Ecuador Crisis. What Went Wrong?

In recent days, we could have witnessed the massive demonstrations in Ecuador, primarily in its capital Quito. The demonstrators got involved in several violent clashes with the security forces and many people got bloodily injured. All that happened due to the presidential decree from 2nd October which affected the prices of fuel whereby the prices increased by 100 %. According to the latest information from 15th October, it seems that the government stabilized the whole situation by cancelling the decree and restoration of the fuel prices to the original amount.

But why was the president Lenín Moreno supposed to impose the decree and let the country crisis launch so it has paralyzed the whole Ecuador? There are many reasons for that. One of them is that Ecuador is facing a considerable debt from IMF in the amount 4,2bn USD, and in the exchange, Ecuador was supposed to accept austerity measures in 2019 such as tax, labour market and pension reforms. Moreover, according to Al Jazeera, the Ecuador government asked the IMF for help in 2016 when struggling to deal with large foreign debt and fiscal deficit.

In order to fulfil IMF requirements Moreno’s austerity measures, lead to imposing special decree which doubled the prices of fuel. By doing so Moreno also terminated 40 years old system of subsidies on fuel which according to BBC cost the government 1.3bn USD each year. For instance, the prices of diesel increased up to 2.3 USD instead of the previous 1 USD overnight. This increment was clearly rejected by the public due to low salaries (average salary was in 2018 around 300 USD/month) and poor economic situation.

Furthermore, Ecuador’s current economic situation is deeply rooted in the policies of the previous government which was led by President Correa. Bloomberg is stating that Correa between 2007-2017 had increased the public debt on more than 40 % and had accepted several oil-backed loans from Western countries or China.

After the 2nd October when Moreno declared its austerity measures, the country fell into the deep crisis. Protestors took the streets plus taxi and truck drivers blocked the streets and bridges in the capital Quito. After the first clashes with the police units, several protestors burned tyres and begun throwing objects on the security forces. The very first incidents shortly after that showed up on the internet and the pictures of injured protestors caused a massive influx of other citizens to Quito. As the situation in Quito rapidly worsened Moreno declared the state of emergency and left together with the government Quito given the security concerns.

Nevertheless, worsening situation fulfilled the highest national security concerns, on 15th October Moreno cancelled his previous decree from 2nd October and the prices of fuel returned on the previous rates. This change went into the effect after the series of negotiations with leaders of the protest.  The results of 2 weeks long protest are more than 500 people arrested, 2000 heavily injured and 7 dead.

The question is how Moreno’s government ought to proceed with the necessary economic reforms. Even though Ecuador experienced considerable economic growth due to crude oil, Ecuador is still far from prosperity. On the one side, Moreno should adjust the fuel subsidies which are untenable in the long-term perspective. On the other side, by cutting the subsidies he has to offer the increase of social assistance in return. IMF itself noted that cutting such subsidies must be very slow and careful process. Probably having experienced a recent crisis, the creation of deep risk assessments would be inevitable. Another Moreno’s step should be to stabilize Ecuador completely in order to bring foreign investors which might help to lift the economy up. Moreover, private investments are a must and according to the World Bank Ecuador is supposed to improve competitiveness and job creation.

To sum up, Ecuador should not definitely deal with the situation by increasing its own debt because at this moment more loans are not solutions in the long run. Ecuador shall come up at the earliest possible convenience with economic reforms which would consequently lead to the reduction of the public debt. However, it seems that the cooperation with the experts from the IMF or World Bank is indispensable.

Written by: Zdeněk Rod

Photo: El Diario De La Pampa