Earthquake and low oil prices force Ecuador’s government to make major economic changes

By Nicholas Casey

Even before the earthquake struck, economic prospects were rough for Ecuador.

Oil prices, which once fueled a government spending bonanza aimed at the poor, had collapsed. The economy was contracting. The only lifeline came from China, whose loans included high interest rates and terms that the government here has not made public. Now, after Ecuador’s largest earthquake in a century, the country’s leftist leaders are turning to the kinds of measures they rose to power railing against.

A week ago, President Rafael Correa delivered the news on television: There would be an increase of two percentage points in the sales tax, a one-time garnishing of government wages for those earning more than $1,000 a month and the possible sale of government assets. He also announced a one-time personal wealth tax for millionaires.

President Rafael Correa with quake victims. (New York Times)

In recent days, his government has begun talks with the World Bank and the International Monetary Fund, two organizations he said he would never deal with.

“The deficit, the lack of savings and now an earthquake have made it clear that the old way of doing things simply can’t continue in Ecuador,” said José Hidalgo, an economist who directs the Corporation for Development Studies, a research institute in Quito, the capital. Ecuador has become the latest country in the region where falling commodity prices have joined with other circumstances in pressuring leaders to renege on populist promises of the last decade.

In oil-producing Venezuela this year, President Nicolás Maduro ordered gas stations to begin charging a nominal rate for the first time. Mauricio Macri, Argentina’s new market-oriented president, has ordered his country to undergo an audit by the monetary fund for the first time in a decade, which may signal austerity ahead.

In Ecuador, a 7.8-magnitude earthquake a week ago helped set off what many say was a debate years in the making. Over the last decade, the government made significant investments in infrastructure and education while depleting emergency funds set aside for disasters like earthquakes, analysts say. Spending on government salaries also ballooned as the government grew.

Mr. Correa said the bill for earthquake reconstruction would be more than $3 billion, a sum he said the government does not have.

“The government is using the earthquake as an excuse to introduce measures it had needed to introduce for a long time,” said Francisco Rodríguez, the chief Andean economist at Bank of America Merrill Lynch.

The news did not go over well in Portoviejo, the largest city hit by the earthquake, where the death toll has passed 100 people. More than 650 have died throughout the country.

Roberto Rodríguez, a former congressman who lives in the city, said raising taxes after a natural disaster would only make the reconstruction effort more costly for residents.

“The price of everything will simply go up — concrete, asphalt, any construction material you can imagine,” he said. “There needs to be incentives to build at a time like this.”

Evelyn Poggi, the owner of a warehouse in Portoviejo, said taxes had already been too high for her business before the earthquake. And Ecuador’s economic contractions, felt even more profoundly in provincial cities like Portoviejo, had given her business a beating.

“We went from having an average of $1,500 in sales a day to suddenly $800,” she said. “Then we went to $300. Public institutions stopped paying their bills. If there’s no money, we don’t sell anything.”

Yet while the new taxes are expected to cover the costs of the earthquake, economists say larger economic problems still lie ahead for Ecuador.

Its main challenge — one faced by the leftist oil-dependent governments of Venezuela and Brazil — is petroleum prices, which have collapsed in the last year. More than half of Ecuador’s exports still come from oil.

Ecuador, however, failed to save much income from the high energy prices for rainy days like these.

Mr. Hidalgo, the economist, said that between 2010 and 2013, the price of oil exceeded the government’s budget projections. Had it saved the surpluses from those years, it would now have a $7.5 billion cushion, according to his calculations.

Adding to the country’s woes is its use of the U.S. dollar, a switch that took place in 2000, when a financial crisis caused the national currency, the sucre, to collapse. Now the dollar has appreciated against other currencies in the region, and Ecuador’s exports have suffered as they have grown more expensive.

Because Ecuador is unable to control its currency, it faces recession and contraction of wages, a process that Mr. Rodríguez, the economist, said was already underway.

With Mr. Correa leaving office next year, opponents say they see a chance to put their stamp on the country’s balance sheet.

Abdalá Bucaram Jr., a candidate for president from the Ecuador Force party, said the country needed to follow the model of Argentina, which after years of conflict with the monetary fund is beginning the process to accept assistance.

While Mr. Correa’s public spending was popular in the previous decade, Mr. Bucaram said, the consequences are becoming widely visible.

“Poverty hasn’t been eliminated in Ecuador,” he said. “It has only gotten a coat of cement.”

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Credit: The New York Times, www.nytimes.com