Augusto de la Torre, professor at Columbia University in New York, former director general of the World Bank and coordinator of the commission of the Ecuadorian Social Security Institute (IESS), believes that in a few weeks or months Ecuador will experience a difficult cash situation in which it will be difficult to pay salaries . This, along with the liquidity problems of IESS, becomes a “perfect storm”. He believes that urgent but unpopular measures must be taken, including a review of subsidies and value added tax (VAT). He does not recommend taking resources from the reserves that support dollarization, saying “that would be the beginning of the end.”

How do you see the economic sustainability of the country, with such a lack of liquidity and few ways to finance ourselves?

One of the situations we have encountered in recent months is the lack of liquidity. This is felt more strongly in a dollarized country, since we cannot issue dollars. In dollarization, you either have dollars or you don’t have them, and when there are none, the pressure on cash is enormous. In other countries, governments ask the central bank to issue banknotes, but this eventually leads to inflation and reduced purchasing power. Here, in Ecuador, we closed December with a bang, the Ministry of Finance made a superhuman effort to get money, place bonds in commercial banks, in public banks, juggling closed the month, but that will not be possible again. in January, February or March.

So what’s coming for us?

I see a year that will be very difficult, if there is no solid fiscal adjustment program, I don’t see how the Government can transfer 40% to IESS. This in turn will have to sell a large amount of its assets, which will drive the pension system up against the wall. I think that at the end of 2024 or the beginning of 2025 there will be problems with the payment of pensions. That’s why I think that the first thing we need to do is check the reality and make decisions proportional to the problem. The fiscal situation enters intensive care and for that we must listen to the doctor and perform an emergency operation.

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What would be urgent to do?

You have to understand the magnitude of the problem. The Ministry of Economy is responsible for the projection of the behavior of the fiscal fund for the year 2024 (expenses and revenues). You need to have the income to pay your salary, minimal investment, and even pay off your debt, since 2024 is when bond renegotiation amortization begins, and also payments to the IMF. While I don’t have definitive data, my perception is that the size of the problem is $8 billion, and it should be noted that in 2023 $6 billion in outstanding liabilities has accumulated. Dues cannot accumulate indefinitely, the supplier will not be able to pay the employees, the payment chain can be broken. When such a situation exists, fiscal adjustment measures must be combined. Half of the $8 billion can be an adjustment between costs and revenues, and the other half can be requested for help from multilateral institutions.

But President Daniel Noboa did not go to the multilateral with such a speech, but only to ask for money, maybe he did not like it…

President Noboa’s first statements caused uneasiness to the point that there was no sign that he was ready to make his own internal sacrifices. Now he was talking about cutting spending by a billion dollars, which is laudable but difficult to achieve. There is money that can come from tax reform and amnesty this year, but that won’t happen again.

So where can we get the remaining resource?

If you want the rest of what you need to come painlessly, you won’t get it. The president would surely like to go without pain. But I don’t see that being possible. We need a reduction in subsidies on the price of domestic fuels. We lose about 4 billion dollars a year there. For years we have seen efforts by governments to get out of this subsidy trap, but every time it is talked about, people rise up, the street gets heated. Without a measure of that type, that is, an increase in the VAT rate from 12% to 16%, without a measure of that size I do not see how the figures could be equalized.

But as you say, people do not accept such measures; Could another way be to take money from the reserve and what would that mean for dollarization?

This could happen when the Government becomes aware of the problem. There will be people who will say “we have to ask the ECB.” Currently, there are 4,000 million dollars in the reserve, the funds of which are owned by depositors. The problem is that this is a very poor patch measure because it draws support from dollarization. That step would be very bad and, I believe, it would be the beginning of the end of dollarization. The president should say no to that option, he should do like Milei in Argentina and come out and clearly talk about the problem and explain how it can be overcome.

In Argentina, some people have accepted, but there is opposition. In Peru, people have a general awareness of taking care of their finances. In the case of Ecuador, people don’t see it yet…

In Peru, there is a destructive culture among political opponents, but respecting fiscal and monetary issues. Ever since they experienced hyperinflation, they knew how to appreciate the health of public finances or the Central Bank.

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But in Ecuador there was also a financial crisis and high inflation in 1999.

We are facing a problem of financial origin that was complicated by fiscal problems. But now we see a big problem of fiscal origin. We have a few weeks, a month at the most, to make a proposal to society. Society will learn, it will understand the serious problem we have in the fiscal treasury, a month when we no longer have money to pay salaries. Perhaps the awakening of consciousness will be such a situation. With that fact, maybe it will be easier for the president to talk to people and for society to accept that something must be done. It must be shaking.

But the impression will still remain that there is waste, that there are pitfalls, so people are not convinced that there are no more solutions.

It is true, if the Government wants to propose a way out for society, it must also include clear actions that give it the perception of fairness, including taking action against the indigenous population, with corruption.

Returning stolen goods, for example.

Yes, trying to be balanced on that side, society should understand that these are victims that are shared equally. Harsh measures require legitimacy. But when I listen to President Noboa’s statements, it seems to me that they are still in an unreal world. I notice that the Minister of Finance is trying to explain what is happening, but I see it myself, I don’t see an echo in the Government itself.

For the first time, IESS and the state are having liquidity problems at the same time, putting members and pensioners at risk

Will the understanding of what is happening reach the people and the Government at the same time?

It is understandable that the Government initially does not want to hear bad news. This always happens. It is difficult for us economists to communicate this to the Government, which is difficult news and not easy. For reasons of human psychology, they prefer to hear good news, they need a certain amount of time to understand it.

But that moment is already near.

I have the impression that we don’t have much time left, we closed December with a bang and delays. I think that the Government must be encouraged to make the situation more transparent and talk to society. It is not easy, because the country has already heard so much bad news: insecurity, lack of employment, now we have to say that we also have a desperate problem with fiscal cash, not something we like.

And that with the aggravating factor of votes that do not see the source of the problem.

The natural tendency of the human spirit is to think that by creating an oil plant you are helping yourself for six months, but in the future you no longer have that income. You need measures that give you permanent solutions, because the problem we have is structural: we inflated spending too much under President Rafael Correa, that spending has remained, but the income is no longer there. Politicians have also been increasing costs in recent years. This creates a cash problem, in addition to the Social Security cash problem. It’s the perfect storm.

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As for IESS, the president of that entity said that he would try to implement structural reform, but in eight months, taking part of his proposal. What do you think?

I think it is magnificent that he is talking about legal reform, and that the proposal that was made is taken as a reference.

And won’t the question of paying the debt to IESS with assets be a tangle for the institution?

You have to separate the problems a bit. There is a historical debt of the Ministry of Economy for pensions to the IESS. They are about 4000 million dollars from a few years ago. They must agree and have a payment plan that may include paying with the property. The most pressing problem is current cash flow. In 2024, IESS will have to pay 6,000 million dollars, and it will receive only 3,300 dollars in contributions, and Finance will not be able to transfer everything to it. Things have reached a point where even if the treasury could pay, it is no longer enough to cover the gap. As the Commission, we said that if the treasury manages to pay 40%, three years of pensionable service remain, if not, only one year of life.