2024-05-01 12:33:31
The scenario is complex, but the Government has tools to ensure that the impact is less and to prepare the economy for a rebound in 2025.
The Guayaquil Chamber of Commerce, within its demand for unconstitutionality against the law that increases VAT and creates temporary taxes, explains that the Ecuadorian economy went from a sales growth of 17% in January 2022 to a drop of -4, 5% in sales in January 2024.
That is to say, companies and citizens have been suffering from a process of economic recession, where there is less and less movement and less income.
Since July 2023, sales in the economy have decreased and the figures for February 2024 are not the most encouraging.
A few weeks before the VAT increase from 12% to 15% begins on April 1, February sales fell by $492 million compared to January of this year.
New taxes, in this context, could exacerbate the decline in the economy.
The Guayaquil Chamber of Commerce expects an additional 4% decrease in sales; while from self-employed and retail businesses there is talk of up to 15% less.
In this scenario, the Government can take measures so that the impact is less; and prepare the country for the rebound that may occur in 2025.
Quick money back
It is clear that the economy will continue to adjust. This 2024, in the best of cases, it will grow by 1.5%.
The economy has been growing less and less since the rebound after the pandemic.
This year there is the addition of additional taxes that take money away from people. But, according to Fausto Ortiz, former Minister of Economy, the impact can be softened if the Government of Daniel Noboa quickly returns those taxes to the economy.
“That is, he took money from people via VAT, he took liquidity from companies and banks via temporary taxes; but I return it through the payment of arrears or in Government activity, through public works,” he pointed out.
If this return is not made quickly, the drop in economic activity will be more pronounced: fewer sales, fewer jobs and less investment.
Ortiz expressed concern because, as of March 14, 2024, there is a very low execution of the state budget.
Certain expenses such as debt interest and payroll are up to date; but then transfers go in dribs and drabs to local governments, more arrears are accumulating and money for public works flows very slowly.
This situation must change radically if the blow of higher taxes is to be partially cushioned.
It gives the impression that the Government is waiting for more resources to come in from the VAT; but that will begin to be felt in the recent fiscal box from May
However, the biggest problem is that growing at 2% or less does not allow enough wealth to be generated to really generate net employment and allocate sufficient resources to sectors such as health and education.
Economic rebound
Ecuador has come from a long period of adjustment since 2020. After the post-pandemic rebound, the economy, according to the new methodology of the Central Bank, grew 10% in 2021, 6% in 2022 and 3% in 2023.
In 2024 the lowest point of the current cycle will be reached with a growth of 1.5%.
But, in 2025 a rebound is expected, that is, a new boost for the economy.
The agreement with the International Monetary Fund (IMF) seems inevitable, but it is necessary, once and for all, to promote investment in two sectors that can generate important liquidity such as oil and mining.
The latter, plus a pragmatic external financing policy and the benefits of the trade agreements that will be put into effect (the first is the one signed with China that will come into force from May 2024), would allow for fresh resources for the economy to recover. reactivate.
Fiscal deficit and adjustment
Although from a purely liberal vision there is a drastic reduction in the size of the State to solve the fiscal problem (Javier Milei in Argentina seeks to reduce the State from more than 38% to 25% of the GDP), this process can be highly recessive and restrict the economy very strongly.
For this reason, the Noboa Government would be aiming to find the ideal fiscal deficit, or zero, which can be manageable.
Thus, according to Ortiz, a deficit of between 2% and 3% of GDP per year could be established and everything structured so that it works that way.
The benefit of this strategy is that the country would stop putting efforts into adjustment and would shift them to finding ways to reactivate the economy.
Only if the country grows at more than 4% for several years, can informality truly be reduced and adequate jobs created in the long term. (J.S.)
Alert for a “politically” managed VAT
As approved and published in the Official Registry, the Organic Law to Confront the Internal Armed Conflict, the Social and Economic Crisis allows the President of the Republic to change the rate only with the support of a report from the Ministry of Economy. VAT from 13% to 15% when considered necessary.
This opens the door to political management of this tax, where at discretion, and only through an executive decree, the rate can be raised or lowered.
“This is disastrous for the economy and for legal security for investment. When a president needs money he sets the rate to the maximum of 15%; When he needs popularity, and ingratiate himself with the electorate, he can go down to 13%. That uncertainty does more damage than a permanent 15% increase,” said Andrea Romero, economist.
Even the investment bank Barclays has warned that the approved mechanism is not the most appropriate and generates uncertainty.
A tax managed politically, from the Presidency and without any counterweight, can become a burden on the economy.
By: Diario la HORA