The IMF is demanding Ecuador reduce its annual $7 billion in tax exemptions, credits and refunds

As a condition for receiving future loans from the International Monetary Fund (IMF), the government has agreed to make a “significant reduction” in tax exemptions, refunds and other benefits that amount to almost 6% of Ecuador’s GDP. Beyond reducing “inefficient expenditures,” however, officials have been tight-lipped about where the reductions will apply.

International Monetary Fund headquarters in Washington, D.C.

According to the agreement with the IMF, the cuts must be made by the end of December.

The tax breaks, which benefit businesses as well the poor, elderly, disabled, will amount to $7.2 billion in 2025, according to the Internal Revenue Service. In March, President Daniel Noboa said he would propose reductions, claiming that the country can no longer afford the “extravagance” of uncollected taxes. He did not mention the IMF conditions

Among the largest tax exemptions are those for rice, sugar, cooking oil, rent, education, health care and other products and services listed in the “basic basket” of household goods.

Other major revenue losses, according to the SRI, are VAT refunds paid to the elderly and the disabled, and tax credits granted to certain industries.

According to former SRI director Jorge Sanchez, large reductions of tax exemptions, refunds and credits could create a major political headache for the government. “This is why we have heard so little about it,” he says. “Depending on where the reductions are applied and the amounts, we could see protests by social groups at the end of the year.”

On the other hand, says Sanchez, the IMF may accept smaller reductions made over a period of years, since it too is interested in avoiding major political disruption. “Because no specific numbers are mentioned in the agreement, we really don’t know what the IMF expects or what it will accept.”

Sanchez sees similarities between the tax exemption issue and fuel subsidies. “Both cost the government billions of dollars, and both are politically explosive if not handled carefully and gradually.”