During the last 10 years, Ecuador has enjoyed positive growth in its GDP, with an annual average growth of 3.86 percent. The last time Ecuador’s economy registered negative growth was in 1999, which was also the year of “Bank Holiday” and the introduction of the U.S. currency into the Ecuadorean economy.
Annual variation of GDP 2007-2015
Source: Ecuador Central Bank
and the dollar
The drop in oil prices deeply affected the economies of almost all of Latin America, resulting in devalued currencies, a rise in the exchange rate and the plummeting of real income. The dollarization of the economy in Ecuador makes it an anomaly in this regard, though the high price of the dollar has made Ecuadorean exports more expensive in comparison to its competitors.
Foreign Direct Investment has decreased in comparison to the first quarter of 2015, falling by 26.3 percent from US$280 million to US$206 million in the first quarter of 2016 falls.
One notable policy of Rafael Correa has been the signing of an agreement with the European Union. This trade agreement with the EU, which in many ways continues previous preferential agreements with the 513-million customer bloc, provides an opportunity for Ecuadorean exports, mainly for raw materials and agricultural goods, to enter Europe without tariffs.
The Ecuadorean government foresees a substantial increase of exports since 99.7 percent of the Ecuadorean exports is free of taxes. The stability (even in the short term) of the oil prices shows a more favorable forecast for 2017 than in 2016.
The issue of taxes has been at the centre of debates and protests over recent years in the South American nation.
Since dollarizing its economy in the late 1990’s, Ecuador has had to ensure that it retains US currency in the country. The government of Rafael Correa has sought to also stimulate location production, imposing surtaxes on imports for non-essential goods.
In addition, over the last years the government presented a proposal to increase taxes on inheritance as well as on speculative gains on land sales (Plus valia). Despite the fact that these would affect less than 2 percent of Ecuadoreans, there was an intense campaign against these proposals from opposition parties and mainstream media.
Following the devastating earthquake that left hundreds dead and billions in damage, the Correa government also imposed a 2% increase in sales (VAT) tax, along with an temporary, progressive income tax to fund reconstruction.
Despite opposition to these measures, Ecuador maintains among the lowest tax regime in the region and well below the average of countries in the OECD.
In 2016, the issue of tax havens came to the global spotlight following the so-called Panama Papers leak which revealed the intricate methods whereby the wealthy keep there money in tax free restrictions.
For Ecuador tax evasion through the use of these havens is not only a major concern because it is a developing nation in the need of resources to service the needs of the country and its people, but also because these can also be used to facilitate money laundering and corruption.
According to the country’s tax agency, from January 2014 to October 2016, $4.52 billion left the country destined for tax havens.
President Correa proposed that politicians and public officials should be barred from using tax havens, as a means of demonstrating their commitment to transparency and the public good.
As a result, there will be a referendum to accompany the Feb. 19 General Elections that will ask Ecuadoreans:
“Do you agree that, in order to fulfill a dignity of popular election or to be a public servant, it is established as a prohibition to have assets or capital, of any nature, in tax havens?”
Trade and Debt
Ecuador has long enjoyed a preferential agreement for its agricultural exports with the European Union. As an export dependent country, these agreements serve to buoy exports and are seen as vital for the country’s agricultural sector. This agreement is also important in light of the currency devaluations implemented by the country’s neighbors in order to lift their own exports.
After extensive negotiations to maintain the central tenets of the previous deal while not relinquishing hard fought for sovereignty, the Correa government recently finalized a new agreement with the EU.
Ecuador has also experienced significant financing from China, which has become a major lender to nations in the developing world. Despite these, Ecuador maintains one of the lowest debt-to-GDP ratios in the region (only behind Chile, Paraguay and Peru) and has also ensured that the loans do not compromise social spending and other sovereign decisions, as they did under finance agreements from the IMF, World Bank and others.