic and political agenda and ensure the governance of the country.

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