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World Bank lowers growth forecast for Ecuador as a result of the June strike

Published on October 10, 2022

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According to the World Bank, Ecuador has the best budget results in the region, but the cut in investment will affect GDP growth.

Among 28 nations in Latin America and the Caribbean, Ecuador will have the greatest balance in its fiscal accounts in 2022, according to a report on new approaches to close the fiscal gap, from the World Bank.

The foregoing means that the income of the budget of the public sector of Ecuador will be higher than its expenses by 1.03%. That is, the accounts in all public entities in the country will have a surplus.

The World Bank report details that, apart from Ecuador, only Jamaica will have a surplus in its fiscal accounts this year, of 0.3%.

While the other 26 countries in the region will close with expenses higher than their income or what is known as a deficit in 2022.

According to the World Bank, the budget deficit in Latin America deepened due to the increase in public spending to reactivate the economy in 2020 and 2021.

Dominica, Saint Vincent and the Grenadines, Bolivia and Colombia are the countries that will have the highest deficit at the end of 2022, says the World Bank.

Investment cutback

The spending cut in 2022 has allowed the government to reduce borrowing needs, says the chief economist of the World Bank for Latin America, William Maloney.

The adjustment came from a reduction in the budget allocation for public works, which is the most flexible to cut.

In fact, 40% of the decrease in spending in Latin America was in the investment variable.

But this “short-term” measure will harm the growth of countries in the medium and long term, adds Maloney.

The government of Guillermo Lasso budgeted $6.433 billion in capital investment and public works in 2022. And with only one quarter of the fiscal year left, the Ministry of Finance has only executed 44% of that allocation.

Finance Minister Pablo Arosemena acknowledges that cutting investment has been the only space the government has had to reduce the deficit.

However, this measure has led to citizen unrest due to problems in the quality of health services and in other sectors, which was reflected in the national strike of June 2022.

Inefficient spending

Reducing waste and overhauling inefficiencies in the public sector are the best ways to cut the deficit, says the World Bank.

According to the multilateral, on average, 17% of public spending in Latin America and the Caribbean is allocated to overpriced contracting, inefficient salary mass and diversion of funds. The report does not include data from Ecuador on this variable.

Tax reforms

The World Bank says that there is room, albeit small, for an increase in taxes such as the Value Added Tax (VAT) in countries where rates are lower. Among them are Ecuador, Bolivia and Paraguay.

However, increasing this tax could result in lower growth of the Gross Domestic Product (GDP), warns the entity.

The Ecuadorian government has ruled out further tax reforms in 2023.

In the Income Tax for companies there would be more room for increases in Latin America.

Despite this, this measure could lead to more tax evasion and avoidance, which are already high in the region, according to the report.

Ecuador is the country with the highest tax revenue as a percentage of GDP in the region, its revenue is equivalent to about 34% of its GDP.

Less growth

Nonetheless the World Bank revised the growth forecast for Ecuador’s economy downwards.

In its last report, before the national strike in June, the multilateral forecasted that Ecuador’s GDP would grow 4.3% in 2022 and 3.1% in 2023.

However, in its new report for October 2022, the growth projection for the economy is 2.8% in 2022 and 3% in 2023.

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