|
|
A Special International Report Prepared by
The Washington Times Advertising Department - Published on April 21, 1999
[Home Page]
|
| |||||
Advertisers
(1) Bell South
|
 |
President Mahuad announces new economic plan
"I thought the most important objective was to achieve peace with Peru. In addition to the ethical, moral and human advantages of peace, it would bring great economic advantages," begins Mahuad. Peace was negotiated and commercial and social exchanges between Peru and Ecuador began almost immediately. Next, Mahuad worked with the Armed Services to decrease government expenditures. "There will be zero investment in military expenditures during the four years of my administration. Only contracts signed earlier that can't be terminated will continue. The entire wages system of the Armed Forces is matched to the public sector. Twenty-five percent of the forces will be dedicated to internal security and will coordinate with the police patrolling roads, tourist sites, beaches, etc." The subsequent steps, however, are more difficult. "The second issue is to tackle economic problems," Mahaud continues at an exclusive interview in the Presidential Palace in Quito's Old Town. His plans are to deal with "the country's biggest problem - inflation," which he explains is due to a very large deficit, "six percent of GDP." Throughout the interview statistics roll off Mahuad's tongue. Although his last job was Mayor of Quito, he is more of a technician than a politician. He is an honest, clear speaker who isn't afraid to tell it like it is. Perhaps this comes from his days as a student at Harvard's Kennedy School. However, in March, the sucre began a downward spiral. From early January to March the sucre went from 6,700 to the dollar to highs of 18,000, which led to a crisis of confidence. People began to withdraw their money from their banks. A weeklong bank holiday was followed by two days of national strikes led by indigenous sectors and unions, the closing of universities and the fear that major banks would become insolvent. For four days, the public did not see or hear from President Mahuad. On Thursday, March 11th, he greeted the nation in a half-hour discourse. More presidential than ever, Mahuad faced his critics and announced a new economic plan combined with strict regulations. He firmly placed the blame for the situation on those not working for the country, bankers who take advantage of insider trading information and people who avoid the value added tax (VAT). Mahuad understands that he has been severely criticized for a lack of leadership. He faced this criticism from the start and stated that his "honest government is fighting corruption," and is leading the way for social, state and financial reforms. He set his goal of fighting inflation and used the examples of neighboring Argentina, Chile and others. These countries experienced hyperinflation, but took strong measures and are now prospering with zero to 10 percent annual inflation. From the start he constantly stated that there must be national consensus and cooperation to fight for the country's future. His first major announcement was an increase in the VAT from 10 to 15 percent, which could bring in $150 million. At the same time, he stated that without enforcement an increase amounts to nothing. With this in mind, he asked Congress for two legal reforms. The first would jail those who don't pay their VAT. The second would temporarily or permanently close businesses that don't collect VAT or those that collect it, but don't report it. One of the biggest surprises of the evening was the 48.5 to 166 percent increase in gas prices. For cars using extra gas, prices went from 8,756 sucres (about 88 cents) to 23,250 sucres ($2.30) per gallon. However, the President said when the Congress passes the VAT reforms, prices would decrease proportionately. At the same time he announced a four percent, annual tax on luxury cars. The moneys received from this tax would be targeted for the Solidarity Bond. In the end, the government agreed to remove many VAT exemptions so the tax would be increased but not by five percent, to return gas to more normal prices, and to apply the luxury tax to more vehicles. The President then confronted the financial system, which has seen a number of banks go under and which has been accused of worsening the situation. "We need serious, solid and efficient banks," he began. Ecuador has opened these institutions to international auditors who will study the financial system over the next two months and will report on the actual situation. The international reserves, which according to Mahuad belong to all Ecuadorians, are severely depleted. They were used by the Central Bank to defend the sucre. In response, Mahuad instituted a partial freezing of current, savings and fixed term accounts. This was not unexpected, but it still worried many people. However, Mahuad promised that the government was "not going to touch one cent of anyone's money." For current accounts up to two million sucres (about $200 USD) the entire amount could be withdrawn. Above this amount, half could be withdrawn; the rest was frozen for seven months at current interest rates (40%). For checking accounts, amounts up to five million sucres could be withdrawn and the rest was frozen for six months. Fixed term accounts would be automatically renewed upon maturation. People who are seriously affected by this policy can go to their bank and request a certificate that can be negotiated on the Stock Exchange. The next big issue was privatization, modernization and the reform of the state. In total, Mahuad presented Congress with 10 laws, including new electrical, hydrocarbon, telecommunications and VAT laws and reforms of the ports, educational and legal systems and public contracts. He gave the Congress 30 days to approve these laws. The last bit of news was the best. Due to these reforms, Ecuador would at last begin to see money coming into the country - a total of $930 million - from the InterAmerican Development Bank, the World Bank, Corporation Andina de Fomento, and the International Monetary Fund. Meanwhile, the National Financial Corporation would extend lines of credit for agricultural production, microenterprises and multi-sectoral projects. These moneys will be used to bolster reserves, finance the productive sector and restructure the financial system. The international community responded by increasing the value of Ecuadorian paper. Mahuad is still talking about the future dollarization of the economy. Wall Street has come out against this idea. According to Mahuad, however, once "serious, fundamental changes have been made, we can look forward." The responses to the President's speech were varied. However, everyone agreed that major actions need to be taken to insure the future of the country. Mahuad and his administration have always been considered serious, honest technicians who try to reach consensus before making major decisions. Now, the President is becoming more presidential. The next few months will be difficult ones, but with international support, strong leadership and consensus building, the future of Ecuador still looks bright. |
|
Table of Contents (1) President Mahuad announces new economic plan |
|
Elected to office in August, 1998, President Jamil Mahuad's first task was signing the Peace Agreement with Peru. He then worked to establish consensus to combat the country's economic problems due to mismanagement of previous governments, the El Nino phenomenon and a large, government bureaucracy.