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Lenín Moreno’s government decides not to raise VAT to meet targets

Lenín Moreno’s government decides not to raise VAT to meet targets

02/10 - 15:56 - Ecuador is to scrap fuel subsidies to meet targets agreed with the IMF, risking a public backlash as it tries to keep international investors happy and stay on track in its $4.2bn programme with the Washington-based lender.

Financial markets are closely watching the oil-producing nation, with investors in Latin America already anxious at the likelihood that Argentina — the other country in the region with an IMF lending programme — will be forced to renegotiate its own $57bn bailout package.

President Lenín Moreno’s government shied away from raising value added tax rates to keep to Ecuador’s IMF targets, which require the country to turn its fiscal deficit into a surplus, reduce its debt pile and shore up foreign reserves.

He said the state would instead eliminate subsidies on diesel and gasoline, saving Quito about $1.3bn a year.

The measures will have a massive and immediate impact on fuel prices, which are among the cheapest in Latin America. Local analysts say the price of gasoline will rise by between 25 and 75 per cent, while diesel prices will more than double.

The price increases will take effect from Thursday.

“The next few days will determine whether these subsidy cuts are permanent,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities.

“It’s not exactly what we were expecting with the focus shifting from tax hikes to fuel subsidy cuts. But this equates roughly to what was expected from a 3 per cent VAT hike and delivers more efficient fiscal savings.”

Ecuador has also announced it would withdraw from Opec, the oil producers’ cartel, in a signal of its intention to boost state revenues by raising crude output.

The IMF agreed in March to lend Ecuador $4.2bn as part of an overall $10.2bn plan involving other multilateral lenders.

Mr Moreno said his government would expand welfare payments to poorer families to cushion the blow of fuel price rises and levy a special three-year tax on all companies with annual revenue above $10m.

The IMF programme envisages Ecuador’s fiscal deficit, which was worth 0.9 per cent of gross domestic product last year, flipping to a surplus of 3.8 per cent next year. The country’s debt would fall from 46.1 per cent of GDP in 2018 to 36.6 per cent by 2023.

Perhaps the most audacious target in the IMF package is on foreign reserves, which stand at $5.1bn. The IMF wants Ecuador to take the total to $11.4bn by the end of 2021.

Ecuador’s withdrawal from Opec will have little impact globally since the country was one of the group’s smallest producers, accounting for about 0.5 per cent of world crude output.

In practice Ecuador has already largely turned its back on Opec. In 2017 it announced it would no longer abide by the cartel’s quota demands, and it has regularly exceeded them since.

The country first joined Opec in 1973 before leaving in the early 1990s. It returned in 2007 when leftist Rafael Correa was elected president.

Since his election in 2017, Mr Moreno has steadily dismantled many of Mr Correa’s policies, shifting Ecuador towards the political centre.

 

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