Over the past year, a rebranded IMF has returned to Latin America with promises of loan deals that would be different from the dreaded “structural adjustment programs” of the past. Behind the declarations on inclusive growth and the protection of the most vulnerable, hide policies similar structural adjustments of the era of the Washington Consensus. While the Argentinian program has already imploded, leaving behind rampant poverty and a collapsed economy, the IMF seems determined to press ahead with its deal with Ecuador.
Things have not been easy for the IMF in Ecuador. Massive protests erupted after an attempt to impose fuel price hikes as part of the IMF deal – forcing the Ecuadorian government to withdraw the measures and temporarily suspend its IMF deal. The IMF recently announced its intention to Carry on its program in Ecuador after the country’s National Assembly passed a tax reform bill.
However, the IMF press release fails to mention that the Invoice contains several provisions that seek to weaken and essentially render ineffective Ecuador’s capital controls. Ecuador introduced a series of measures to discourage capital flight and prevent speculative capital flows in 2007 by taxing outflows that did not meet the criteria for productive foreign direct investment (FDI). The measurements were to success in strengthening macroeconomic stability and increasing government revenue.
It is important to note that under the original bill, inflows financing productive activities and staying in the country for at least one year were already exempt from this tax. He also clarified that exits to a list of tax havens cannot be exempted from paying the tax.
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The new bill passed by the Ecuadorian assembly removes the provision on tax havens, shortens the waiting period for certain investments to be exempt from tax and removes it completely for equity and securities markets as well as for financial investments.
The changes to the law effectively open the door to financial speculation. In addition, by removing the provision on tax havens, the new law allows domestic and foreign investors to redirect their money as “Ghost IDE” – by avoiding both income taxes and capital outflows.
The measures included in this bill are in direct contradiction to the so-called evolutionary position of the IMF on capital controls. A recent article from the Financial Times rented the IMF’s warming up to capital controls, reviewing a series of statements made by senior IMF officials on what they call “management of capital flows”. These statements are consistent with the position of the IMF institutional vision on the Management of Capital Flows published in 2012. This position recognized that capital account liberalization may not be the appropriate measure in all circumstances, moving away from the neoliberal dogma of open capital accounts.
It is also stated in the IMF Agreement statutes that the resources of the Fund cannot be used to “address a sustained outflow of capital”. But that is exactly what happened in Argentina, where $36.6 billion to the left the country while the IMF disbursed 44.5 billion dollars. Continuous capital flight was undeniably one of the main contributors to the colossal failure of the last IMF program in Argentina.
It seems natural to ask under these circumstances and given the context, why the IMF is pushing for measures that weaken Ecuador’s current capital controls. Since the exit tax already did not apply to long-term productive investments, attracting more (real) FDI cannot justify these measures. On top of all this, the unpopular measures demanded by the IMF and which fueled the massive protests in the early fall have only been postponed.
It seems that the IMF will redouble its efforts austerity program in Ecuador, which could lead to a prolonged recession and growth projections that will never materialize (a commmon characteristic of IMF programs). It is therefore unrealistic to believe that the measures of the new bill will massively attract new productive investments. The most likely outcome is an increase in volatile capital flows that will further threaten the macroeconomic stability of Ecuador’s dollarized economy. Even in the program itself, the IMF recognizes that the current context, which has only worsened since the signing of the agreement, is perhaps not the best time to abolish the tax on transfers abroad.
The IMF nevertheless States that these measures “lay the foundations for robust and sustainable growth, while protecting the most vulnerable”. Yet the tax bill does no such thing. It allows local elites to take their money out of the country at no cost; it facilitates tax evasion and speculation; and it introduces regressive fiscal measures, placing the burden of adjustment on Ecuador’s most vulnerable. Unfortunately, rather than learning from its mistakes in Argentina, the IMF seems to be repeating them.