Ecuador’s new government will face an economic crisis; How will González and Noboa confront it?

No matter who wins the presidential runoff, he or she will face one of the worst economic crises in the Ecuador’s history. “There is no money for social spending, there is no money for security and there is no money for a recovery from El Niño,” says Finance Minister Fausto Ortiz. “The big question for the next president is how they will find the money to fund the government.”

Luisa González and Daniel Noboa

Ortiz adds that GDP will drop 16% to 17% in 2023 from 2022, and will continue to drop into 2024. “We are experiencing a reduction in oil revenue this year and will collect $800 million less in taxes. Without considering the decision to end oil pumping in the Amazon, it is clear that the new government faces overwhelming budget problems.”

Both Luisa González and Daniel Noboa agree that filling the budget shortfall with borrowed money will be almost impossible. “Borrowing from the IMF [International Monetary Fund] or other sources may be out of the question in the short-run due to the country’s risk factors,” Noboa says. “We will have to find other ways to fill the gap.”

From early in her campaign, González has said she would use international reserves at the Central Bank. “I will not let that money sit idle given the many needs of our people,” she says. “We will use $2.5 billion to 3 billion of those funds to meet basic needs.”

Noboa says tapping Central Bank funds is a “last resort” although he will consider using as much as $1.5 billion of the bank’s $7 billion on an emergency basis. “We face a potential disaster with El Niño and money is in the Central Bank if there is not an alternative.”

Noboa says maintaining a strong balance of reserve funds is critical for future needs, adding “we must be aware of the risk of drawing down those funds.”

To borrow from the Central Bank, the new president will need the approval of the National Assembly. In 2018, the Assembly passed the Law to Defend Dollarization, shielding Central Bank reserves from government use.

According to Central Bank General Manager Guillermo Avellán, the law was important for two reasons. “First, it protects the deposits of Ecuadorians in public and private banks, as well as contributions to the Social Security fund,” he says. “It is important to understand that these funds belong to the people, not to the government.”

The second reason to maintain the reserve is to protect the country’s credit rating. “Since we are a dollarized economy, this is more important than it might be in countries with their own currencies,” Avellán says.

Avellán offers an alternative to dipping into Central Bank funds. “A temporary solution I don’t hear being discussed is for private banks to invest some of their reserves in government bonds,” he says. “This would require a legal adjustment to bank reserves mandates.”

Former Economy Minister Paul León says that neither González nor Noboa have presented “solid, actionable” plans for economic recovery. “In the heat of the campaign, they are not discussing the hard decisions that must be made next year and I think this is a disservice to voters,” León says. “It is true that fighting the drug cartels is the number one priority but it’s a mistake to ignore the economy if, for no other reason, you need money to fight the criminals.”

According to León, Noboa offers the standard center-right solution of generating employment and attracting investment. “This is good but it will take years of stability to accomplish, and he may be in office for only a year and a half.”

González, on the other hand, says León, is offering the Rafael Correa economic plan. “He used fictious dollars and secret-deal loans from China and this is what got Ecuador in trouble in first place,” he says. “We need new ideas from both candidates.”