The Minister of Energy, Roberto Luque, said that liberalizing the price for everyone and giving compensation to specific sectors is being analyzed. President Noboa has spoken of targeting (charging real prices to a few sectors and maintaining subsidies for the majority). There is no clear speech. The World Bank considers that “generalized subsidies are a vestige of the past” and are inefficient.
One question becomes increasingly unavoidable as the second half of 2024 approaches. Does the Government have a clear, effective and achievable plan to address the problem of costly fuel subsidy?
If the statements of several officials, including the President of the Republic, are taken into account, it seems that not even in the speech the issue is clear.
Thus, for example, in a recent interview with Ecuador TV, the Minister of Economy, Juan Carlos Vega Malosaid: “If subsidy measures are taken, like all measures, they will be with compensation and the subsidies will remain for the lower strata who need that level of subsidies.”
From these statements it would be understood that there is a targeting horizon, as expressed Daniel Noboa during his last tour of Spain. During an interview with the EFE agency, the president stated that “We are not going to touch subsidies to the diesel nor subsidies al gaswhich has a direct relationship with inflation, with the cost of living, with transportation and agriculture.
On that occasion, President Noboa stated that what is being analyzed is the subsidy targeting of extra gasoline and eco-country (20% of the annual subsidy).
«If we think about the targeting of fuel subsidies in extra and eco countrywhich are low-octane gasoline or naphtha and with a fairly low percentage of national consumption. Of course, we should gradually eliminate it from the groups that do not need it. “In this way we do not touch the true cost of living,” the president assured the EFE agency.
From these statements it is understood that the aim is to liberalize the price for certain sectors and segments (charge the real cost), but maintain the subsidy for the majority.
However, in a recent interview, the Minister of Energy and Mines in charge, Roberto Luqueasserted that targeting generates distortions, which is why they are analyzing the liberalization of prices for everyone and compensation for certain sectors and activities.
“It is not a program to target subsidies but to compensate those affected by the release of subsidies. Targeting generates a double price and that will generate distortions, smuggling and we want to avoid it,” Luque stressed.
In addition, Minister Luque commented that inter-institutional work is being carried out based on data on those potentially affected and on that basis the amount and compensation mechanism will be determined.
The plan that Minister Luque has, which could even include resuming the price band system that was promoted in the Government of Lenín Moreno, goes against what was said by President Noboa and Minister Vega Malo.
It must be remembered that on May 2, President Noboa signed the decree to create the Energy Optimization Committeewhose powers include the review of fuel subsidies.
The president has said on multiple occasions that a plan to address the fuel subsidy problem would be in place for the second half of 2024.
Generalized subsidies are a vestige of the past
During a conversation with the media, before the release of the report titled ‘‘Ecuador: Resilient growth for a better future’, Oscar Calvo-González, director of the equitable growth, finance and institutions practice of the World Bank for Latin America and the Caribbean, explained that the lack of consensus has prevented Ecuador from solving the expensive and inefficient problem of fuel subsidies.
Calvo-González considered that widespread subsidies “are a vestige of the past,” which has caused an inefficient use of resources. Furthermore, in the end the worst thing of all is that “there are people who don’t need them and receive them.”
«Generalized subsidies are vestiges of the past, they emerged at times when there was a shock and an attempt was made to protect the population. At that time the only way to deal with this was with an indiscriminate subsidy,” said the technician of the World Bank.
The report of the multilateral organization makes it clear that, if Ecuador does not find a way to have public finances in order and cut inefficient and unsustainable public spending, it will not be able to enter a path of sustainable economic growth that generates employment.
Thus, addressing the issue of subsidies is vital, among other aspects of optimizing state spending so that the country can grow and develop.
In 21 years, spending on fuel subsidy has reached a cumulative sum of more than $50,000 million; and it is one of the structural reasons for the more than $80,000 million of the current Ecuadorian public debt. (J.S.)
Interview Between Time.news Editor and Energy Policy Expert, Dr. Ana Torres
Setting: A virtual conference room. The atmosphere is charged with anticipation as the pressing issue of fuel subsidies in Ecuador is about to be discussed.
Editor (John Smith): Welcome, Dr. Torres! Thank you for joining us to discuss a very timely topic—the current approach to fuel subsidies in Ecuador. With recent statements from President Noboa and various ministers, it seems there is a significant amount of confusion. What’s your take on the government’s current stance regarding fuel subsidies?
Dr. Ana Torres: Thank you for having me, John. Yes, the situation is indeed complex. The government appears to be grappling with the legacy of generalized fuel subsidies. While they are considering liberalizing prices for certain sectors, there remains a strong commitment to maintain subsidies for lower-income groups. This dual approach can lead to inefficiencies—something the World Bank has pointed out.
Editor: That’s interesting. The World Bank described generalized subsidies as a “vestige of the past.” What does that mean for Ecuador’s economy moving forward?
Dr. Ana Torres: It suggests that these subsidies may be doing more harm than good. Historically, such subsidies drain government resources and can distort market prices, leading to inefficient consumption. If Ecuador aims for sustainable economic growth, it may need to consider more targeted and temporary measures instead of blanket subsidies.
Editor: Minister Luque has expressed a divergent viewpoint, suggesting that targeting can cause distortions and that a broader liberalization might be the answer. How do you interpret this?
Dr. Ana Torres: Minister Luque’s perspective highlights a significant dilemma: While targeting subsidies might sound logical, it can indeed create a two-tier pricing system that risks smuggling and other economic distortions. A comprehensive price liberalization approach, with compensation for the most vulnerable, could simplify the system and reduce these risks. However, it’s crucial to assess whether the government has the administrative capacity to implement this effectively.
Editor: President Noboa seems to be focusing on maintaining subsidies for diesel and gas, which are directly linked to inflation and the cost of living. Could this create a contradiction in their policy approach?
Dr. Ana Torres: Exactly. Maintaining these subsidies while trying to liberalize others sends mixed signals. It creates uncertainty for both consumers and businesses, which can discourage investment and planning. If the intention is to gradually eliminate unnecessary subsidies, it would be beneficial for the government to communicate a clear and coherent strategy.
Editor: You mentioned communication. How important is the clarity of the government’s messaging in this scenario?
Dr. Ana Torres: Extremely important, John. Clear messaging fosters public trust and can guide consumer behavior, which is essential in a situation where prices might fluctuate. If the government can effectively communicate its goals, rationale, and the benefits of these changes to the public, it might mitigate pushback and confusion.
Editor: With the plan expected to roll out in the second half of 2024, what steps should the government be taking now to prepare for this transition?
Dr. Ana Torres: Right now, they should focus on data collection to identify vulnerable segments of the population who will need compensation. Engaging with stakeholders—like community leaders and economic experts—can also help design effective compensation mechanisms. Moreover, they should also launch public awareness campaigns to prepare the population for potential price changes.
Editor: Great insights, Dr. Torres. As we conclude, what is your overall assessment of Ecuador’s fuel subsidy situation? Is there hope for a smooth transition?
Dr. Ana Torres: I believe that there is potential for a smooth transition, but it hinges on effective planning and communication. If the government approaches this issue strategically, with a focus on transparency and stakeholder engagement, it can pave the way for a more sustainable energy policy that benefits all Ecuadorians.
Editor: Thank you, Dr. Torres, for sharing your expertise with us today. Your insights have shed much light on this critical topic. We look forward to following how these plans unfold in the coming months.
Dr. Ana Torres: Thank you for having me, John. Always a pleasure to discuss these important issues.
The interview concludes, leaving viewers with a greater understanding of the complexities surrounding Ecuador’s approach to fuel subsidies.