Ecuador should raise its value added tax to at least 15 percent, substantially increase taxes on corporations and the wealthy, reduce tax exemptions and the size of government. According to the Ministry of Finance, those are the key demands the International Monetary Fund insists on to continue its loan program for Ecuador.
“These things are not set in stone but they provide the framework for achieving an increase in income and reduction of expenditures the IMF wants to see,” says Finance Minister Richard Martínez. “Because the country will have a change in governments in the coming months there will need to be flexibility.”
The IMF has long been concerned about Ecuador’s 12 percent VAT, the tax charged for purchase of goods and services, noting that it is one of the lowest in Latin America. The VAT is 19 percent in Colombia and 18 percent in Peru, Ecuador’s neighbors.
In its agreement to provide loans to Ecuador, the IMF noted that the country has one of the lowest overall tax rates in the Western Hemisphere. “Given its current economic situation, Ecuador must make fiscal adjustments to meet the reality,” the agreement says. The document also suggests the elimination of tax breaks and exemptions, such as those for senior citizens. “Nowhere else in the Americas are so many exemptions allowed,” the IMF wrote.
The IMF also urged “continued review” of Ecuador’s fuel subsidies, particularly the one for LP gas, which costs the country almost three billion dollars annually.
Among other recommendations, the IMF says Ecuador must reduce corruption, improve enforcement of tax collections, which it calls “lax”, downsize government and provide more assistance to the poor,
Ecuador business leaders call the IMF demands unreasonable, claiming they put the burden on the country’s productive sector. “The emphasis should be on reducing government spending, which has become bloated in recent years,” says Pablo Zambrano, president of the Ecuador Chamber of Industries. “The fiscal adjustments must be made on the spending side and should not punish consumption, such as a higher VAT, since this will damage the entire economy.”