Ecuador to phase out 'unfair' gasoline subsidies by end of June

(Bloomberg) — Ecuador’s government unveiled a plan Tuesday to cut subsidies for low-octane gasoline as it continues to adjust public finances amid a war on drug gangs declared in January by President Daniel Noboa.

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Initially, pump prices are expected to increase about 25 cents from the current $2.47 per gallon, then increase by up to 5% per month with the introduction of a new price range to gradually match international prices.

“This is something that cannot wait,” Deputy Economy Minister Cristina Avilés said during a press conference at the presidential palace in Quito. “This is the most unfair and ineffective subsidy” of all national subsidies, she added.

This plan, which will be rolled out at the end of June, is the second major tax measure after Noboa imposed an increase in the value added tax from 12% to 15%, previously one of the lowest in Latin America, in the aim of obtaining a new value added tax. agreement with the International Monetary Fund that will provide $4 billion over the next four years, plus $8 billion from other multilateral lenders.

Gasoline prices may also fall by up to 10% from one month to the next, in line with developments in the global market. Prices for high-octane gasoline are not subsidized, but a reference price is set monthly by the national oil company Petroecuador.

Around 85,000 registered taxis and motorized rickshaws commonly used as taxis in coastal areas will receive a subsidy to avoid price hikes for consumers, and additional social spending plans are being rolled out, but the measure aims to reduce the subsidy by about $500 million per year.

Costly diesel subsidies, which account for the bulk of the roughly $3 billion Ecuador spends each year on fuel subsidies – the same amount spent on public health and three times the amount for social programs – will not be affected, Noboa said.

Balancing act

However, unpopular economic measures have cost him dearly politically. His approval rating, which had risen to 80% in January when he declared war on gangs, fell to 53.1% in a survey by local pollster Click Report. General elections are scheduled for February 9.

Bonds have shed some of their year-to-date gains on fears that market-friendly Noboa could be replaced by a left-wing politician. According to the Click Report poll, only 29.5% say they would vote for a left-wing candidate, compared to 39% for a centrist and 31.6% for a conservative.

Anti-government protests have so far been limited. Riots followed the swift decision to cancel fuel subsidies, including diesel, in October 2019, and similar cost-of-living protests brought large areas to a standstill in June 2022.

The last bitter pill to swallow before the elections will come in November, when the government must present to the IMF a plan detailing the elimination of tax exemptions.