Ecuador grows: Lasso achieved the largest fiscal surplus in decades, and the economy is expanding

President Guillermo Lasso’s reforms are laying the groundwork for sustained growth of the economy within the framework of dollarization and price stability.

Economic activity grew by 1.67% in the third quarter of 2022 and by 2.34% in the last three months of the year.

The growth rate is double that of before the pandemic.

The President managed to eliminate the primary fiscal deficit in only nine months of the administration.

By December last year, Ecuador recorded a surplus equivalent to 1.63% of GDP, excluding interest on public debt.

This is the most significant positive result in the last 11 years.

Likewise, Ecuador has not had a financial deficit (including debt service payments) since August last year, having eliminated it in only 14 months of the Lasso administration, according to the Central Bank’s monthly fiscal estimates.

The pace of public finance reorganization was a record in the region and one of the most drastic in the world in the post-pandemic period.

Lasso inherited a primary fiscal deficit of 3.82% of GDP in May 2021 and financial debt of 6.08% of GDP.

Former President Lenín Moreno set a first precedent by distancing from Correism in economic matters and carrying out a certain fiscal reorganization.

Still, it was not until the arrival of Lasso that this could be efficiently carried out.

The Ecuadorian President’s diagnosis was simple:

To revitalize growth within an orthodox price stability framework (dollarization), lowering the risk premium and the cost of credit was necessary to reactivate the economy.

To this end, it was essential to bring certainty to public finances and end the deficit.

As Ecuador carried out a strong fiscal adjustment of almost 10 points of GDP between 2015 and 2021 (public spending fell from 47.2% to 37.8% of output), and in the face of the President’s slim legislative majority, it was decided to bet most of the adjustment through tax reform to increase revenue collection.

The reform included tax increases in traditional taxes and reductions or complete elimination of distortionary taxes.

The most important tax reduction was on the Tax on the Exit of Foreign Currency (ISD) approved by the Correa administration, whose rate fell from 5% to 4% in 2022 to 2% for the 2023 fiscal period.

As of 2024, the definitive elimination of what is probably one of the most distorting taxes in the country is foreseen.

The President decided to eliminate the financial income tax on time deposits and fixed-income investments (previously taxed at a rate of 10%), provided they have been issued with a term of not less than 180 days and remain in possession of the original holder of these yields also for 180 days.

It was decided to extend the range of products covered by the reduced VAT from 0% to 12%, or by a 0% rate in the Special Consumption Tax (ICE), eliminate the advance payment of income tax for public shows, and eliminate the inheritance tax when the transfer is to direct children or surviving spouse in case of being a beneficiary.

The Special Regime for Entrepreneurs and Popular Businesses was established three years.

Under this system, small businesses no longer pay taxes on their sales and are only taxed between 1% and 2% on their net profits.

Several income tax deductions for individuals were eliminated, and the highest marginal income tax rate was increased to 37% (previously set at 35%).

It was also decided to create a temporary wealth tax effective from March 31, 2022, and ending the same month of this year.

A tax on the transfer of shares at a rate of 10% was also created.

The program strengthened economic growth and kept the Country Risk Index below 800 basis points until June of last year.

The episodes of political instability are today the main disruptive factor for the increase in the risk premium, even despite the extraordinary fiscal soundness.

The no-confidence motion discussion against President Lasso alone sent the Country Risk up to 1,859 basis points on April 1.

With information from La Derecha Diario