On September 8, the IMF and the government of Guillermo Lasso in Ecuador announced a staff-level agreement renegotiating the conditions of the Extended Fund Facility (EFF) reached last year. If approved by the IMF’s Executive Board, the new accord would enable access to US$ 1.5 billion in new IMF disbursements this year and likely give the government of Ecuador increased flexibility in the implementation of structural reforms, including a pending tax reform. The previous IMF accord required Ecuador’s approval of a tax reform in 2021 that increases revenue by 2.5% of GDP and expands the VAT and Ecuador’s tax base. Since the new deal was announced, President Lasso has repeated that Ecuador’s VAT rates would not be increased under a forthcoming tax reform. However, he has somewhat shifted from previous statements that his government would not increase any taxes. Civil society groups have already held limited, though noteworthy, protests in response to the new deal with the IMF, calling for increased government spending on education and expanded oil subsidies.
Our View
The pro-business Lasso government and its reform agenda remain in a precarious position owing to a deeply divided legislature and a polarized civil society prone to engaging in aggressive protests. In addition to the continued IMF support for Ecuador’s financing needs, increased flexibility from the IMF will be key to the Lasso government’s ability to implement reforms. Nonetheless, implementation of a tax reform will remain politically complex, particularly given President Lasso’s goal to mitigate the need for tax increases through reduced government spending. Lasso will likely be forced to compromise on his vision; however, the ultimate impact on the nature of his government’s reforms remains to be seen.
Business Implications
Businesses in Ecuador should ensure that they have solid contingency plans in place to respond to possible increases in social unrest and related disruptions to supply chains and economic activity. Despite Lasso’s pro-business leanings, firms should also prepare for possible increased tax burdens under a new tax reform, and closely monitor developments around reform proposals from the government.
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