QUITO/NEW YORK (Reuters) – Ecuadorean President Lenin Moreno’s hastily ditched plan to terminate fuel subsidies put an end to days of indigenous-led protests but has left him with few good options to cleanse public accounts and comply with an IMF-backed financing program.

Moreno on Monday officially mothballed the subsidy cuts, which were supposed to save the government nearly $1.5 billion, returning fuel prices to their prior levels and pledging to build a new plan to tackle a $3.6 billion fiscal deficit.

The government has said the new plan will be unveiled later this week, but has given few details on what it will contain. The International Monetary Fund, which has already disbursed over $600 million of its $4.2 billion package, has pledged to work with Moreno to find ways to “protect the most vulnerable in society.”

But economists and political experts said the government faces few good options, with a risk of more protests if the fuel subsidies are seen to be under threat. Already weakened by the clashes, Moreno will now have to rely on the goodwill of lawmakers and gamble on diminishing support for the protesters to get austerity measures over the line.

“For this economic program to succeed it relies upon a resolute Moreno administration to deliver austerity through difficult political conditions,” Siobhan Morden, head of Latin America Fixed Income Strategy at Amherst Pierpont Securities, said in a note.

“The swing factor will be whether the legislature cooperates and whether there is broader solidarity to embrace the adjustment.”

Morden said she expected some fuel subsidy cuts to persist, while a tax reform due to head to lawmakers shortly may need to be tweaked to generate more savings. Further spending cuts would also be necessary.

Ecuadorean bonds were under pressure as the protests began, and eventually fell sharply on concerns over the future of its IMF program after Moreno walked back the subsidy reform.

The 2029 bond traded tmsnrt.rs/2Mo1eo7 at around 108 dollars at the start of October and fell toward 104 mid-month, dropping to 100 on Oct. 15 after markets reopened following the government’s reversal. Shorter-term bonds saw similar price movements.

SUBSIDY CONUNDRUM

Developing countries have long struggled to focus fuel subsidies on the poor, usually opting for programs that end up providing significant benefits to wealthy and middle-class vehicle owners at the expense of state finances.

Targeting subsidies toward people of lower income brackets can make such programs less expensive. But those efforts require cumbersome mechanisms to determine who should be eligible for discounted fuel, and can also spur corruption.

Other measures such as hiking Value-Added Tax (VAT), or eliminating exemptions on specific items, can generate quick revenue but disproportionately hit the poor and generate backlashes.

“One option is to raise the VAT from 12% to 15% (with food excluded) though that would face opposition from the business community and Congress,” Roger Horn of SMBC Nikko Securities America said in a note.

Katrina Butt, a senior economist at AllianceBernstein, said that any dilution of the country’s fiscal goals would likely have to be compensated by more bond issuance in 2020, something that “has been negatively received by the market.”

Most experts agreed, though, that the government would struggle to “square the fiscal circle,” as Nicholas Watson from Teneo put it. Instead, they said, muddling through was the most likely outcome, with the government cutting spending where possible and seeking to avoid fresh confrontation.

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