LatinNews Daily - 06 February 2024

In brief: Ecuador’s central bank calls for urgent fiscal reforms

*Ecuador’s central bank (BCE) has warned that an “urgent restructuring” of the public finances is needed to address the country’s precarious fiscal situation, and has called for economic reforms that are likely to be unpopular. A BCE statement called for “a permanent rise in value added tax [VAT] and the focussing of fuel subsidies as part of an integral reordering of the public finances, to aid the development of the economy and the sustainability of the country’s dollarisation”. President Daniel Noboa’s government presented a bill to raise VAT last month, but the proposal has been criticised by parties on both the left and right, making the bill’s passage through congress uncertain. Attempts to reduce fuel subsidies would also be risky for Noboa, as attempts to do this by previous governments have resulted in major protests. The BCE noted that the non-financial public sector (NFPS) deficit is estimated to have reached 3.1% of GDP in 2023, at US$3.8bn, up from US$22m in 2022, due to a 15% year-on-year drop in oil revenue and a US$749m drop in tax revenue. The BCE stated that the NFPS deficit is on course to swell to US$9bn in 2024 due to a planned cessation of oil drilling in the Yasuní national park, a lower tax take due to an economic slowdown, and an increased need for security spending. The BCE said that “this weak fiscal situation would cause payment difficulties across the national economy, due to greater delays for local governments and state contractors, resulting in reduced internal liquidity and having a negative impact on economic activity”. The BCE said that this would result in “difficulties accessing external finance on good conditions, which would diminish international reserves and deepen the economic contraction”.

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