Ecuador's banks brace for new tax - Blogs - Financial Times

Rafael Correa, Ecuador?s president

Banks in Ecuador are bracing themselves for a new tax on the sector designed to boost welfare payments by about $150m a year.

A bill paving the way for the tax is expected before Ecuador?s congress in the next few weeks, where it is likely to be waved through by legislators hoping to be returned to congress at general elections in February.

It was unveiled last month, shortly before Rafael Correa, Ecuador?s president, launched his campaign for election to a third term last weekend.

?We?ve done a lot but there?s a lot more to be done, to turn this bourgeois state into a truly popular state that would serve everyone, especially the poor,? Correa (pictured) said at a gathering of the ruling Alianza Pa?s coalition in a football stadium in Quito.

Correa, who first came to power in 2007 could easily win, forging ahead with his ?citizens? revolution?. A recent a survey by Cedatos, a pollster, had him winning with 55 per cent of the vote. Still, the 49-year-old US-trained economist, who recently offered asylum to Julian Assange, founder of WikiLeaks, is taking no chances.

The proposed bank tax would levy a 3 per cent charge on local banks? taxable income, and be used to increase monthly stipends paid to low-income Ecuadoreans.

With elections looming, ?increasing the stipend is an electoral move,? says Walter Spurrier, a political economist who runs Grupo Spurrer, a think-tank in Guayaquil.

Banks worldwide have come under the cosh from governments seeking to raise extra revenues and rein in excessive risk-taking. Correa?s plan would also erase tax breaks for the sector, which have cut effective bank tax rates to 15 per cent from 23 per cent, and boost tax rates on assets held abroad and in offshore havens.

The estimated $150m raised by the measure will finance a 30 per cent hike in the $35 a month stipend made by the state directly to 1.8m low income Ecuadoreans, Correa?s powerbase. The government believes the cash-transfer scheme broadly benefits 5m people, in a country with 14m inhabitants. In addition, analysts say the move will undercut Correa?s main opponent, Guillermo Lasso, a former bank president and finance minister. Mr Lasso initially pledged to increase the stipend if he wins, however saying he would not make banks pay for it.

But it will not go down well in the banking sector, which made total profits of about $340m in the first nine months of this year.

?The timing might sound cheeky to many, but the move is perfectly coherent with the president?s policies so far,? a government official told beyondbrics.

Correa and Pedro Delgado, governor of the central bank and the president?s cousin, have long been at odds with banks, blaming them for a financial crisis in the late 1990s that sparked hyperinflation.

Today, Ecuador?s dollarised economy is chalking up impressive growth rates of over 7 per cent a year, although the smallest of the Opec nations depends heavily on commodities and suffers from a shortage of financing sources ? a problem that began with Correa?s default on $3.2bn in foreign debt in 2008.

Since then, Ecuador has met much of its funding needs through bilateral credit agreements, mostly with China, which has already lent an estimated $7.2bn to the Andean nation. Being on the Financial Action Task Force money laundering black list ? something the government regards as politically motivated because of Ecuador?s increasing ties with Iran ? has also made it hard for local banks to raise international loans.

?This government thinks the banks are public services and should not be subjected to private capital,? says Spurrier, the analyst. ?The tendency is, has been, and it seems will be to limit the banks? profits and their room for manoeuvre.?

Related reading:
Ecuador: time to say adios to the dollar?, beyondbrics
Ecuador: going from bad to worse?, beyondbrics
Gazprom: Ecuador?s new petro-amigo, beyondbrics
Ecuador file, beyondbrics

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Source: http://blogs.ft.com/beyond-brics/2012/11/15/ecuadors-banks-brace-for-new-tax/

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