Ecuador's setback: An oil-rich nation in crisis

A country with 8.4 billion barrels of oil reserves producing 520,000 barrels of oil per day, ends up in an oil crisis; how? Citizens are protesting for welfare subsidies for the poor, why? A country whose most valuable exportation has been oil for the past 40 decades, is facing a hike. In October 2019, the President of Ecuador Lenin Moreno announced that the government would be ceasing oil subsidies within the country. This came after Ecuador signed a $4.2 billion agreement with the IMF. According to the IMF, Ecuadorian authorities put together an effective plan to help modernize the economy and nurture jobs for people. These government plans aimed to benefit the vulnerable, with the funds helping them achieve their set target. If the deal with the IMF was for welfare policies for the poor, then why end the fuel subsidies? To understand this, we have to look at the policies which regulate these very oil subsidies. These policies were made in 1974 to bring down the living cost for the poor. For policymakers, a country rich in oil and gas resources meant that the price stabilization program would not pose a problem to the economy and would keep prices of essential goods in check. Several years following, this posed a tremendous obstacle for the economy when the price of oil rose in the international market. Price stabilization subsidies soon went on to become balloon subsidies which then became large scale subsidies. Such grants are challenging to overturn because of their effect on the vulnerable. Moreover, it slowed down the economic growth of the country and hindered the reduction in carbon emission, which is toxic to the environment. The subsidies were cut to lower the fiscal deficit of the country from $3.6 billion to $1 billion in 2020, costing the government $1.3 billion each year. It led to the fluctuation in prices of Gasoline by 25% and the price of Diesel almost doubled. Alternatively, the government proposed a policy for the welfare of the poor such that the payments were to be made to cushion the blow from the sudden hike in fuel prices. Furthermore, it promised to levy a three-year tax on all companies who had annual revenue of more than $10 million. However, to understand these concerns accurately we must take a look at how the Ecuadorian government monitors the oil and gas industry. The domestic oil and gas legislation is controlled by Articles 1, 408, 313 and 315 of the Constitution which deals with state-owned companies who manage the strategic sectors. The strategic sectors include the energy in all its forms (renewable and non-renewable resources) which include the extraction of such resources too and hydrocarbon refining too. One such contract is the service contract which states that the contractor is required to provide the exploitation and exploration services and invest in all other equipment on their own and will also have to bear the risk for the same. The contractor receives a fee per net crude oil barrel produced and delivered and will be the sole and exclusive operator of the area. The state will take 25% of the gross income from the sales of the crude oil produced in the contract. To increase the income from the export of crude oil, the Ecuadorian government announced its exit from OPEC citing financial crisis and the need of higher oil revenue that had been cut down by the group's oil price regulation. This led to a job security scare and employment rights among the labour unions across the country. Ecuador sits in the Amazon basin. Here, the indigenous communities have long protested the drilling of oil because it is destroying the environment. Although the amazon region law established in 2018 stated that it is imperative for the companies to hire no less than 70% of the local residents to perform the non-skilled activities, the job security is still at high risk. CONAIE, an umbrella organization of indigenous groups across Ecuador has been in continuous talks with the government for the protection of jobs which are provided by the organizations in the amazon bay area. The most crucial thing to consider while reforming such subsidies is the analyzation of the impact of the removal of the subsidies on the different income groups. As for the poor, it can be regressive in a manner that a larger fraction of revenue of income is spent on the prices of goods that have risen from the removal of the subsidy. If the government is able to reinvest the money saved from such subsidies to shield the poor and vulnerable from the negative impacts into building an efficient social protection program, such as direct cash transfers, it will significantly increase the success of increase in price rise of oil. The removal of subsidies led to protests within the capital Quito. The taxi union has a heavy political influence and the transport sector accompanied them as the low prices of diesel were heavily essential for their mode of operations. The taxi drivers blocked the prominent roads within the city and also the ones leading to the airport. CONAIE joined the protests for the protection of jobs provided by the organizations in the amazon bay area. The reason for protests is the distrust amongst people concerning government policies, whether such policies would be implemented in a corrupt-free manner or not and whether the poor would eventually benefit from it at all. The main issue that the government faced was that they announced the reforms for these subsidies and alongside promised welfare payments for the poor, but did not deliver prior to the implementation of the reform in the subsidy. The poor households, hence, were not able to trust such promises as they were most vulnerable to regressive effects. The compensation mechanisms were not transparent enough to concretely deliver the benefits. The social dialogue was not actively involved in decision making and public opinion was not taken on board to instil confidence in such a huge reform. The distrust in CONAIE grew for the lack of anti-corruption laws. Although Ecuador signed the Inter-American Convention against corruption in 1996, the Citizens' Participation and Social Control Council is in charge of national anti-corruption efforts formed under Ecuador’s constitution. Finally, the United Nations Convention against Corruption was ratified in 2005 and Ecuador does not have specific anti-corruption rules for the oil and gas industry, the very industry that forms a major part of the export of the country.

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