Subsidies cost Ecuador almost $3.5 billion a year; Some say fuel subsidies should end now

Mar 5, 2018 | 15 comments

For Ecuador’s cash-strapped economy, one of the biggest budget drains in 2017 were subsidies that totaled $3.47 billion. Of that, more than $3.2 billion was for diesel, gasoline and propane gas.

Ecuadorian motorist pay about about a third of the market price for gasoline. (El Comercio)

Some say most of the subsidies should end, and the sooner the better.

“This is a massive expense for the national economy and it’s time to consider ending some of them [subsidies] and we should start with diesel,” says former economic minister Mauricio Pozo.

In 2017, the government paid $2 billion for diesel.

“Subsidies should be need-based, not given out across the board, as we do it today,” says Pozo. “Commercial trucking companies and commercial fishermen should pay market price for fuel, as should private bus companies,” he says. “The elimination could be phased out but it should begin immediately.”

The problem with ending the subsidies is political, Pozo says. “Over the years, several presidents have recommended a phase-out but they didn’t follow through because they feared public reaction,” he says. “[Former president] Correa had a detailed plan to end fuel and gas subsidies but, like the others, he backed down.”

In addition to diesel, Pozo says that the gasoline subsidy for the general public should be eliminated.

According to a recent analysis by Ecuador’s treasurer’s office, Ecuadorians pay a fraction of international market prices for diesel and gasoline. In early February, the average world price for gasoline was $4.92 and $4.42 for diesel, while prices at the pump in Ecuador were $1.48 and $1.03 respectively.

“Given our budget deficit, we should begin narrowing the gap between the subsidized prices and real prices as soon as possible, especially for those who don’t need the give-away,” says University of San Francisco economics professor Pablo Dávalos.

He says the gap in the subsidized price and market price for propane gas is even more extreme than for diesel and gasoline. Ecuadorians pay $1.60 for a gas cylinder that goes for $12.25 on the world market. “What is particularly outrageous is that the gas is used to heat the swimming pools and jacuzzis of rich people in Quito and Cuenca, as well as to provide cooking fuel for poor families in the country. This is crazy.”

Neither Pozo or Dávalos objects to providing subsidies to the poor. “That would total less than $500 million even by liberal calculations,” Dávalos says. “It’s time the government show some backbone on this issue. I understand there could be political repercussions but the subsidies are a massive expense to the economy and the money could be better spent on reducing the deficit and on social and infrastructure needs.”

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