Ecuador to phase out ‘unfair’ gasoline subsidy in late June

Ecuador’s government on Tuesday unveiled a plan to slash subsidies for low-octane gasoline as it continues to adjust public finances amid a war on drug gangs President Daniel Noboa declared in January.

In a first step, prices at the pump are scheduled to jump by about 25 cents from the current $2.47 per gallon and then rise by a maximum of 5% per month with the introduction of a new price band to gradually match international prices. 

“This is something that can’t wait,” said Deputy Economy Minister Cristina Avilés in a press conference at the presidential palace in Quito. “It’s the most unfair and inefficient” of all of the nation’s subsidies, she added.

The plan, which will be rolled out late June, is the second major fiscal move after Noboa imposed an increase of the value-added tax to 15% from 12%, previously one of Latin America’s lowest, in a successful bid to obtain a fresh agreement with the International Monetary Fund that will provide $4 billion over the next four years, plus $8 billion from other multilateral lenders. 

Gasoline prices will be allowed to drop as much as 10% month-to-month in tandem with the global market, too. High-octane gasoline prices aren’t subsidized, however a reference price is set monthly by national oil company Petroecuador.

About 85,000 registered taxis and the motorized rickshaws commonly used as cabs in coastal areas will receive a subsidy to avoid price hikes for consumers, and additional social spending plans are being rolled out, but the measure aims to slash the subsidy by about $500 million annually.

Onerous subsidies for diesel, which make up the bulk of the about $3 billion Ecuador spends on fuel subsidies annually — the same amount spent on public health and three times the amount earmarked for social programs — won’t be touched, Noboa has said.

Balancing Act

Still, unpopular economic measures have cost him politically. His approval rating that soared to 80% in January when he declared the war on the gangs dropped to 53.1% in a survey by local pollster Click Report. A general election is scheduled for Feb. 9. 

Bonds have lost some of their gains year-to-date out of concern that market-friendly Noboa might be replaced by a left-wing politician. According to the Click Report poll, just 29.5% said they would vote for a leftwing candidate, compared with 39% for a centrist and 31.6% for a conservative.

Anti-government demonstrations have so far been small. Rioting followed the snap decision to cancel fuel subsidies including diesel in October 2019 and similar cost-of-living protests paralyzed large areas in June 2022.

A final bitter pill to swallow ahead of the election will come in November, when the government is scheduled to present a plan to the IMF detailing the removal of tax exemptions.