How Can Noboa Encourage Job Growth in Ecuador?

Fecha: 06/12/2023

How Can Noboa Encourage Job Growth in Ecuador?

At his swearing-in as Ecuador’s president on Nov. 23, Daniel Noboa highlighted his goal to create jobs through urgent legislative reforms. In order to spur job creation, Noboa isexpected to propose legislation to incentivize hiring, particularly of young people. What are the most important reforms Noboa should push in order to create jobs in Ecuador? Which are the most important industries to target for job creation? What other economic reforms does Ecuador need in order to help grow its economy?

Adrian Pérez Salazar, senior associate at Coronel & Pérez in Guayaquil, Ecuador: “Daniel Noboa emphasized job creation as one of his key campaign promises. Accordingly, on Nov. 28, less than a week after he was sworn in, he presented a bill to the National Assembly titled the ‘Economic Efficiency and Employment Creation Act’ aimed at revitalizing the economy and spurring job creation. Some of the bill’s highlights include the creation of free trade zones, a
new framework for public-private partnerships and tax incentives for hiring younger workers. The National Assembly must now analyze and eventually approve, amend or veto the proposed bill. While most of these reforms are welcomed, it is still unclear whether they will address the
more serious structural problems in the labor markets. In particular, analysts have long pointed out the necessity of reforming the very outdated Ecuadorean labor code. Common-sense amendments such as legalizing hourly wages would bring much-needed flexibility for workers and employers, reducing unemployment and energizing the economy. Implementing
structural labor reforms, however, is easier said than done. Labor laws are an extremely sensitive topic in Ecuador, and many political groups, particularly unions and other workers’ associations, have historically been extremely suspicious of any changes to the labor code. Additionally,

Labor laws are an extremely sensitive  topic in Ecuador…” — Adrian Pérez Salazar

many critical reforms would need approval of the Constitutional Court and perhaps even constitutional amendments to be enacted. As such, it is clear that while President No boa’s proposed reforms are welcomed, there is still much to be done.

Grace Jaramillo, professor at the University of British Columbia and Simon Fraser Uni versity: “President Noboa just sent a lackluster first economic reform to the National Assembly—lackluster because he prioritized tax deductions and even an extremely out of place forgiveness to tax debtors at a moment when Ecuador’s fiscal situation is at its worst since 2018. Even during good times—much less during bad times—it is not good to use tax exemptions as the main tool to attract investment. It is a moral hazard that perpetuates income inequality and a persistent fiscal deficit and therefore low investment in social policies. Noboa can do way more to restart the econ omy by unlocking permits and reducing regulatory burdens to mining projects that are already in the pipeline of approval. Just 10 of them can provide more than 20,000 direct jobs, not counting the many opportunities for small and medium-sized enterprises that provide transportation, hospitality services and procurement to those projects. These mining projects are the low-hanging fruit at this moment, especially now that Yasuní-ITT oil production is staged to close. The energy sector can also jumpstart the economy if Noboa thinks outside the box. One of the fastest and probably the most important ones for resuming energy provision without blackouts is to finally execute the gasifier plant in Guayas. Another idea that can spur the economy and does not imply tax discounts, but rather direct investment, is to ask the largest companies in the country to invest in solar plants in arid zones, through power-purchasing agreements whereby their

It is not good to use tax exemptions as the main tool to attract investment.” — Grace Jaramillo

energy production connects to the rest of the electric system while they receive for their plants and infrastructure the amount of energy their energy plants produce in the country. The plants as assets are theirs, but they provide for their immediate energy needs and the country as a whole, creating energy banks. Mining and energy are the key elements to jumpstart Ecuador’s economy immediately. However, the country’s interna tional attraction for investment will depend on Noboa’s credibility as a fiscal manager, and the reform he just sent for approval is not sending good signals to the world.”

Santiago Mosquera, head of research at Analytica Invest ments in Quito: “President Daniel Noboa unveiled a com prehensive tax reform destined for urgent deliberation in the National Assembly, with the aim of securing approval before the end of the year. Notably, the reform does not introduce new taxes or propose increases in tax rates. Instead, it focuses on invigorating economic activity by extending tax incen tives to corporations, fostering employment opportunities for young workers and offering tax rebates incurred by companies in the construction sector. Moreover, the reform incorporates provisions such as tax amnesty for delinquent taxpayers, a robust framework to bolster free-trade zones and foster pub lic-private partnerships, and incentives for renewable energy projects. Recognizing the historical weakness in tax collection during the early months of the year, especially preceding the influx of income tax revenues in late March and early April, the bill includes a novel approach. It mandates monthly income tax withholdings, equivalent to 3 percent of monthly taxable income, to be remitted by companies to the tax authori ty. These payments will be treated as tax credits during the annual income tax filing. This measure targets 499 major taxpayers identified by the tax authority, which collec tively are responsible for 55 percent of total income taxes, according to official figures. If ratified, this initiative seeks to ensure a more consistent inflow of tax revenues through out the year, albeit potentially affecting companies’ liquidity position, precisely when Ecuador is suffering an economic slowdown and companies face restricted access to bank financing. While the extent of partici pation in the tax amnesty remains uncertain, authorities have expressed optimism re garding potential tax collection, anticipating a figure exceeding $900 million. It’s worth noting that Ecuador has previously employed tax amnesty measures, with concerns raised about their frequency undermining the tax authority’s ability to combat tax crimes.”

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Fuente: Latin America Advisor