The Ecuador’s private debt was reduced by more than $1 billion between August 2022 and March 2023. which coincides with the greatest increase in country risk. Namely, while in August the public debt was placed to 11.986 million dollars, for February of this year it was located at 10.914 million dollars, that is (1.072 million dollars less). The current amount of private debt also saw a significant decrease between January 2023 ($11,407 million) and the current amount in February ($10,914 million).

The reduction of external credit, which is proportional to the growth of the country’s risk, leads to a shortage of internal credit and the flow of fresh dollar bills in our economy, according to experts.

The country’s risk was 768 points in January 2022, but it has been escalating for several months. By August 2022, after indigenous protests and during round tables and peace talks, the risk had risen to 1555 points (August 22). It had a slight decline then, but rose to 1,584 in February 2023 (February 5) after elections that were not favorable to the Government. Upon learning of the intention to impeach President Lasso, the risk reached 1,975 points on April 6. As of April 17, with the recall process underway, it was 1,864 points. Country risk increases the rates at which Ecuador can borrow, privately and publicly.

According to Jaime Carrera, executive secretary of the Observatory for Fiscal Policy (OPF), the reduction of private debt is closely related to the increase in country risk. It is about the fact that loans abroad are more expensive, companies and banks borrow less, but pay the due date and nothing more. If they borrow with expensive loans, the increase should be transferred to their products (in the case of companies) and loans (in the case of banks), which is not sustainable, both due to the legislation and the market situation.

So says Carrera, The consequence of expensive foreign loans is precisely the reduction of access to loans for companies and banks and therefore, as part of the chain, the reduction of credit in the country. Consequently, the economy does not grow, because credit is the main factor of economic growth. Additionally, in a dollarized economy, this reduced access to external credit is worrisome, since private debt is the source of dollar inflows into the economy, he explained.

About the topic, Alberto Acosta Burneo, editor of Análisis Semanal, said that access to external financing is crucial for a developing country like Ecuador.. Any country that wants to accelerate its rate of development must have access to capital found in developed countries. In this sense, he indicated that it is worrisome that access to credit is falling, in an environment where internal financing is also scarce, and therefore investments.

In the middle of this panorama, a few weeks ago, The governor of the Central Bank, Guillermo Avellán, informed that a reform is being worked on in the Monetary Board on the deduction of interest on loans in the income tax and the exemption of ISD. According to the Central Bank, it is a necessary reform of the current policy, which is not new, and which enables economic dynamics to be maintained, especially when funds are obtained from abroad.

The announcement drew criticism, and since then he has not spoken about how the process is progressing. In any case, what is known is that since 2004, state regulations have stipulated that interest on loans is deducted from income tax and that they are exempt from tax on foreign currency output. It therefore goes without saying that, under conditions of high external rates, the current deduction limit would increase.

The regulation of interest deduction has its roots for almost two decades.

Acosta Burneo explains that the reform under consideration, It should not be seen as an incentive, but as a necessity. It is known that access to loans, especially in the segment of productive companies and productive operations, has significantly decreased, even after a slight increase in rates at the beginning of the year.

It would be important for Acosta to work on exiting the current harmful interest rate cap plan and understanding that the international financial environment is high and domestic caps must be higher to prevent lock-in or the lack of credit being experienced, he said.

Instead of that Jamie Carrera, believes that this type of incentive makes no sense. It would be an unsustainable measure, because in the current circumstances of political and economic instability, no matter how many incentives are given, the demand for loans will not increase. People are not investing right now, because there is no security, he says.

“The only incentive What is possible is for the state to reach agreements so that there is peace, legal certainty and trust for investment, if the internal and external investors do not feel safe, the incentive is not used at all. The key is trust,” he said. For Carrera, without that, there will be no investment, as there have been none in the last 43 years.

In addition, he said that the country always talks about incentives, investments, employment of the disabled and other sectors, but nothing works because there is no suitable climate for investment.