Government struggles to meet IMF demands to reduce tax exemptions and subsidies

Last week’s aborted attempt to apply the 15% value added tax to bread, milk and other food items reveals the pressure the government is under to balance International Monetary Fund demands with domestic social and political interests. Although some of the announced taxes remain in place, the government was forced to back down on most of them following a public outcry.

The IMF wants Ecuador to reduce its tax exemptions, grants and subsidies by about $1.8 billion in 2026, a figure that represents $1.75% of GDP. It points out that the country loses almost $7 billion in revenue annually, the highest rate in South American based on GDP. “If the government recovers most of the amount, it could eliminate its deficit and improve services to the population,” the IMF said in a 2025 report.

According to sources in the Finance Ministry, the IMF is increasing its demands for Ecuador to continue receiving loans.

According to an SRI estimate, the national budget lost about $4.19 billion in taxes as a result of 0% VAT rates. SRI reports that $2.3 billion of the losses were for goods; $1.35 billion were for services; and $540 million were in refunds.

Among goods, VAT exemptions for food represent the largest tax loss at $1.42 billion.

Other exemptions and subsidies that the IMF is asking the government to reconsider are the subsidy for LP gas, which will cost an estimated $770 million in 2026, and various exemptions, grants and refunds to businesses, which amounted to almost $1.8 billion in 2025.

The IMF criticized the government for lack of transparency in financial benefits to corporate interests, calling the accounting “opaque.”

Quito tax attorney Carlos López says the government will not be able to meet the IMF’s goal of recovering $1.8 billion in 2026. “As we saw with the attempt to tax food, there will be widespread public rejection of adding the VAT to products and services,” he said. “There is also the issue of protecting the poorest sectors of the population. And let’s not forget there’s an election at the end of the year.”

Alberto Acosta, economist and editor of Análisis Semanal, agrees that recovering $1.8 billion in unrealistic. “Under current conditions, I think $350 million to $420 million is realistic with the current government,” he says. “IMF may be thinking about the billion-dollar savings last year from the elimination of fuel subsidies but that won’t happen this year.”

Acosta criticized the government’s attempt to add the VAT to food items that are part of the so-called “basic food basket” for Ecuadorians. “I’m glad most of this was rescinded but am surprised it was suggested in the first place. It was a regressive proposal that would have affected people who could least afford to pay it. It would have also reduced the income and employment of the producers of essential products like milk and bread.”

Acosta adds that the government is correct to ignore the IMF suggestion to raise the VAT to 18% from the current 15%. “Just because Colombia, Peru and Chile have 18% VATs does not make it a good idea for Ecuador. We just increased our rate by 3% last year and another increase would be political suicide for the Noboa government.”