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Ecuador tax reforms face long odds.

QUITO -- New Finance Minister Jorge Gallardo may have a hard time delivering on his three main goals for 2001: maintaining good relations with multilateral lenders, pushing tax reform through Congress and modernizing the banking sector.

While many in Congress oppose the government's tax reform proposals, these other priorities have some support. However, the government's decision to cut subsidies and raise fuel prices could lead to civil unrest, which would undercut the government's position in an already fractious Congress.

Gallardo is racing to try to push fiscal reforms through Congress in time to convince the IMF to make a scheduled payment under its stand-by agreement in mid-February. He already has announced he plans to seek an extension of Ecuador's letter of intent with the IMF, which is due to expire in April.

By Jan. 12, Gallardo hopes to present President Gustavo Naboa with his proposal for tax reform, the biggest challenge facing the government. Naboa has said that rather than introducing a bill to Congress immediately he will meet with members of Congress to try to reach an agreement on the draft before it is submitted. While this could help avoid unpleasant surprises in the legislature, there are many points of contention that will have to be resolved before the government's target for a vote at the end of January.

Gallardo has not said whether the reforms will include a controversial proposal to raise the value-added tax, a measure that faces strong opposition in Congress and on the street. The main thrust of the package will be to reduce the huge number of unproductive taxes and consolidate government income in a few that are easy and cheap to collect. The reforms also are intended to restructure municipal taxes in order to encourage the government's plans of decentralizing government administration.

By April, the government hopes to introduce a second package of reforms, including one that would restrict Congress from tapping the Oil Stabilization Fund, where oil revenues above government forecasts are supposed to be deposited as a hedge against lower future prices. Congress often uses the money for other purposes, which has been causing a problem now as Ecuador's oil exports- it's main source of foreign revenue - are selling for $16.60 per barrel, well under the forecast of $20.

Another set of proposals are intended to reform the financial sector. Many companies that are in arrears on their loans from state banks want the government to forgive some or all of their debts. In some cases, the government has said this may be justified. But the local press has published the names of a number of companies that appear to have the resources to service their debts but are seeking forgiveness anyway, which has sapped support for a bailout.

Over the past few years, the government has taken over a number of banks and Gallardo plans to propose that all of the dosed banks in hands of the Deposit Guarantee Agency be merged into a single bank and be sold or liquidated. He also wants to sell or transfer to private administration several state-owned banks, including Banco Pacifico and Filanbanco this year.

All of these plans are ambitious and would be a tough sell under the best of circumstances. However, the recent hikes in fuel prices could trigger civil unrest, which would further undermine the reform effort. In a bid to cut subsidies by $40 million per year, the government recently doubled the price of propane, used by the majority of Ecuadorian for cooking. To compensate, the government raised payments to 1.3 million retirees and mothers of small children by $1 per month.

Inflation was 91% last year and is expected to rise sharply early this year as the propane increases and hikes to gasoline and other fuel prices trickle through the economy.

Labor unions and groups representing indigenous people are threatening to strike and there already have been street protests against the measures. One thing on the government's side however, is that transportation companies have been allowed to raise their rates due to the fuel increase and now support the government. However, groups representing the poor have become increasingly militant in recent years and could still cause significant disruptions.
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Title Annotation:plans of Finance Minister Jorge Gallardo
Publication:America's Insider
Article Type:Brief Article
Geographic Code:3ECUD
Date:Jan 4, 2001
Words:700
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