Correa takes money from Ecuadorians’ pockets

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How to turn an economic package into an alleged health plan? Perhaps we could ask the Ecuadorian Government which, on March 30, sent its Organic Law to Balance Public Finance to the National Assembly, where it holds a controlling majority.

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No one escapes the taxation raison d’etre for this law, which the Assembly has been asked to consider as a matter of urgency. However, the Government has made unprecedented efforts to promote it as a plan to combat tobacco, liquor and sugary drinks. To reinforce this propaganda, Correa proclaims the new law will only bring in $300 million and has branded its critics as advocates of nicotine, alcohol, sucrose and the accompanying adverse health consequences.

This is how Rafael Correa’s Government decided to finance economic adjustment directly from the pockets of its people. This shows that the measures taken so far (measures presented by the Executive as ‘creative,’ which have allowed the Government to largely avoid the political cost) have reached their limit. Thus far, these measures have comprised using the Central Bank to provide the Government with loans, supported by papers issued by the Ministry of Finance ($2.466 billion); increasing external debt (mainly to China, with the total now at $6.395 billion); eliminating budgetary obligations (the 40% contribution to the State Social Security Institute); resorting to oil presales; and the delivery of an oilfield to Schlumberger, which will invest $4.9 billion over 20 years with a $1 billion advance payment to this Government.

Dollarization has prevented devaluation and keeps Ecuador sheltered from the traditional adjustments, including high inflation, low wages and costly interest rates. The adjustment has been silent and translates into a gradual cooling of the economy with unmistakable signs in all areas: less production; a slowdown in sales; unemployment; business closures; shrinking of deposits in the banking sector; a high country risk factor; low external investment … all the traffic lights are red. The Government, which had been the sole engine of the economy, now owes money to employees, suppliers and local governments. And yet it still has not adjusted the public spending of a State whose size grew 20% of GDP, from 25% when Rafael Correa came to power in 2007, to 45% today.

Without money and a fiscal gap amounting to approximately $10 billion dollars, according to experts, the Ecuadorian Government still does not acknowledge the abyss-like depth of the economic crisis. In fact, the word ‘crisis’ is not part of its vocabulary. At most, it speaks of a minor pothole, even since the collapse in oil prices.
A government with no cracks, cutting edge, patriotic, walking on the right side of history; a government which concentrates all powers and has created one, which it controls, to represent society; a government which, in addition to permanent self-praise, benefited from and squandered the biggest oil boom in the history of Ecuador, does not accept that its economic model is not viable. So in Quito we hear a proliferation of speeches full of sophistry, intended to hide the reality and the obvious responsibilities of a government that has dismantled the orthodox economic management mechanisms, including all savings funds.

The tax package being discussed by the Assembly sends wrong messages in many ways. Ecuadorians and foreigners leaving Ecuador may only carry $ 1098 in cash. The rate paid by businesses for fixed and mobile telephony has risen by 15%, except when electronic money is used for these transactions. Vehicles registered to disabled drivers are no longer exempt from environmental tax. Retirement pensions are now subject to income tax.

One issue of great concern with the new bill, due to be voted on before the 30th of this month, is the use of electronic money. The Government uses it and encourages its use. Examples: the repayment of part of the Value Added Tax (VAT) will be done in this way. From the advance payment of Income Tax, the balance of revenues earned and costs incurred will be undertaken using electronic money. The tax for credit card use disappears. Among the official explanations for the use of electronic money is increased liquidity in the system. But arguments like this strengthen some analysts’ suspicions that the Government is looking to introduce bi-monetarism in Ecuador. Looking at the marginal amount of electronic money currently in the financial system, there is no real basis for these suspicions.

But experts insist that Correa-ism wants to impose this means of payment which was launched in 2014 and to which only 53 thousand people have responded out of an anticipated 500 thousand. There are also fears that the issue of electronic money is not backed up by the Central Bank which, at this time, does not cover the liquidity of banks. The Government is increasing the liabilities of the Central Bank.

In short, this project, as commented by renowned Ecuadorian economists Abelardo Pachano and Mauricio Pozo to the website 4pelagatos.com, sends inconsistent and wrong messages for the market. And, by removing liquidity and competitiveness, it discourages the productive sector.

Correa lets the productive sector and society pay the bill for his economic model. Not submitted, by pure political calculation, the bulky State that created the great diet imposed by the economic crisis.

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