In order to approve the loan, the IMF has conditioned Ecuador to implement further austerity measures in the future
Multinationals in Ecuador should brace for more expansive fiscal policies in the coming months focused on security and the expansion of energy infrastructure, as well as anticipate further tax increases in the ensuing years to fund growing debt obligations incurred by the Ecuadorian government.
Overview
Ecuador has secured an Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF), amounting to US$ 4 billion to be disbursed over the next 48 months. This agreement provides Noboa’s government with additional funding. The EFF program assists countries facing serious medium-term balance-of-payment issues due to structural weaknesses in their fiscal balances. This marks the third occasion Ecuador has received this type of loan—the first being in 2019 under Lenin Moreno’s administration, and the second in 2020 under Guillermo Lasso’s government to manage pandemic-related expenditures.
The approval of the EFF loan followed significant tax reforms initiated by the Noboa government, starting with the Economic Efficiency Law, which targets major taxpayers with income withholding measures that can seize up to 10% of taxable income, projected to yield about US$ 326 million in 2024. Furthermore, a crucial tax reform, “The Law to Confront Armed Conflict,” was enacted on March 9 to bolster funding for heightened security measures. This law increases VAT from 12% to 13%, with subsequent rises to 15% planned over the next two years. It also introduces new taxes, including a 3.25% tax on companies’ EBITDA for 2022, a 25% tax on the profits of banks and cooperatives for 2023, and an increase in the currency exit tax from 3.5% to 5%.
The recent IMF credit agreement is vital for Ecuador, given its considerable external debt obligations between 2024 and 2026. During this period, Ecuador must repay a significant total of US$ 9.3 million to various creditors. Notably, 29.7% of this debt, or US$ 2.76 billion, is directly owed to the IMF from previous loans. Analysts suggest that this new IMF credit could be utilized to settle these outstanding debts, thereby freeing up approximately US$ 1.3 billion for other expenditures outlined in the program.
Moreover, the approval of the EFF loan will enable Ecuador to roll over its existing IMF debt and defer interest and debt payments from earlier agreements until 2029.
Our View
Ecuador’s recent deal with the IMF will provide the country with additional liquidity to implement a more expansive fiscal policy, primarily directed toward Noboa’s security reforms and investment in power generation infrastructure.
The EFF loan will also help Ecuador regain credibility in international markets, facilitating the issuance of further debt bonds, which will aid in external debt restructuring before 2026.
Despite the influx of funds, the government is unlikely to pursue any major reforms this year due to a fallout with opposition parties following the contentious raid on Mexico’s embassy to apprehend former Vice President Jorge Glas.
Due to the temporary nature of many taxes established in the most recent tax reforms, the government will need to implement an additional tax reform before 2027, when debt payments are expected to normalize, to fulfill its obligations to the IMF.
Additionally, prior to approving the loan, the IMF likely required further commitments from the Ecuadorian government, including a reduction in fuel subsidies and a decrease in the fiscal deficit as well as ensuring timely payments on external debt. Austerity measures, particularly the reduction of fossil fuel subsidies, have the potential to trigger social unrest in the country, as evidenced by the protests that occurred under the administrations of Moreno and Lasso when they attempted to implement similar policies.
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