Closing of the ITT and tax reduction will mean a drop in income of at least USD 2.4 billion per year, without taking into account the possible effects of El Niño.
Image of the Ishpingo field facilities, at ITT, on July 4, 2023.
The closure of the ITT oil block and the tax reduction promoted by the current President Guillermo Lasso will leave a huge financial gap for the next government.
At the latest, at the beginning of December, the new President of Ecuador will be sworn in, who will receive a weak budget in terms of income.
The foregoing after the popular consultation in which the Yes vote was imposed to leave the ITT oil on land.
The ITT will mean a reduction of USD 1,200 million per year for the State. This will depend on when the infrastructure of this oil block is dismantled , since the Constitutional Court gave 365 business days to close it.
To complicate the fiscal scenario, in 2024 or 2025 the new government will have lower tax revenues of USD 1,210 million compared to 2023.
This, without counting the arrears that the current government will leave, the fiscal deficit that ends up becoming a debt for the next government, and the possible adverse effects of the El Niño phenomenon on the economy .
This in a context in which Ecuador’s finances are not comfortable, since the country could close 2023 with a deficit of around USD 4,000 million or USD 5,000 million , projects the former Finance Minister, Fausto Ortiz.
The deficit occurs because the income is not enough to cover all the expenses of the State.
Will we have to borrow?
The situation of the fiscal accounts is uphill, moreover, because the country does not have many options to obtain credit to compensate all the money that it lacks to cover its expenses.
Due to the high country risk, Ecuador has practically closed the bond market, since it would have to pay an annual rate of 23% if it issued papers.
That is very onerous considering that the multilaterals lend to the country at a rate of 3% or 4% per year.
But to get more money from the multilaterals, the country would have to seek a more flexible agreement with the IMF, says Ortiz.
With this scenario, “the sad thing is that in the next year and a half Ecuadorians will see what they have seen this year, a stagnant economy“, adds Ortiz.
These are the fiscal challenges.
Below, we detail the fiscal challenges that the next Government will face:
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Lower income without the ITT
The ITT oil block is the fourth with the highest production in Ecuador, with 58,000 barrels per day . The closure of this area will mean a 12% reduction in national oil production, which is now around 481,000 barrels per day.
The infrastructure withdrawal plan will be drawn up as soon as the results of the popular consultation on August 20, where the Yes vote won, are confirmed.
The foregoing will mean a reduction in income of USD 1,200 million a year , resources that the State uses to import fuel and to finance its budget.
The popular consultation does not propose compensatory measures for these resources, so it will be the next Government that defines how it will replace these state revenues.
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Less taxes due to ISD reduction
Lowering the rate of the Foreign Currency Exit Tax (ISD) was one of the promises that Guillermo Lasso has fulfilled. It is the third tax with the most weight in collection, after Value Added Tax (VAT) and Income Tax.
The ISD rate, which was 5% in 2021 , gradually dropped to 4% in December 2022. And so far in 2023 it has been reduced to 3.5%.
This reduction has meant that the State Budget no longer receives important income.
Thus, ISD collection fell from USD 756 million between January and July 2022, to USD 653 million in the same period this year; that is, a reduction of 14%.
And it will continue to fall, since Lasso’s plan is to reach December 2023 with an ISD rate of 2%.
If the rate is lowered to 2%, the State’s tax revenues will fall by USD 638 million per year, according to projections by tax officer Napoleón Santamaría.
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There will no longer be a contribution from companies
In 2022 and 2023, the State benefited from a special contribution from some 1,711 companies with assets of more than USD 5 million, but this payment no longer applies to 2024.
The contribution was established in the Economic Development Law, which forced these high net worth companies to pay in 2022 and 2023 an annual contribution of 0.8% on their 2020 declared net worth.
In other words, starting in 2024, the State will no longer have the USD 376 million annually taxed by these high-net-worth companies, adds tax officer Napoleón Santamaría.
These payments increased the total collection of 2022 and 2023.
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Natural persons pay less tax
Through a decree law, President Guillermo Lasso reduced the payment of Income Tax for natural persons from July 2023.
The foregoing will mean that the State will stop receiving some USD 200 million annually.
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Effects of the El Niño phenomenon
The State will need more money to face the possible effects and damages caused by the El Niño Phenomenon.
This year, the Ministry of Finance estimated that it will need at least USD 200 million in 2023 for El Niño mitigation works and to cover the damage left by the winter in the first semester.
According to the Government’s own calculations, El Niño will cause losses in the economy of up to USD 4,000 million, which will imply a negative impact on company sales and that, in turn, will lower tax collection.
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More budget to close the ITT
The state oil company Petroecuador has invested USD 1.9 billion in equipment and facilities to extract oil from the ITT block. Dismantling them would mean an expenditure of USD 452 million, which is not budgeted for now.
It would be necessary to find the resources to close the block, anticipated the Minister of Energy, Fernando Santos, and increase the budget of Petroecuador.
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Tax arrears grow
In the seven months of 2023, the Government has million-dollar arrears with the Ecuadorian Social Security Institute (IESS), with sectional governments and, to a lesser extent, with suppliers.
In fact, the State has committed expenses for USD 13,584.4 million between January and July 2023; however, in practice, they have only paid USD 12,092 million of those obligations.
This means that the General State Budget drags USD 1,492 million in arrears until July 2023.
These arrears will continue to increase and could close at USD 2.5 billion, explains the former Finance Minister, Fausto Ortiz.
At the end of the day, those arrears become debt that will have to be paid in 2024.
The most critical point is that the country has to raise the budget for health and education year after year, but the following year there will be limitations to comply with this constitutional provision due to lack of financing, lower income and accumulation of arrears.
