Ecuador: IMF austerity programme sparks off protests and strikes
Ecuador has recently turned to the IMF for financial assistance to overcome its economic crisis. The results were predictable: the IMF’s Extended Fund Facility has benefitted banks and powerful economic groups at the expense of the middle and working classes. Wilma Salgado explains.
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.
Ecuadoran President Lenín Moreno has been cutting government spending since signing the Extended Fund Facility (EFF) agreement with the IMF. 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 towards poverty and extreme poverty. Moreno subsequently 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 the Law entered into force, the private sector owed the government almost $4.3 billion in 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 instalments 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 construction giant 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 (SRI, the government tax authority) 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 1 October 2019 – $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.
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 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 programme 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 programmes.
The last package announced by President Moreno on 1 October 2019 included the elimination of gasoline and diesel subsidies, causing gasoline prices to go up by 24% while premium diesel went up by 119%. In addition to the elimination of these fuel subsidies, the announced package included a broad array of measures such as tariff reductions, tax cuts and compensation cuts to government employees.
Elimination of the fuel subsidies is what hit the poor the hardest. We Ecuadorans have already been impacted by a stagnant economy and competition from imported goods, especially from neighbouring Colombia and Peru whose currencies have been devalued in recent months. The border provinces, particularly El Carchi on the border with Colombia, have been clamouring 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 organised social movements: transport workers, the indigenous movement, workers’ organisations and social movements in general.
The IMF agreement also includes the privatisation of certain state-run businesses, the opening of markets with Ecuador joining the Pacific Alliance, labour 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 fraction of the $422 million the financial system collects for every 1% of interest it charges customers. This is surprising given that the agricultural sector is such an important source of employment, accounting for 28.3% 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% reduction in gross domestic product (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% of the population in December 2014 to 43.8% 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. Meanwhile, the IMF policies are still geared towards serving the interests of creditor countries.
The policies adopted under IMF austerity packages do not resolve fiscal crises. Rather, they heighten them, forcing privatisations and the opening of the economy to foreign capital. Meanwhile, the structural problems in the countries concerned grow worse. The labour market becomes precarious, poverty and extreme poverty rise, wealth continues to concentrate, and the economy de-industrialises and reverts to raw material production. This encourages mining and fossil fuel extraction – extractivism – with its multiple harmful impacts on the environment and leads to a deterioration of the living conditions of the people.
The main demand of the people in the streets was 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 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. The above article is reproduced from nacla.org, the website of the North American Congress on Latin America.
*Third World Resurgence No. 341/342, 2019, pp 14-15