ECUADOR: Unrest Reigns in Wake of Tough New Economic Measures

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IPS Correspondents

QUITO, Mar 12 1999 (IPS) - The intense unrest and street protests in Ecuador continued Friday, financial institutions remained closed to prevent the possibility of an all-out run on banks, and activity in the country’s main cities remained at a standstill due to a general strike.

After declaring a 60-day nationwide state of emergency and announcing a bank holiday that lasted through Friday, President Jamil Mahuad announced a string of tough economic measures.

He also looked ready to implement an Argentina-style currency board designed to overcome the country’s hard-hitting economic crisis.

The crisis, which dates back to 1996, took a sharp turn for the worse around three months ago. The local currency, the sucre, plunged from 6,540 to 13,200 against the dollar in the space of three months, bottoming out at 18,000 at one point.

Two outside factors that have hit the country hard were the El Nino weather phenomenon and the still low international oil prices.

Real wages are falling. The real monthly salary of a minimum wage-earner was equivalent to 143 dollars in December, but now stands far below 100 dollars – which falls far short of covering the basic consumer basket of goods for a family of five, calculated at 278 dollars in late February.

Late last year, the Mahuad administration granted a special monthly “bonus” to the poorest sectors of the population. At that time, it was worth around 20 dollars, but now does not even reach 10.

Servicing of the public debt swallows a full 40 percent of the budget, while the balance of payments is equivalent to 10 percent of Gross Domestic Product (GDP). This year’s public sector deficit could reach five percent of GDP.

The economic measures announced by Mahuad Thursday appear to pave the way for the establishment of a currency board – a possibility that he himself, as mayor of Quito in 1996, had rejected.

That year, then-president Abdala Bucaram invited former Argentine economy minister Domingo Cavallo, the architect of the Southern Cone country’s currency board system, to Ecuador.

The currency board system – presently used in Argentina and Hong Kong – consists of pegging the local currency to the dollar. The Central Bank is not allowed to print money that is not backed by foreign currency reserves.

During the state of emergency and heated protests that have led to hundreds of arrests, Mahuad announced Thursday a 100 percent hike in fuel prices, a 20 percent rise in electricity rates and increases in the rates of other public utilities.

The president will also send Congress an urgent bill to increase the value added tax from 10 to 15 percent and immediately launch the privatisation of telephone, electricity and oil companies.

Cutbacks in public sector salaries and reforms of labour legislation are also on the books, as well as a restructuring of the banking system to ensure the survival of the strongest institutions.

Long-term deposits will be frozen and an upper limit set on bank withdrawals, to continue to ward off the threat of a run on banks in response to the announced measures.

The package of economic measures creates the conditions for a currency board, based on advice from Cavallo’s team of experts, the ‘Fundacion Mediterranea’, currently on a visit here, government sources reported.

Several government spokespersons, such as the secretary of Administration, Jaime Duran Barba, admitted that the currency board could be one of the solutions to the current crisis.

In 1996, when Bucaram invited Cavallo, Mahuad was opposed to the possibility of setting up a currency board, and even took part in the movement that led to the former president’s impeachment.

The measures previously implemented by the government failed to control the budget deficit, while triggering an apparently irreversible rise in inflation, according to analysts.

The first of those measures was the elimination of a subsidy on cooking gas, which drove up the price of an 11-kg canister from 0.70 cents of a dollar to four dollars. Then electricity rates soared 50 percent. In December, a one percent tax was imposed on bank transactions, while income taxes were eliminated.

Deputy Jaime Nebot of the Social Christian (christian democratic) Party, a former presidential candidate, said the new tax on bank transactions would bring in around 600 million dollars a year, compared to the 350 million previously collected in income taxes.

But while Mahuad said the tax on bank transactions would eliminate the deficit, that has not yet occurred.

The immediate response of most business owners was to raise prices by five or 10 percent in order to compensate for the new tax, which helped trigger an inflationary spiral that has proven difficult to curb.

Meanwhile, the demand for dollars increased, and the value of the sucre took a nosedive. Although the Central Bank poured dollars into the market to increase supply, it was unable to curtail the depreciation, which went far beyond the goverment’s most pessimistic projections.

Businesses slapped dollar price-tags on merchandise, and raised prices by as much as 100 percent.

The government has spent more than one billion dollars bailing out a string of bank failures. Nevertheless, banks continued to go under: the Filanbanco, Azuay, Finagro and Occidente banks followed on the heels of the Banco de Prestamos.

The Mahuad administration was optimistic that the banking system had finally been set on firmer ground. But last week, it was announced that the Banco del Progreso, one of the leading institutions on Ecuador’s Pacific coast, was also in trouble – and that the government did not have the money to bail it out.

Fearing an uncontrolled depreciation of the sucre due to the financial system’s new problems, the Superintendency of Banks declared a bank holiday Monday, which was extended through Tuesday.

The nationwide strike and street protests called by social organisations and opposition parties for Wednesday and Thursday, and continued Friday, led authorities to keep banks closed through Friday.

Rural highways in Ecuador’s mountain region and the eastern part of the country remained blocked by indigenous protesters and subsistence farmers Friday.

The 60-day nationwide state of emergency declared by the government means the armed forces are authorised to crack down on any public demonstrations and search homes without any need for a warrant.

The president has the authority to raise public utility rates without consulting parliament, and to decide on the early collection of national or local taxes as an emergency measure to tackle the crisis.