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Ecuador Hikes Taxes, Shuts Banks

March 12, 1999

QUITO, Ecuador (AP) _ In an effort to stem Ecuador’s worst financial crisis in decades, the president announced tax hikes and other tough measures and ordered banks shut until next week to give the government time to implement the program.

The announcement Thursday came as a two-day nationwide strike to protest the government’s economic programs wound down and just hours after the Central Bank’s board of directors, including its president, Luis Jacome, reportedly resigned. Their situation remained uncertain Friday.

After receiving their resignations just before he announced a drastic economic austerity package, President Jamil Mahuad asked the board of directors members to stay on during this time of economic crisis, a Central Bank source said.

The government’s political opponents had accused Jacome of mismanaging Ecuador’s fiscal policy, and had criticized President Jamil Mahuad of acting too slowly to right the economy.

In response, Mahuad is imposing strict measures to ensure the wealthy pay their taxes, to raise revenues with new taxes, and to prevent a run on banks as economic reforms take effect.

Ecuador is locked in its worst economic crisis in recent decades, battered by low prices for its main export, oil, and $2.6 billion in damage from El Nino-powered floods last year.

Inflation is near 50 percent, the highest in Latin America, and the national currency lost a quarter of its value last week.

Stunned Ecuadoreans warned of further protests as the new measures doubled the price of gasoline overnight and the little money people had when the banks were closed Monday runs out.

``This cannot continue. Now we don’t even have money to buy food since the banks have been closed for a week,″ Quito shopkeeper Ricardo Jimenez said today.

Business leaders, who have traditionally paid little taxes, reacted angrily to the tax hikes and Mahuad’s decision to partially restrict bank withdrawals to protect the shaky financial system.

``The president has wasted our time. One does not build a country with more price and tax hikes,″ Joaquin Zevallos, president of Ecuador’s Chamber of Commerce, said today.

In a nationwide television address late Thursday, Mahuad detailed plans to jail tax evaders, eliminate sales tax exemptions except on food and medicine and impose the new taxes on the rich.

Mahuad also announced that banks, which have been closed for four days, would remain shut until Monday.

Mahuad said the country’s rich have to learn they have a duty to pay taxes. ``They should give thanks to God that they have the money to do it,″ he said.

Among other points of his plan to end the $1.2 billion budget deficit:

_ Restrict the amount of money that can be withdrawn from checking and savings accounts.

_ Increase the sales tax from 10 percent to 15 percent, and introduce a luxury tax of 4 percent on cars worth more than $1550.

_ Increase the price of a gallon of gasoline from $1 to $1.90.

Mahuad said the increase in gasoline prices was an emergency measure until Congress approved the increase in the sales tax. He said gasoline prices would be gradually reduced after the sales tax increase went into effect.

Before the president’s announcement, police dispersed protesters with tear gas in isolated street clashes Thursday. No injuries were reported.

Police have arrested 235 people over the two days of protests, with 29 of those detained on Thursday, said Col. Mauro Lopez, head of police anti-riot operations.

Mahuad decreed a 60-day state of emergency Tuesday to offset the double impact of the strike and financial crisis, and ordered machine gun-toting police to guard oil and electricity installations from strikers.

Strikers want Mahuad to back down on earlier austerity measures that have ended fuel subsidies, frozen wages and caused prices to soar for already impoverished Ecuadoreans.

The strike was called by Ecuador’s powerful, leftist-led unions and has the support of student and Indian groups. It has shut down most commerce, costing Ecuadorean businesses $120 million, according to the Quito Chamber of Commerce.

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