Ecuador: Society’s Reaction to IMF Austerity Package

Wilma Salgado

Posted October 15, 2019

The recent protests in Ecuador represent more than just fuel subsidies, but a stagnant economy leaving all but the rich behind. 

Demonstrators gather in Quito, Ecuador to protest the elimination of fuel subsidies in October 2019. (Photo by Cloe Perol)

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Ecuador has been going through an intense period of protests and strikes by social movements triggered by the government’s decision to raise fuel prices. This policy was implemented in the context of an agreement signed with the International Monetary Fund (IMF) in February 2019, which caused the economy to fall into a recession, leading to a loss of jobs and increase in poverty. Meanwhile large firms and powerful economic groups have benefited enormously.

Ecuadorian president Lenín Moreno has been cutting government spending since signing an Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF) this February. This policy has benefited multinational corporations, the banks, and in general, powerful economic groups at the expense of the middle and working classes, who are being pushed toward poverty and extreme poverty. Moreno reached an agreement with Indigenous groups to cancel the decision to scrap fuel subsidies that sparked the protests, but the spirit of the movement also represents much more.

In the context of the IMF negotiations, the administration issued a law called “the Organic Law to Foster Productivity, Attract Investment, and Create Jobs, Stability, and a Balanced Budget,” which has been in force since August 2018. The law brought neoliberalism back to the country by instituting a policy to reduce the budget deficit and national debt, which have now become the top priorities.

On the day that the Law entered into force the private sector owed the government almost $4.3 billion for unpaid income tax alone—not counting interest. This figure is higher than the total credit granted by the IMF. The IMF loan is for $4.2 billion and will be paid in installments if the country is deemed to be complying with the IMF conditions.

The list of big winners from the new policy is topped by fossil fuel corporations, offshore phone companies, private banks, and Odebrecht. Alex Bravo, the former manager of Petroecuador, who is known to still have accounts in offshore tax havens even though he is in prison, would also have over $2 million in debt forgiven. We should also remember the acts of corruption associated with Odebrecht operations, for which Ecuadoran beneficiaries and accomplices have yet to stand trial. This stands in stark contrast with how this was handled in other countries, such as Peru.

Once these debts were partially collected, the Servicio de Rentas Internas (Government tax collecting agency, SRI) reported that $1.25 billion had been taken in. However, it did not explain what happened with the remaining $3 billion, which is twice the amount that the government estimates it will save from the fuel subsidies it eliminated as of October 1, 2019—US$1.3 billion.

❝There has been an utter lack of transparency in both the approval of the law and its true scope.?

The total amount of debt collected by other public entities included in the aforementioned law is not known, nor is there any information on how much the many tax exemptions included in the law cost the government. There has been an utter lack of transparency in both the approval of the law and its true scope.

The legislature passed this law without requesting even the basic information outlined above. It did so with the votes of Alianza País—the movement started by former President Rafael Correa, with only the votes of the Moreno supporters in the Assembly after the defection of all of Correa’s supporters—and with the Social Christian Party.

While the most powerful economic interests in the country have been enjoying debt reduction and tax exemptions, the current administration has been punishing the middle and working classes by cutting government spending under the agreement signed with the IMF.

Poor Hit Hardest

The Memorandum on Economic and Financial Policy gives details about “the public policy program for the next three years,” which includes targets for reducing the fiscal deficit and national debt. These are much more drastic than the targets the IMF set for Argentina.

In order to reduce the debt burden and budget deficit, under its agreement with the IMF, the government has been cutting spending by laying-off government workers, eliminating subsidies, and drastically cutting programs.

The last package announced by President Moreno on October 1, 2019 included the elimination of gasoline and diesel subsidies, causing their prices to go up 24 percent for gasoline , while premium diesel went up 119 percent . The government expects this measure to bring in additional funds of $1.3 billion/year.

In addition to the elimination of these fuel subsidies, the announced package includes a broad array of measures, including tariff reductions, tax cuts, and compensation cuts to government employees.

?Elimination of the fuel subsidies is what is hitting the poor the hardest.❞

Elimination of the fuel subsidies is what is hitting the poor the hardest. We Ecuadorans have already been impacted by a stagnant economy and competition from imported goods, especially from neighboring Colombia and Peru whose currencies have been devalued in recent months. The border provinces, particularly El Carchi on the border with Colombia, have been clamoring for government relief from a deep economic crisis, even resorting to ad hoc measures sometimes.

People’s reaction to the IMF austerity package was immediate, particularly in the organized social movements: transport workers, the indigenous movement, workers’ organizations, and social movements in general.

The IMF agreement also includes the privatization of certain state-run business, the opening of markets with Ecuador joining the Pacific Alliance, labor reform to make employment more precarious, tax reform, and financial deregulation. 

Meanwhile, government spending on agricultural development in the first half of 2019 was a paltry $53 million—just a quarter of the $422 million the financial system collects for every 1 percent of interest it charges customers. This is surprising given that the agricultural sector is such an important source of employment, accounting for 28.3 percent of jobs in the country.

Ecuador is in dire need of far-reaching financial reforms, including drastic cuts in interest rates—rates which everywhere else in the world go down when there is a need to stimulate the economy and boost production.

The policies the government has implemented under the IMF agreement have brought the economy to a standstill. The IMF itself predicts a 0.5 percent reduction in GDP this year. Unemployment has continued to rise, with only 37.9% of the economically active population having adequate employment. The poverty rate has risen from 35.3 percent of the population in December 2014 to 43.8 percent in June 2019,  meaning two million more people have fallen into poverty, for a total of 7.6 million Ecuadorans living in poverty out of a total population of 17.3 million people. Meanwhile, the IMF policies are still geared toward serving the interests of creditor countries and the national debt.

The policies adopted under IMF austerity packages do not resolve fiscal crises. Rather, they heighten them, forcing privatizations and the opening of the economy to foreign capital. Meanwhile, the structural problems in the intervened countries grow worse. The labor market becomes precarious, poverty and extreme poverty rise, wealth continues to concentrate, and the economy de-industrializes and reverts to raw materials. This encourages mining and fossil fuel extraction—extractivism—with its multiple harmful impacts on the environment and a deterioration of the living conditions of the people living in countries where these policies are imposed.

The main demand of the people in the streets has been the repeal of the decree that raised fuel prices. Before finally agreeing to concede to this demand, the government responded by digging in its heels and declaring a state of emergency. It has suspended rights and Constitutional guarantees for 30 days, stepped up repression, and accused indigenous people of acts of vandalism—which the Indigenous leaders say were actually perpetrated by pro-government infiltrators. 

Wilma Salgado holds a doctorate in economics and is an economic analyst. She has previously held such positions as Minister of Finance, Manager of the Deposit Guaranty Agency, Professor at the Universidad Andina Simon Bolivar, and staff economist at the Central Bank of Ecuador. She writes a column for the journal Ecuador Debate.

This was originally published in NACLA on October 14, 2019