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Ecuador reverses fuel subsidy decision

Government backtracks after seizure of key oil fields and infrastructure decimate production

Anti-austerity protests mobilised across Ecuador against the government’s decision to end a forty-year subsidy on fuel prices—driving President Lenin Moreno from the capital Quito and prompting the state-owned oil company Petroecuador to declare force majeure on oil exports—have finally ended after the government agreed to broker a deal with indigenous groups.

Moreno announced that the government will now annul the cancellation of subsidies, part of a programme of austerity measures agreed with the IMF. Last year, the organisation approved a $4.2bn loan with the Ecuadorian government to assist the country with debt issues. The IMF highlighted poorly-targeted fuel subsidies as a key chunk of government expenditure in a report issued following the loan agreement.

“These subsidies to diesel and regular fuel have severely affected the Ecuadorian economy and in the last 40 years of democracy, no government took the decision to eliminate them due to political considerations,” says Francisco Roldan, partner at Ecuadorian law firm Perez, Bustamante & Ponce.  “This government took this decision which is extremely important for the maintenance of a stable economy and dollarisation in Ecuador.”

Diesel, gasoline and LPG subsidies combined cost the tax payer more than $1.5bn a year. The IMF claimed the agreement with Ecuador would lower the non-oil primary deficit, including fuel subsidies, from 5.3pc of GDP in 2018 to 0.3pc of GDP by 2021.  

Cut and run

Pressure on Moreno had been intensifying. A week of violent protests across Ecuador deteriorated as demonstrators occupied government buildings, including the National Assembly, and major oil fields across the Amazonian region.

$1.5bn — fuel subsidy cost annually

Moreno directed the blame at his former party ally and predecessor Rafael Correa, now in self-imposed exile in Belgium. He accused Correa of exploiting the protests to orchestrate an attempted coup, an allegation Correa later denied. Moreno imposed a national state of emergency but was forced to flee the capital to the relative safety of the country’s largest city Guayaquil as indigenous protestors descended on Quito.

“The fact that indigenous leaders accepted Moreno’s proposal to launch a direct dialogue was indeed a major breakthrough, although one that came only after a state of siege was declared in the capital Quito,” says Lucia Caamano Stanek, Americas principal analyst at political risk consultancy AKE International. “The risk of further disruption affecting the oil sector as well as policy continuity and stability risks will persist throughout Moreno’s term.”

Wiped out

Oil production is central to the government’s plans to resurrect the economy. Moreno announced that the Andean country would exit the crude producing lobby Opec on the same day as he revealed the subsidy cuts plan. “Ecuador's oil production represents a small percentage of Opec production and the cartel’s decisions to restrict production have affected Ecuador rather than benefiting our economy,” says Roldan.

The Andean country produces just over 500,000bl/d but has ambitions to raise this figure. Last week, oil field occupation and pipeline closures in three Amazonian provinces drastically slashed production. The Ecuadorian ministry for mining and natural resources revealed that cumulative losses in the Amazon totalled 393,037bl/d.

Pipelines including the Trans-Ecuadorian Pipeline System (SOTE), with capacity of more than 100,000bl/d, were shut down due to low crude deliveries. The total financial loss to the state of reduced output was at least $21.6mn.

In Block 60, the military regained control of the country’s second largest oil field Sacha, but the field remained down while state-owned oil company Petroamazonas assessed the extent of the damage. Combined, a total of 11 blocks across the country experienced production losses.

“The government now has to strike a balance between meeting IMF-mandated targets—the most pressing of which is a fiscal surplus of 3.8pc in 2020 ⁠—and avoiding a relapse into nationwide violent unrest that could end up forcing Moreno’s resignation should the oil sector and the country’s overall stability be put once again in jeopardy,” says Caamano Stanek.

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