The IMF is destroying Ecuador in partnership with Lasso

 The IMF is destroying Ecuador in partnership with Lasso

by Germanico P Vaca

Ecuador has been cutting government spending since signing an Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF) in 2018. But most Ecuadorians do not even realize that such policy has not been for their benefit at all, but rather benefited multinational corporations and Ecuadorian banks, and in general, powerful economic groups at the expense of the middle and working classes, who are being pushed toward extreme poverty.

“The Organic Law to Foster Productivity, Attract Investment, and Create Jobs, Stability, and a Balanced Budget,” is pathetic irony. The so-called law instituted a policy to reduce the budget deficit and national debt, which was placed as the utmost important priority. The policy became the collection of interest, fines, and other charges for outstanding obligations with several government institutions: the Internal Revenue Service (SRI), decentralized autonomous governments, the Office of the Superintendent of Businesses, the Ecuadorian Institute of Credit for Education and Scholarships, state enterprises, and even the Ecuadorian Social Security Institute (IESS).

In August 2018 the Law entered into force. However, back then the private sector owed the government US$4,291,200,00 (almost $4.3 billion)—for unpaid income tax alone—not counting interest. Otherwise, the figure was much higher than the total amount of credit granted by the IMF. The IMF loan was for $4.2 billion and was to be disbursed under conditions to be fulfilled by the government of Ecuador with the IMF.

The list of big winners from the new policy is topped by fossil fuel corporations:

ODEBRECHT owned US$11.8 million, and was forgiven US$4.5 million;

Andes Petróleum Ecuador LTD owed US$396.2 million, and was forgiven US$228.3 million;

Oleoducto de Crudos Pesados, OCP, owed US$347.7 million and was US$194.4 million;

Consorcio Petrolero Bloque 16, owed US$141.6 million and was forgiven US$78.7 million;

AGIP OIL Ecuador owed US$96.1 million and was forgiven US$61.5 million;

Repsol Ecuador S.A. owed US$93.7 million and was forgiven US$52.2 million,

OTECEL S.A., which owed US$78.4 million and was forgiven US$38.9 million;

 Exportadora Bananera Noboa S.A. owed US$71.1 million and was forgiven US$41.2 million.

Banco Pichincha owed US$39.6 million and was forgiven US$18.3 million;

Banco de la Producción S.A. Produbanco, owed US$29.3 million and was forgiven US$14.9 million;

 Banco de Guayaquil owed US$6.3 million and was forgiven US$3.9 million.

Alex Bravo, former manager of Petroecuador, who is known to still have accounts in offshore tax havens even though he is in prison, owed US$6.3 million and was forgiven US$3.9 million.

So the government of Lenin Moreno collected these debts with massive forgiveness, then the SRI reported that US$1.25 billion had been indeed paid. Please understand that the amount collected was only the difference between what was owed and what was forgiven. However, it did not explain what happened with the rest of the US$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

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. But what happened, in reality, is that the IMF forced Ecuador to forgive a massive amount of debt to several multinationals and a few banks and yet forced austerity laws to damage further the citizens. The IMF is playing an evil game in Ecuador and despite the promises that it offers better interest rates than the Chinese, if they do not do the right thing eventually the Chinese will take over.

There was never any explanation as to why the Lenin government agreed to all those measures but later received a temporary reprieve in 2020 when investors agreed to a consent solicitation to defer interest payments until August 2020. In the end, somebody made a lot of money because as a matter of fact, the Ecuadorian government defaulted on the payment, somebody bought the Ecuadorian debt at a massive discount of about 35 cents on each dollar (when in fact Ecuador could have done that and buy his own debt at a massive discount) In the end Moreno made a deal with the devil and The International Monetary Fund agreed to lend Ecuador $6.5 billion which to allow Ecuador to complete a bond restructuring plan and fund its 2020 budget.

On Aug. 31, 2020, the Ecuadorian authorities completed an exchange of 10 sovereign bonds for four new ones, after having received acceptance of their offer from bondholders (98%) well above the thresholds set in the collective action clauses (CACs). The deal postpones amortization payments to 2026, includes a 10% principal haircut, reduces interest payments via a 25% reduction in the effective terminal coupon rate (to 6.9%) with gradual step-ups through 2029, and includes a USD1 billion zero-coupon bond for past-due interest (PDI). Concurrently, the authorities have obtained staff-level approval from the IMF for the new USD6.5 billion EFF

Of course, the IMF made this announcement “The administration of President Lenin Moreno has been seen taking the right actions but has been hit by a series of recent events - namely the COVID-19 pandemic and plummeting crude prices - that have further hurt the finances of the cash-strapped oil exporter.”

“Debt holders trust in Ecuador,” the country's president Lenin Moreno tweeted.

“They have accepted to renegotiate [the debt]. We have just saved US$811m that will serve to help in the national emergency that the country is going through.” Lenin Moreno lied to cover the stupidity and he was apparently happy he was fucked and let his country be raped was again.

The assembly of Ecuador filled with some people who can barely read but could have a degree in how to rob and steal from a nation passed this law without requesting even the most basic financial information and as to why such devilish deal was done. 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.

The sad reality is that only the most powerful economic interests in the country enjoyed such debt reduction and tax exemptions, the current administration of Guillermo Lasso now is asking for a new tax law that he claims will help the country and will avoid punishing the middle and working classes and will continue cutting government spending under the agreement signed with the IMF. But his “Plan de creación de Oportunidades” is supposed to increase mining to five times the current levels and claims that it will increase oil production to twice the current output of about 520,000 barrels a day over one million. Yet apparently the huge monetary benefits that massive development could create is not been taken into account as if there would be any such economic benefit.

 

IMF FULL INTENT TO DESTROY ECUADOR

The Memorandum on Economic and Financial Policy was supposed to be “the public policy program for the next three years,” But was replaced by a new EFF that supposedly should help the sovereign overcome a severe financing squeeze in 2020, which has led to spending cuts, build-up in arrears (USD2.8 billion as of July in the 2020 budget alone, excluding the now-resolved bond interest arrears), and attempts to clear some of these with debt securities rather than cash. Fitch projects the sovereign should be able to cover its financing needs of USD16.8 billion in 2020 (including a USD8.8 billion central government deficit) with external and internal financing secured so far in 2020, rollover of local debt in the rest of the year (including USD2.5 billion in short-term Cetes instruments), further intra-public debt placements, and the funniest thing of the deal is that it claimed that Ecuador was expected to actually get new loans from China, and up-front disbursements under the EFF that Fitch expects to represent most of the total USD6.5 billion package. which includes targets for reducing the fiscal deficit and national debt. Those measures are extremely more drastic than the targets the IMF set out for Argentina.

The target for reducing the debt to GDP ratio:

In Ecuador debt is to be reduced to 40% of GDP over three years, by 2022; in 2018 debt was close to 60% of GDP. While Argentina's debt was to be reduced to only 55.8% of GDP over three years.

In Ecuador the primary fiscal deficit was estimated at 7% of GDP in 2018 (at the time of the IMF negotiations) and was to be eliminated over three years, which means that by now in November 2021 such deficit should have been reduced, that has not happened of course. There never was a 2.3% reduction each year.

In order to reduce the debt burden and budget deficit, under its agreement with the IMF, the government of Lenin Moreno was desperately cutting spending by laying-off government workers, eliminating subsidies, and drastically cutting programs. Cumulative reductions since 2016 amounted to 75%, or approximately US$1.5 billion by 2019.

Among those measures were included the elimination of gasoline and diesel subsidies, causing their prices to go up 24% for gasoline (from $1.85 to $2.30), The current price of gasoline in the international markets is fluctuating around $2.50 and diesel about $1.57. Yet the indigenous groups are demanding a freeze of prices of gasoline at $2.00 dollars per gallon and $1.51 dollars for premium diesel, which has gone up 119% (from $1.037/gallon to $2.27/gallon). Yet the Moreno government and the administration of Lasso have claimed that they expected this measure to bring in additional funds of $1.3 billion/year. The sad reality is that with inflation of the US dollar of over 6% this year the purchasing power of the dollar has been reduced even further and those numbers are obviously wrong.

 

Lasso, of course, needs to maintain the elimination of these fuel subsidies, because Ecuador can neither finance them nor swallow the poison to the Ecuadorian economy that it will bring. Yet the announced package by his government includes a broad array of measures that are being promoted by the IMF that seems to be more interested and expanding the export of the products of other nations to Ecuador than the well-being of Ecuador,  those measures are actually good for Ecuador to reduce the massive cost and includes new tariff reductions on raw materials and capital goods imports for the agricultural and industrial sectors; reduced import taxes on vehicles priced under US$32,000; elimination of advance payment of income taxes by companies; elimination of taxes on technology imports (cell phones, computers, and tablets); 50% tax cut on the foreign exchange being used to import raw materials and capital goods; 20% cut in compensation for government employees; increase in the number of beneficiaries of the human development bonus, and loans at 4.99% interest under the Own Your Own Home plan—just to mention some of the bigger programs.

Elimination of fuel subsidies is a controversial issue in Ecuador because while most people will claim that such policy is hitting the poor the hardest. In reality, smugglers make billions out of Ecuador just by buying the subsidized fuel in Ecuador and selling it in Colombia and Peru, countries that have a much larger price of fuels.

Nevertheless, Ecuadorians 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 tragedy is that most people do not understand the complexities of the Ecuadorian economy that is literally in the mouth of a wolf and if it tries to get out of the IMF mouth it will end up being eaten by the jackal from China.

The IMF agreement apparently has been embraced by Guillermo Lasso because it is part of his plan:

The IMF is gutting out Ecuador by forcing the transfer of profitable businesses from the Ecuadoran State to the private sector, resulting in decapitalization and the loss of future revenue, which harms public finances;

The opening of markets with Ecuador joining the Pacific Alliance, and the negotiation of free trade agreements with the United States and even with China;

Extensive labor reform to make employment and the labor market more precarious;

Lasso’s Tax reforms are nothing but Ivermectin for the strain of COVID affecting the Ecuadorian economy. In fact, his laws may actually cause more damage than good and it will increase excise taxes that punish the most vulnerable sectors of society and make taxation even more difficult rather than more simple, instead of correcting it by increasing income taxes on the wealthy, or proper collection on multinational companies or at least proposing a clear 15% of 25% of all mining companies operating in Ecuador that will bring a lot more than any taxes by the 37% of Ecuadorians enjoying full employment; Even under his pathetic proposals, he claims that he only expects to increase employment for only 50% of the population. I do not know about you, but I have never seen any other country that could give a 60% approval rating to a president that clearly is saying to his own people, literally “FU, you may be in the 50% I do not give a shit about”.

Yet Lasso’s plan is in reality massive financial deregulation by eliminating taxes on foreign tourists, foreign companies, multinationals, and foreign companies taking their money out of the country who will enjoy total exception of the 5% capital tax that its own citizens will have to pay if they are much as leaving the country. It makes no sense to me how people are supporting this president. He is clearly proposing no taxes to be charged to any foreigner who visits Ecuador, but he is not forgiving any taxes if Ecuadorians go visit another country, they will still have to pay 5% tax to take any money out of the country.

Of course, all these stupidities in Ecuador are sold as breaking out ideas, which has allowed interest rates from banks to reach their currently usurious levels. Interest rates are set by the monetary authority. The Central Bank currently is charging at almost 9% annually for loans to microenterprises, despite the fact that the economy is dollarized and in the United States bonds are barely paying 3% and loans for mortgages for example have been around 2% TO 3%.  

The Lasso government seems to be working for multinational companies and is willing to do nothing for the majority of people. If we analyze carefully the amounts of interest charged by banks, for example, we come to realize that for every 1% of interest collected by the financial system in Ecuador, then around US$500 million dollars are extracted from the economy as a whole, considering the balance of credit to the private sector. This means that with a 3% interest rate, banks extract $US1.500 million, which is the amount the government claims are needed to raise taxes on. As a matter of fact, a 4% reduction in interest rates from the banks of Ecuador would literally erase the need of the government to cover those amounts and rather inject around US$2 billion into the economy. A tax of 15% on all multinational companies with no loopholes of a 25% tax with loopholes will bring at least seven times the amount of any taxation on its own citizens. Further reductions allowed on the excessive fees charged by financial intermediaries could give the government more revenue. So, of course, if at least US$1.5 billion is saved by Lasso eliminating fuel subsidies, Lasso could be on his way to solving the financial quandary.

Meanwhile, government spending on agriculture, health, and education is being reduced and people are not going to like it when the shit releases its foul smell and people confront the mess that will cause.  

Ecuador is in dire need of far-reaching financial reforms. Bold new ideas to make a real change for the massive increase of processing factories to export processed fruits and vegetables, the same with fish and ocean food products, new factories in technology, create its own gold coin and silver coin, assembly of electric buses, a massive increase in export of Ecuadorian products, handcrafted products, textile products, and new and innovative products from homeopathic medicine to construction products and electricity and services. While at the same time it should strive for drastic cuts in interest rates. That in turn will fuel investment and entrepreneurship. Lasso has not done that at all and the country is without clear answers.

 

The proposed policies the Lasso government wants to implement under the IMF agreement are nothing more than a continuation of the failed policies of Lenin Moreno and will bring the economy to a standstill.

Meanwhile, the idiots at the IMF remain with their doomsday predictions for Ecuador. I guess they do not realize and do not care that the whole world can see their failure. After all, one will think that if such a great world economist intervenes to help any country of dumbbells was to change. But any country under IMF manipulation gets the same medicine, they will be fucked badly. They will always end raped and pillaged and the IMF of course never has any answers but most austerity measures. My recommendation is to tell the IMF to go fuck themselves.

Unemployment in Ecuador has continued to rise (only 37.9% of the economically active population has adequate employment or those that actually can count on salaries above minimum wage and benefits. The poverty rate has risen from about 36% of the population to 45%. That means 2 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.

Yet the absurd IMF policies clearly state that they “are geared towards serving the interests of creditor countries and toward reducing the national debt”. Tragically that is exactly what the objectives of the Lasso regime are:

Generate surplus in Ecuador and transfer that money as fast as possible out of Ecuador to pay powerful countries as the creditor countries through “deficit reduction policies” and by reducing the debt to GDP ratio at the expense of the middle and working classes;

I will give you a plan that will simply erase the debt of Ecuador:

• 1)      Set up a hedge fund managed by an algorithm that will trigger the buy and sell of the Ecuadorian debt following certain parameters.
• 2)      Sacrifice from time to time a minister or two making claims that “Ecuador will not pay the national debt to their foreign creditors and to the IMF”
• 3)      Wait for the bonds of Ecuador to drop to about 24% to 28% of their real value.
• 4)      Buy such debt and allow the hedge fund to purchase all such debt, thereby reducing the debt of Ecuador to levels that could allow for Ecuador to be successful with a true economic plan.
• 5)      Tell the IMF to go to where they came from.

Of course, Lasso will not do any of that. He wants to Expand profitable business options for foreign capital and for national capital allied with foreign capital by privatizing profitable state enterprises and assets. In short, Lasso wants mining companies and take away as much gold, silver and copper as they came and pay no taxes, barely any royalties and I guess his plan is that as long as they used Banco de Guayaquil, he will be happy. Bastard!

Lasso also claims that he wants to expand export markets for the developed countries that are the IMF’s biggest contributors by opening markets while giving nothing in return, putting sectors and businesses that cannot compete with exports at risk of collapse. Many of these imports are highly subsidized or come from countries that have devalued their currency, such all the neighboring countries like Colombia, Peru, Chile, and Bolivia, while Ecuador’s economy is dollarized.

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 biggest stupidity I see in the plan of Guillermo Lasso is the willingness to give away the gold, silver, and copper (real money/asset) for measly 3% to 8% royalties while giving them tax exceptions for 20 and 30 years. The structural problems in the intervened countries grow worse. The labor market becomes precarious, poverty will become extreme, there will be a greater concentration of wealth for the wealthiest Ecuadorians, and the economy rather than creating new industries, jobs, and prosperity will become an abandoned country, and Ecuadorians become gypsies as their Venezuelan counterparts. Eventually, Ecuador will have nothing to sell, so much for Lasso, too late they will realize is really the end.

Lasso’s proposals are nothing but the massive intensification of mining. His very own Plan claims that his goal is to “Increase export of mined minerals from USD $921,935.961 to $4,040,016.198. Yet job creation will be only a 13% increase? Please someone explain to me how this man was a banker. Do you expect to have mining be increased to five times the current mining levels but only create a 13% total job increase? Is someone stupid or insane? Is Horse shit.

Further, Lasso claims under his plan that he will “Increase and fossil fuel extraction from 516,083 to 1 million barrels per day by 2025. So much for climate change and the Galapagos marine preserve.

That is —extractivist— and the multiple harmful impacts on the environment and a deterioration of the living conditions of all Ecuadorians could last decades.

In the case of Ecuador, the economic policies submitted by Guillermo Lasso are certainly in perfect conformity with the IMF’s neoliberal recipe but will do nothing to improve the lives of Ecuadorians.