New Report Finds Ecuador's IMF Austerity Program Likely to Result in Economic Recession, Higher Unemployment

A new report from the Center for Economic and Policy Research (CEPR) examines Ecuador's March 2019 agreement with the International Monetary Fund (IMF) and finds that Ecuador is likely to have lower GDP per capita, higher unemployment, and increased macroeconomic instability under the program. Even the program itself, the authors note, projects Ecuador to have a recession this year and increased unemployment for each of the first three years of the program. But these projections are optimistic, the report concludes.

"The IMF's program for Ecuador calls for undoing a whole range of policies that have been quite successful in recent years in spurring economic growth, lowering unemployment, reducing inequality, and bringing down poverty," CEPR Co-Director Mark Weisbrot, one of the report's authors, said. "Unfortunately, even the IMF itself is predicting a decline in these and other economic and social indicators as it and the current Ecuadorian government roll back these policies."

The program calls for a large fiscal adjustment to create a sizable fiscal surplus, which would result from a combination of wage cuts and firing of up to 140,000 public sector employees, increasing energy prices by reducing subsidies, raising fees for government services and public utilities, increasing indirect taxes -- most likely a Value Added Tax (VAT, a tax on consumption) -- and doing away with VAT exemptions that currently benefit most households.

"The IMF program relies on supply-side reforms to make Ecuador's real exchange rate more internationally competitive, and therefore to improve its current account balance," the report states. "This is known as a strategy of 'internal devaluation.'" This means keeping unemployment high and lowering wages to supposedly make a country's economy more competitive internationally, as has been applied by the IMF and European authorities in Greece and also implemented in some other eurozone countries.

Other recommendations related to this strategy include increasing the probation period for workers, cutting severance payments, and establishing part-time jobs without more favorable remuneration.

The IMF program also advocates privatization of "airlines, utilities and other publicly owned enterprises," although it is unclear the extent to which such privatization measures would increase productivity, and therefore how they would improve Ecuador's real exchange rate and its current account.

While the program includes a number of measures unfriendly to workers, it is much kinder to the financial sector, calling for lifting interest rate ceilings; reinstating central bank operational independence; prohibiting central bank financing of the public sector; and facilitating capital flight by deregulating the capital account.

Other reforms include scrapping the development planning ministry as a lead actor in the budgeting process, and enabling a regressive tax reform that prioritizes indirect taxes. The IMF anticipates "social and political opposition" to the program. Civil society organizations, and, notably, Ecuador's ombudsman, have filed lawsuits alleging that the agreement violates Ecuador's constitution.

"The IMF's austerity hijacks growth in a conscious manner," Andres Arauz, one of the report's authors, said. "Unfortunately, austerity hits hardest on working people and the poor. It is likely to worsen Ecuador's economic downturn and make employment and living standards much more precarious for many Ecuadorians."