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The new tack of economic authorities is to boost government spending, through disbursement of funds previously retained at the Central Bank. They are after stimulating the economy and increasing employment. Sales are now higher than what they were before the pandemic. BCE lowered a notch their 2022 growth outlook but raised that of 2023 to 3.1%. The debt and oil contracts with China were reprofiled. 2022 financial needs would be fully covered, and those of 2023 significantly reduced. However, falling oil prices and oil output plus an end to the domestic fuel price rise all lead to shrinking oil revenues. Interest rates for both deposits and loans are rising and those for loans are fast nearing their ceiling.
Tax collections have had an extraordinary performance, accumulated to August they rose 25.2% y-o-y, and are already higher than those pre-Covid. The explanation? Cumulative sales to July exceed the pre-Covid level by 13.9%. In addition, the tax reform approved in November 2021 came into force, raising the permanent tax burden and creating extraordinary contributions. Mining is now an important source of tax revenue. Between royalties and the income tax of the two industrial mines that the country has, the collections reached $293M. It is now the fifth largest source of permanent tax revenue above the motor vehicle tax. Until August, the Treasury has received $678M for special contributions created in 2019 and in 2021 through the latest tax reform. These types of contributions are justified as extraordinary, but they are repeated year after year. It is confirmed that each tax reform encourages the increase in public spending. The 2021 reform sought to increase 2022 collections by $800M, but expenditures have risen so far this year by $915m. If the economy does not accelerate its growth rate, significantly raising tax revenues, the ground will be fertile for the next tax reform sooner rather than later.
There will be no widespread price controls. The Government did not accept the Conaie demand to set both a floor producer price and a ceiling consumer price for 42 consumer goods, some of which are imported manufactures. It agreed to set up a system of reference price for growers and for retailers, set administrative sanctions to those retailers who flaunt price ceilings, and to monitor the border to prevent food items to be smuggled in. Expect inflation to gradually die out. Back to inflation under 2% in 2023. Dollarized Ecuador does not undergo inflation from quantitative easing, now afflicting many countries. Services prices which collapsed during the lockdown are now rebounding to their previous level. Inflation is either imported, or in the case of foodstuffs it depends on the size of the crop, this year covered with frost in the highlands.
The fight against covid 19 had a devastating effect on the tourism, which is gradually reviving. Sales are still far from pre-pandemic levels, but employment indicators are very encouraging. As of June, there were 554K jobs, a y-o-y increase of 88K (and higher than the 513K jobs in June 2019). Tourism Minister Niels Olsen successfully promoted the incorporation of tax benefits in the tax reform approved in November 2021. It is a merit considering that this reform had a clear fiscal approach: raising taxes on citizens and businesses to finance the government spending. In February, the Ministry of Tourism released its annual promotion plan with projections until 2025. The goal of 2M international tourists by 2025 is ratified, a strong increase compared to the 579K in 2021. For its part, the World Tourism Organization foresees that this industry would recover to pre-pandemic levels as of 2024.
State-owned banking has traditionally been a tool for governments to fulfill political promises with financing at subsidized rates and reduced guarantees. The problem with easy financing is that it is difficult to collect. As of July 2022, State-owned banks had the largest portfolio problems in the entire national financial system: CFN (32.0%), BanEcuador (24.0%) and Biess (15.5%). The corollary of easy credit is the write-offs and defaults that are routinary in State banking, the most recent being approved in July. The strong deterioration in the portfolio of State-owned banks, added to the frequent write-offs and defaults, have weakened their credit capacity. Comprehensive reengineering and a change of focus are taking shape in what will be the new Economic Development Bank that will result from the merger of CFN and BanEcuador. It will stop lending to large companies to focus on micro, small and medium players. The large business sector will have to seek financing in private banks (domestic and foreign) and in the capital market. The financial situation has changed. Since July, the competition for liquidity has increased. Loan and deposit rates rise again, and financing options become more expensive and scarcer.
In the first semester, Ecuadoran exports grew by a strong 34%. However, in its most recent report, the IMF acknowledges that there are risks that are beginning to crop up in the international environment that would reduce world growth. For Ecuador, this new international environment presents some challenges in the scenario. Ecuador is caught in the midst of the conflict between two world powers and the outcome is still uncertain. With China, in exchange for a trade agreement, the government reiterated its recognition of one China and China's claims to Taiwan. For its part, the US Senate approved a US strategic association law with Ecuador whose objective would be to decouple Ecuador from China. At the negotiating tables with the Government, Conaie demands that small and medium-sized flower producers not be charged royalties on the development of new varieties of roses. Respect for the intellectual property of the developers of rose varieties, originating mainly from the US and the European Union, is a sensitive issue for the commercial relationship.