## 1ecuea2019001

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### Economic performance and outlook
- Real GDP growth: 1.1 percent for 2018; year-on-year growth in 2018Q3 was 1.4 percent.
- Domestic demand expanded and was met through a rise in imports, particularly following the removal of tariff safeguards.
- Private investment remained relatively strong in 2018 despite deceleration in overall growth.
- Unemployment fell to 3.7 percent in December 2018, while the share of “inadequate employment” increased.
- Cumulative inflation was negative for much of 2018, reflecting slow growth, the overvaluation of the real exchange rate, and broader imbalances.
- Outlook and policy mix:
  - Authorities plan to reduce the non-oil primary balance by 5 percent of GDP over the next three years.
  - Near-term costs to growth are likely from fiscal consolidation; supply-side reforms expected to improve medium-term growth prospects.
  - Inflation likely to remain subdued throughout the next few years.
  - Nominal wage restraint and improving productivity expected to steadily erode the overvaluation of the real effective exchange rate, permitting maintenance of a current account surplus over the medium term.
  - Fiscal consolidation will also enable a moderate build-up of reserves from very low levels.

### Fiscal policy actions and public debt
- Non-oil primary deficit (including fuel subsidies) reduced from 7.6 percent of GDP in 2016 to 5.3 percent of GDP in 2018.
- The 2018 adjustment was largely due to a reduction in capital spending (noted elsewhere as 2.3 percent of GDP) and the temporary effects of a tax amnesty (adding 1 percent of GDP to non-oil revenues).
- 2018 measures included beginning the process of reducing fuel subsidies (elimination of subsidy on super gasoline; reductions for regular gasoline and industrial diesel).
- Government improved public debt transparency by publishing an auditor general report revealing higher public debt and reconciling fiscal stocks and flows for 2018 with minimal discrepancy.
- Debt indicators (staff projections):
  - Debt (% GDP): 46.1 in 2018, projected 49.2 in 2019 and 46.8 in 2020.
  - External debt (% GDP): 40.5 in 2018, projected 42.8 in 2019 and 42.9 in 2020.
- Policy measures to lower debt (Box 2 highlights):
  - Realign public sector wage bill (public sector wages have risen 78 percent since 2007; public employment grew 23 percent from 2005−15).
  - Expected cumulative reduction in the public wage bill of 1 percent of GDP by 2021 through hiring and wage policies.
  - Increase social assistance spending by 0.4 percent of GDP by end of program (front-loaded) to cushion subsidy reforms.
  - Reduce untargeted fuel subsidies around 3 percent of GDP, with further reductions planned for 2021.
  - Reduce capital spending by about 1 percent of GDP by 2021 through better prioritization and procurement.
  - Public debt management reforms: develop domestic debt market, phase out direct placements, issue benchmark securities by auction, accept market rates for issuances.

### Balance of payments, reserves, and external financing
- Current account (% GDP): -0.7 in 2018, projected 0.4 in 2019 and 1.4 in 2020.
- Gross international reserves (GIR in months of imports): 1.0 in 2018, projected 2.5 in 2019 and 3.9 in 2020.
- Ecuador maintained access to external financing:
  - January 2018 issuance of US$3 billion in 10-year bonds at 7.875 percent.
  - January 2019 placement of US$1 billion in 10-year bonds at 10.75 percent.
  - Government used collateral-like debt and repurchase operations as global conditions tightened.
- Gross external financing requirement estimates:
  - 2018: about US$9.4 billion, or 8.8 percent of GDP.
  - 2019 (forecast): US$7.3 billion, or 6.8 percent of GDP.
- NIIP and reserves:
  - NIIP reached -12.9 percent of GDP in 2017 and is forecasted to maintain this level during 2018.
  - At end-2018, GIR stood at US$2.1 billion (about 1¼ months of imports or 12 percent of the Fund’s ARA metric).
  - Net international reserves on the program definition: stock on December 31, 2018 stood at negative US$1.7 billion.

### Program objectives, modalities, access, and conditionality
- Program goals: boost competitiveness and job creation; protect the poor and most vulnerable; fortify institutional foundations for dollarization; improve transparency and governance; strengthen anti-corruption efforts.
- Proposed program: a 36-month Extended Fund Facility with access of US$4.209 billion (SDR 3.035 billion, 435 percent of quota).
- Program features:
  - Quarterly reviews; full Fund resources available as direct budget support.
  - Performance criteria: non-oil primary balance of the NFPS (including fuel subsidies), net international reserves (excluding bank deposits held at the central bank), and social assistance spending.
  - Continuous performance criteria: prevent new external payment arrears; prohibit central bank financing of the NFPS (directly or indirectly through public banks).
  - Indicative quarterly target on overall balance of the NFPS.
- Access and phasing:
  - Access for the 3-year Extended Arrangement proposed at US$4.209 billion (435 percent of quota, SDR 3.035 billion, or about 4 percent of GDP).
  - Access to be made available upon completion of quarterly reviews with the first review to be considered by the Board in June 2019, based on end-March performance criteria.
  - Full amount of Fund access proposed to be used for direct budget support and deposited in the Treasury’s account at the Central Bank of Ecuador.

### Executive Board assessment and staff appraisal (policy recommendations)
- Directors commended authorities for efforts to transform the economy and address macroeconomic and structural challenges.
- Fiscal policy recommendations:
  - Focus adjustment on a combination of expenditure and revenue measures.
  - Realign public sector wage bill.
  - Carefully reduce untargeted subsidies.
  - Reprioritize capital and goods and services spending.
  - Make the tax system more equitable, growth friendly, and simpler.
  - Complement expenditure growth rule with binding annual targets for the non-oil primary balance and publish timely in-year reports.
  - Improve public financial management, budget procedures, procurement practices, and fiscal controls.
- Social protection and human capital:
  - Protect the poor and vulnerable by expanding eligibility of social assistance programs with better targeting and higher benefits.
  - Over the longer term, improve education and health outcomes.
- Structural and competitiveness reforms:
  - Supply-side reforms: more efficient tax system, public wage restraint, enhanced access to formal labor market, improved hiring processes, and better governance.
  - Remove trade barriers, improve business climate, and increase private sector involvement.
- Financial sector and dollarization support:
  - Build financial resilience, remove impediments to financial intermediation, strengthen the central bank, build reserves.
  - Increase oversight of banks and cooperatives; build crisis preparedness and contingency planning.
  - Simplify liquidity regulations and gradually phase out interest rate ceilings.
  - Strengthen operational independence and governance of the central bank and prohibit fiscal financing.
  - Strengthen AML/CFT framework.

### Financial sector, central bank governance, and dollarization
- System-level indicators (selected):
  - Capital to risk-weighted assets: 13.4 percent.
  - Nonperforming loans: 3 percent of bank loans.
  - Liquid assets: 28 percent of short-term liabilities.
- Cooperatives:
  - Account for 16 percent of total system assets and 23 percent of total deposits.
- Sovereign–financial linkages:
  - Total exposure of the commercial banking system to the central government and public banks represents about 38 percent of banks’ net worth (mostly in central government paper).
- Reform direction:
  - Eliminate ceilings on interest rates.
  - Replace complex liquidity regulations with minimum liquidity requirements aligned with international best practices.
  - Strengthen banking resolution, deposit insurance, and the Liquidity Fund; enhance supervisory oversight.
- Central bank institutional reforms:
  - Streamline objectives and functions; introduce an independent central bank Board with fiduciary responsibilities.
  - Strengthen financial and personal autonomy of the central bank; introduce an Audit Committee and reform Internal Audit.
  - Prohibit all direct and indirect central bank financing of the government and NFPS; preserve central bank emergency liquidity support to public banks consistent with prudential norms.
  - Medium-term intent to cover central bank liabilities vis-à-vis banks with international reserves (transition period to accumulate reserves).

### Debt sustainability, stress tests, and risk assessment
- External debt trajectory and sensitivity:
  - External debt projected to decline to 28.3 percent of GDP by 2023, from 37.3 percent in 2017.
  - External debt trajectory sensitive to non-interest current account shocks and terms of trade shocks.
  - A large (30 percent) real exchange rate depreciation would create unstable debt dynamics (characterized as improbable in a dollarized system).
- Public DSA baseline projections (selected):
  - Real GDP growth baseline: 2018: 1.1; 2019: -0.5; 2020: 0.2; 2021: 1.2; 2022: 2.7; 2023: 2.3 (percent).
  - Inflation (GDP deflator, baseline): 2018: 2.0; 2019: -0.7; 2020: 1.2; 2021: 1.4; 2022: 1.1; 2023: 0.9 (percent).
  - Effective interest rate (baseline): 2018: 5.8; 2019: 5.7; 2020: 5.7; 2021: 5.7; 2022: 5.4; 2023: 5.3 (percent).
  - Primary Balance (baseline): 2018: 1.5; 2019: 2.7; 2020: 6.5; 2021: 5.5; 2022: 5.1; 2023: 5.0 (percent of GDP).
- Stress tests:
  - Scenarios include Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Oil Shock; Combined Macro-Fiscal Shock.
  - Real Exchange Rate (30 percent) shock increases external debt markedly (examples: baseline external debt around 37; combined shock 41; real depreciation shock example 52).
- RAM (Risk Assessment Matrix) highlights:
  - External financing shortfalls — Likelihood: Medium; Impact: High.
  - Political and social opposition to policy changes — Likelihood: Medium; Impact: High.
  - Sharp tightening of global financial conditions — Likelihood: High; Impact: High.
  - Lower energy prices — Likelihood: Medium; Impact: High.

### Social protection, earthquake reconstruction, and employment effects
- Social protection commitments:
  - Increase social assistance spending in 2019 by around US$400 million.
  - Maintain a floor on social assistance spending of 1 percent of GDP throughout the life of the program.
  - Expand coverage and benefits for Bono de Desarrollo Humano and other programs; update and modernize the social registry.
- Box 1 — Earthquake Reconstruction (April 2016 7.8 magnitude):
  - Human impact: 671 deaths; some 68,000 households affected.
  - Reconstruction costs estimated at US$3.3 billion.
  - More than 32,000 houses need rebuilding or repair.
  - Public infrastructure damage: 875 schools affected (325 medium to severe), 48 health facilities, 83 km of roads, more than 7,000 km of power lines.
  - Emergency response: >1,500 emergency personnel deployed; 30 shelters set up; medical care to over 31,000 people; cash transfers supporting about 43,000 households.
  - Financing: Solidarity Law temporary VAT increase of 2 percent (raising about 1.6 percent of GDP); grants and loans; almost ¾ of funds went to reconstruction of housing, roads, health and education; remainder to business recovery and employment.
  - Employment impact: reconstruction created more than 50,000 direct jobs and about 126,000 indirect employment opportunities.

### Key statistics (selected values preserved exactly)
- Real GDP growth: -1.2 (2016), 2.4 (2017), 1.1 (Est. 2018), -0.5 (Proj. 2019), 0.2 (Proj. 2020).
- Unemployment (%): 5.2 (2016), 4.6 (2017), 3.7 (Est. 2018), 4.3 (Proj. 2019), 4.7 (Proj. 2020).
- Inflation, average (%): 1.7 (2016), 0.4 (2017), -0.2 (Est. 2018), 0.6 (Proj. 2019), 1.2 (Proj. 2020).
- Revenue (% GDP): 30.3 (2016), 32.0 (2017), 36.3 (Est. 2018), 35.2 (Proj. 2019), 38.3 (Proj. 2020).
- Expenditure (% GDP): 38.6 (2016), 36.6 (2017), 37.2 (Est. 2018), 35.2 (Proj. 2019), 34.6 (Proj. 2020).
- Overall balance (% GDP): -8.2 (2016), -4.5 (2017), -0.9 (Est. 2018), 0.0 (Proj. 2019), 3.8 (Proj. 2020).
- Debt (% GDP): 43.2 (2016), 44.6 (2017), 46.1 (Est. 2018), 49.2 (Proj. 2019), 46.8 (Proj. 2020).
- Broad money (% change): 16.5 (2016), 10.0 (2017), 5.6 (Est. 2018), 1.7 (Proj. 2019), 4.2 (Proj. 2020).
- Credit to the private sector (% change): 6.2 (2016), 16.4 (2017), 14.9 (Est. 2018), 4.4 (Proj. 2019), 5.7 (Proj. 2020).
- Current account (% GDP): 1.3 (2016), -0.4 (2017), -0.7 (Est. 2018), 0.4 (Proj. 2019), 1.4 (Proj. 2020).
- FDI (% GDP): 0.8 (2016), 0.6 (2017), 0.9 (Est. 2018), 1.1 (Proj. 2019), 1.1 (Proj. 2020).
- GIR (in months of imports): 2.7 (2016), 1.1 (2017), 1.0 (Est. 2018), 2.5 (Proj. 2019), 3.9 (Proj. 2020).
- External debt (% GDP): 36.6 (2016), 39.5 (2017), 40.5 (Est. 2018), 42.8 (Proj. 2019), 42.9 (Proj. 2020).

*International Monetary Fund staff report and Executive Board assessment for Ecuador (2019 Article IV consultation and request for an Extended Fund Facility).*

### 1.1 percent for 2018. An expansion in domestic demand has been met through a rise in imports,

### 1ecuea2019001 - 1.1 percent for 2018. An expansion in domestic demand has been met through a rise in imports,

### Economic performance and outlook
- Real GDP growth: 1.1 percent for 2018; year-on-year growth in 2018Q3 was 1.4 percent.  
- Domestic demand expanded and was met through a rise in imports, particularly following the removal of tariff safeguards.  
- Private investment remained relatively strong in 2018 despite deceleration in overall growth.  
- Unemployment fell to 3.7 percent in December 2018, while the share of “inadequate employment” increased.  
- Cumulative inflation was negative for much of 2018, reflecting slow growth, the overvaluation of the real exchange rate, and broader imbalances.  
- Outlook: Authorities plan to reduce the non-oil primary balance by 5 percent of GDP over the next three years. Near-term costs to growth are likely from fiscal consolidation, but supply-side reforms are expected to improve medium-term growth prospects. Inflation is likely to remain subdued throughout the next few years. Nominal wage restraint and improving productivity are expected to steadily erode the overvaluation of the real effective exchange rate, permitting maintenance of a current account surplus over the medium term. Fiscal consolidation will also enable a moderate build-up of reserves from very low levels.

### Fiscal policy actions and public debt
- Non-oil primary deficit (including fuel subsidies) reduced from 7.6 percent of GDP in 2016 to 5.3 percent of GDP in 2018.  
- The 2018 adjustment was largely due to a reduction in capital spending (noted elsewhere as 2.3 percent of GDP) and the temporary effects of a tax amnesty (adding 1 percent of GDP to non-oil revenues).  
- Measures taken in 2018 included beginning the process of reducing fuel subsidies (elimination of subsidy on super gasoline; reductions for regular gasoline and industrial diesel).  
- The government has worked to improve public debt transparency, publishing an auditor general report that revealed public debt was significantly higher than previously stated and reconciling fiscal stocks and flows for 2018 with minimal discrepancy.  
- Debt indicators (from staff projections): Debt (% GDP) was 46.1 in 2018, projected 49.2 in 2019 and 46.8 in 2020. External debt (% GDP) was 40.5 in 2018, projected 42.8 in 2019 and 42.9 in 2020.

### Balance of payments, reserves, and external financing
- Current account (% GDP): -0.7 in 2018, projected 0.4 in 2019 and 1.4 in 2020.  
- Gross international reserves (GIR in months of imports): 1.0 in 2018, projected 2.5 in 2019 and 3.9 in 2020.  
- Ecuador maintained access to external financing during the period: January 2018 issuance of US$3 billion in 10-year bonds at 7.875 percent; January 2019 placement of US$1 billion in 10-year bonds at 10.75 percent. The government also used collateral-like debt and repurchase operations as global conditions tightened.

### Program objectives, modalities, and conditionality
- Program goals: boost competitiveness and job creation; protect the poor and most vulnerable; fortify institutional foundations for dollarization; improve transparency and governance; strengthen anti-corruption efforts.  
- Proposed program: a 36-month Extended Fund Facility with access of US$4.209 billion (SDR 3.035 billion, 435 percent of quota).  
- Program features: quarterly reviews; full Fund resources available as direct budget support; performance criteria on the non-oil primary balance of the nonfinancial public sector (including fuel subsidies), net international reserves (excluding bank deposits held at the central bank), and social assistance spending; continuous performance criteria to prevent new external payment arrears and to prohibit central bank financing of the nonfinancial public sector (directly or indirectly through public banks); quarterly indicative target on the overall balance of the nonfinancial public sector.

### Executive Board assessment and Directors’ recommendations
- Directors commended authorities for efforts to transform the economy and address macroeconomic and structural challenges. Emphasis on strong commitment to sound policies and reforms to reduce balance of payments vulnerabilities, consolidate macroeconomic stability, strengthen dollarization, and foster job creation and sustainable growth.  
- Fiscal policy recommendations:
  - Focus adjustment on a combination of expenditure and revenue measures.
  - Realign public sector wage bill.
  - Carefully reduce untargeted subsidies.
  - Reprioritize capital and goods and services spending.
  - Make the tax system more equitable, growth friendly, and simpler.
  - Complement existing expenditure growth rule with binding annual targets for the non-oil primary balance and publish timely in-year reports to assess compliance with fiscal rules.
  - Improve public financial management, budget procedures, procurement practices, and fiscal controls.
- Social protection and human capital:
  - Protect the poor and vulnerable by expanding eligibility of social assistance programs with better targeting and higher benefits.
  - Over the longer term, improve education and health outcomes.
- Structural and competitiveness reforms:
  - Supply-side reforms to restore competitiveness: more efficient tax system, public wage restraint, enhanced access to formal labor market, improved hiring processes, and better governance.
  - Remove trade barriers, improve the business climate, and increase private sector involvement.
- Financial sector and dollarization support:
  - Build financial resilience, remove impediments to financial intermediation, and strengthen the central bank, including building international reserves.
  - Increase oversight of banks and cooperatives and build crisis preparedness and contingency planning capabilities.
  - Simplify liquidity regulations and gradually phase out interest rate ceilings to support greater access to financial intermediation.
  - Strengthen operational independence and governance of the central bank and restrict it from providing fiscal financing.
  - Strengthen the effectiveness of the AML/CFT framework.

### Key statistics (selected from staff table; values preserved exactly)
- Real GDP growth: -1.2 (2016), 2.4 (2017), 1.1 (Est. 2018), -0.5 (Proj. 2019), 0.2 (Proj. 2020).  
- Unemployment (%): 5.2 (2016), 4.6 (2017), 3.7 (Est. 2018), 4.3 (Proj. 2019), 4.7 (Proj. 2020).  
- Inflation, average (%): 1.7 (2016), 0.4 (2017), -0.2 (Est. 2018), 0.6 (Proj. 2019), 1.2 (Proj. 2020).  
- Revenue (% GDP): 30.3 (2016), 32.0 (2017), 36.3 (Est. 2018), 35.2 (Proj. 2019), 38.3 (Proj. 2020).  
- Expenditure (% GDP): 38.6 (2016), 36.6 (2017), 37.2 (Est. 2018), 35.2 (Proj. 2019), 34.6 (Proj. 2020).  
- Overall balance (% GDP): -8.2 (2016), -4.5 (2017), -0.9 (Est. 2018), 0.0 (Proj. 2019), 3.8 (Proj. 2020).  
- Debt (% GDP): 43.2 (2016), 44.6 (2017), 46.1 (Est. 2018), 49.2 (Proj. 2019), 46.8 (Proj. 2020).  
- Broad money (% change): 16.5 (2016), 10.0 (2017), 5.6 (Est. 2018), 1.7 (Proj. 2019), 4.2 (Proj. 2020).  
- Credit to the private sector (% change): 6.2 (2016), 16.4 (2017), 14.9 (Est. 2018), 4.4 (Proj. 2019), 5.7 (Proj. 2020).  
- Current account (% GDP): 1.3 (2016), -0.4 (2017), -0.7 (Est. 2018), 0.4 (Proj. 2019), 1.4 (Proj. 2020).  
- FDI (% GDP): 0.8 (2016), 0.6 (2017), 0.9 (Est. 2018), 1.1 (Proj. 2019), 1.1 (Proj. 2020).  
- GIR (in months of imports): 2.7 (2016), 1.1 (2017), 1.0 (Est. 2018), 2.5 (Proj. 2019), 3.9 (Proj. 2020).  
- External debt (% GDP): 36.6 (2016), 39.5 (2017), 40.5 (Est. 2018), 42.8 (Proj. 2019), 42.9 (Proj. 2020).

*International Monetary Fund staff report and Executive Board assessment for Ecuador (2019 Article IV consultation and request for an Extended Fund Facility).*

### Box 1. Earthquake Reconstruction

### Box 1. Earthquake Reconstruction

### Earthquake impact and damage
- On April 2016 Ecuador was hit by a 7.8 magnitude earthquake mainly affecting the coastal provinces of Manabí and Esmeraldas.
- The earthquake killed 671 people and affected some 68,000 households.
- The authorities’ joint assessment with the UN’s Economic Commission for Latin America and the Caribbean estimated reconstruction costs of US$3.3 billion.
- More than 32,000 houses need to be rebuilt or repaired.
- Public infrastructure damage:
  - 875 schools were affected (of which 325 suffered medium to severe damage).
  - 48 health facilities (e.g., clinics and hospitals).
  - 83 km of roads.
  - more than 7,000 km of power lines.
  - damage to telecommunications and water facilities.

### Emergency response and immediate relief
- The emergency and initial response involved dispatching more than 1,500 emergency personnel to the affected areas.
- Within the first two weeks of the disaster the government:
  - restored water and electricity access to most of the affected areas,
  - set up 30 shelters,
  - provided medical care to over 31,000 people.
- The government gave cash transfers for food, and for families to find shelter (supporting about 43,000 households).

### Financing the emergency response and reconstruction
- The government raised revenues to finance the emergency response and reconstruction.
- The “Solidarity Law” included a temporary increase in the VAT rate of 2 percent (raising about 1.6 percent of GDP).
- The government also received grants, and loans to finance the post-earthquake efforts.
- Almost ¾ of the funds went towards reconstruction of housing, roads, health and education facilities with the remainder used to help businesses recover and provide employment opportunities.

### Employment and economic outcomes from reconstruction
- The reconstruction work and the restart of economic activity has created more than 50,000 direct jobs, and about 126,000 indirect employment opportunities.

*Source: 1ecuea2019001 - Box 1. Earthquake Reconstruction*

### Box 2. Calibrating Ecuador’s Debt Ceiling

### Box 2. Calibrating Ecuador’s Debt Ceiling

### Methodology for calibrating the debt ceiling
- Sequential three-step approach:
  - (1) Estimate a “maximum debt limit” from cross-country data that keeps the probability of debt distress below a specific level.  
    - A probit model was used, based on a sample of oil-exporting emerging markets, to estimate the probability of debt distress (i.e. when the EMBI spread exceeds 1000 bps) at different levels of public debt-GDP.  
    - The model controls for global factors (the degree of global risk aversion, level of oil prices) and Ecuador-specific inputs (quality of institutions, history of default, level of the fiscal deficit).
  - (2) Simulate a distribution for future debt outcomes based on the past distribution of key macroeconomic variables.  
    - This distribution embeds a fiscal reaction function estimated from past outcomes for Ecuador that yields an estimate of the primary balance, conditional on the macroeconomic outcomes for each stochastic simulation.
  - (3) Derive a debt ceiling that ensures the probability of exceeding the maximum debt limit over the next six years is kept below a chosen risk tolerance (e.g., 15 percent).

### Core quantitative findings
- Probit model implications for Ecuador:
  - Keeping the probability of debt distress below 10 (15) percent would require keeping debt below 47 (57) percent of GDP.
- Derived debt ceiling (six-year horizon):
  - Ensuring the probability of exceeding the maximum debt limit over the next six years is kept below 15 percent implies a debt ceiling of about 30 percent of GDP.
- Sensitivity and alternative scenario:
  - Assuming a more prudent fiscal reaction function than historically observed implies a 40 percent of GDP debt ceiling could be appropriate, but only at risk tolerance levels and debt distress probabilities above 10 percent.
  - In the longer term it would be desirable to reduce the debt ceiling to at least 30 percent.

### Graphical/forecast elements (as described)
- The analysis produces a 6-year forecast of Ecuador public debt-to-GDP with empirical distribution quintiles and identifies:
  - Maximum Debt Limit (percent of GDP)
  - Risk Tolerance (percent)
  - Buffer
  - Debt Ceiling (percent of GDP)
- Two fiscal adjustment bases were considered:
  - Debt Ceiling - Market-led Fiscal Consolidation (debt ceiling obtained on the basis of primary balance forecast path necessary to implement a fiscal adjustment capable of closing market financing gaps).
  - Debt Ceiling - Estimated Past Behaviour (debt ceiling obtained on the basis of estimated fiscal reaction function for a sample of commodity-exporting emerging markets).

### Policy measures linked to debt and fiscal consolidation
- Realigning public sector wage bill:
  - Public sector wages have risen 78 percent since 2007 and are now on average twice as high as private sector wages.
  - Public employment grew by 23 percent from 2005−15.
  - Government measures: 10 percent reduction in the number of state enterprise workers; renew only one of every two expiring contracts in the non-social sectors; bring wages of newly hired public employees into line with private sector wages.
  - Expected impact: cumulative reduction in the public wage bill of 1 percent of GDP by 2021.
- Increasing social assistance spending:
  - Fiscal plan builds in an additional 0.4 percent of GDP of social assistance spending by the end of the program, phased in a front-loaded way to cushion the impact of reduction of fuel subsidies.
- Optimizing fuel subsidies:
  - Untargeted fuel subsidies are currently around 3 percent of GDP.
  - Authorities have announced reductions in subsidies on gasoline and industrial diesel and further reductions are planned for 2021.
  - Subsidies are ad valorem; the subsidy bill is being reduced in 2019 by the decline in global oil prices.
- Greater efficiencies in goods and services spending:
  - Improved procurement practices (particularly in health) and stronger controls on expenditure commitments; small savings from travel expense reductions.
- Reductions in capital spending:
  - Ecuador has very high levels of public capital spending relative to the region.
  - Evidence suggests as much as 20 percent of recorded capital spending may be misclassified current spending.
  - Government intends to reduce capital spending by about 1 percent of GDP by 2021, largely through better prioritization of projects and improvements in procurement practices.
- Public debt management reforms:
  - Develop a domestic debt market by phasing out direct placements; issuing benchmark securities through auction mechanisms; accepting market interest rates for issuances.
  - Enhance communication with market participants, improve debt statistics, and formulate and publish a medium-term debt management strategy.

### Fiscal framework and institutional reforms (priority changes summarized from Box 3)
- Fiscal rules:
  - Ensure effective operation of the expenditure rule and consistency with the Constitutional “golden rule”.
  - Modify definitions so the expenditure rule and debt anchor apply to the nonfinancial public sector.
  - Establish binding annual targets for the non-oil primary balance consistent with the debt anchor within a fully articulated medium-term fiscal framework.
  - Specify explicit escape clauses, automatic correction mechanisms, and in-year fiscal reporting.
  - Ensure rules on accumulation of stabilization fund assets do not jeopardize compliance with fiscal rules.
  - Over the medium-term, consider lowering the debt ceiling below 40 percent to build additional fiscal buffers following oil price booms.
- Budget preparation, execution and control:
  - Limit Executive discretion to amend the budget; introduce robust framework for allocating budget contingencies.
  - Prepare the annual budget through a top-down, medium-term, and transparent process; impose hard annual budget and medium-term expenditure ceilings on all central government entities.
  - Develop, implement, and disseminate a mandatory methodology for cash projections.
  - Prepare a plan for reduction in the current stock of Treasury Certificates and restrict new issuance to facilitate cash management only; treat such instruments as part of existing stock of public debt for fiscal purposes.
  - Strengthen budget controls, including requiring entry of expenditure commitments into Ecuador’s information management system (E-SIGEF).
  - Eliminate the Cuenta de Financiamento de Derivados Deficitarios from the central government budget and record it as current transfers.
  - Improve legislation, information systems, and perform a survey to identify, prevent, and clear domestic arrears.
- Fiscal transparency:
  - Publish a summary of fiscal measures underpinning the budget with full quantification and a statement of fiscal risks in the draft budget submitted to Parliament.
  - Publish quarterly fiscal reports that monitor budget execution and compliance with fiscal rules.
  - Undertaking a Fiscal Transparency assessment may provide useful guidance.
- Longer-term reform considerations:
  - Make the fiscal framework more appropriate for resource-dependent economies by building liquid financial assets (managed through a sovereign wealth fund); adopt net (financial) wealth as the fiscal anchor; and undertake a societal debate on intergenerational transfer of net wealth.

### Governance, transparency, AML/CFT, and central bank reforms
- Public debt and fiscal reporting:
  - Recent publication of public debt data closer to international standards; commitment to bring all fiscal reporting in line with international standards and publish quarterly fiscal reports for the nonfinancial public sector.
- Central bank transparency and independence:
  - Central bank published financial statements; authorities intend to change legislation to allow publication of auditors’ opinion and notes and implement IFRS for the central bank’s accounts in a phased way.
  - Government intends to fully prohibit all direct and indirect central bank financing of the government and nonfinancial public sector (covering purchases of bonds by the central bank, temporary advances, lending, provision of guarantees). The 2018 Law on Productive Development already introduced prohibitions on the purchase of new public securities by the central bank and on new central bank funding to public banks that is subsequently invested in securities issued by public sector entities.
  - Central bank emergency liquidity support to public banks would be preserved, consistent with prudential norms.
  - A new legal framework will require the central bank, over time, to cover all its liabilities vis-à-vis banks with international reserves; a transition period is needed to accumulate sufficient reserves.
  - Historical context: In 2016−17, the government drew around US$4.5 billion in central bank financing for the budget and used central bank resources to fund state banks and support quasi-fiscal operations.
- Oil sector transparency and governance:
  - Plans to publish audited financial statements of state-owned oil companies, increase transparency of employment policies in oil companies, and review governance structures; Ecuador is working to gain membership of the Extractive Industries Transparency Initiative.
- Anti-corruption and AML/CFT steps:
  - Transitional Citizens’ Participation and Social Control Council and a Presidential corruption task force established.
  - Proposed measures include enhancing independence and powers of law enforcement agencies and the judiciary; strengthening domestic and international anti-corruption coordination; improving access to information about government operations; strengthening procurement processes (statutorily requiring publication of all procurement contracts and winning bids/companies); and improving asset declaration regime for senior officials.
  - AML/CFT: develop a national risk assessment that gives proper consideration to corruption-related threats; ensure banks and relevant entities monitor business relationships with senior officials; ensure proceeds of acts of corruption can be frozen, seized and confiscated.

*Source: Box 2. Calibrating Ecuador’s Debt Ceiling (excerpt).*

### 34.      Drawing on Fund technical assistance, further steps are intended to strengthen the

### 1ecuea2019001 - 34.      Drawing on Fund technical assistance, further steps are intended to strengthen the

### Central bank institutional framework and governance
- The central bank’s current legal framework contains multiple and unwieldy objectives and functions; the government intends to streamline these in line with best practice for dollarized economies.
- Plans to improve governance and institutional autonomy include introduction of an independent central bank Board with fiduciary responsibilities toward the central bank (the Board would take over responsibilities of the existing Monetary Board composed of ministerial representatives and a delegate representing the President).
- Strengthening of financial autonomy and personal autonomy (i.e. the criteria and procedures for the appointment and dismissal of Board members) is intended.
- Introduction of strong internal mechanisms to ensure proper audit and accountability:
  - An Audit Committee, currently lacking, will be introduced.
  - The central bank’s Internal Audit function will be reformed in line with best practice.
- Medium-term intention to strengthen the BCE’s balance sheet, including by dealing with contingent liabilities linked to the legacy of the liquidated banks from the crisis in the 90s.

### A more resilient financial system — current conditions and risks
- System-level indicators:
  - Capital to risk-weighted assets is 13.4 percent.
  - 3 percent of bank loans are nonperforming.
  - Liquid assets are 28 percent of short-term liabilities.
- Recent dynamics:
  - Deposits and credit contracted in 2015 but pressures eased in 2016 as oil prices recovered and new regulations required commercial banks to repatriate overseas assets.
  - Private credit is growing at 15 percent y-o-y (largely financing household consumption) while deposits have been flat over the past year.
  - Eroding liquidity could raise prospects for nonperforming loans; liquidity risks could materialize if oil prices decline further.
- Cooperatives:
  - Cooperatives account for 16 percent of total system assets and 23 percent of total deposits.
  - Reports of rapid growth and increasing stress in cooperatives; expansion unlikely to create systemic strains but tighter financial supervision is warranted to prevent regulatory arbitrage.

### Impediments to financial intermediation and sovereign–financial linkages
- Total exposure of the commercial banking system to the central government and public banks represents about 38 percent of banks’ net worth (mostly in central government paper).
- Contributing regulatory features:
  - Liquidity requirements include at least 60 percent of liquid assets must be domestic assets and about 17 percent of deposits must either be deposited at the central bank or held in other liquid instruments.
  - Ceilings on interest rates and a complex system of bank liquidity regulations constrain competition and resource allocation.
- Reform direction:
  - Eliminate ceilings on interest rates to allow financial resources to be allocated according to relative risk and term.
  - Replace the complex system of bank liquidity regulations with minimum liquidity requirements aligned with international best practices.
  - Authorities intend to articulate a clear plan of action for such reforms during the course of the arrangement, drawing on planned Fund technical assistance.

### Financial oversight, crisis preparedness, and supervisory measures
- Government intentions to improve oversight and crisis preparedness include:
  - Enhancing the banking resolution and crisis preparedness framework, including reviewing the adequacy of the financial safety net (deposit insurance scheme and the Liquidity Fund) coverage parameters and more clearly defining the deposit insurance fund’s role in bank resolution. This may involve changes to institutional arrangements and legal powers of regulatory agencies (technical assistance requested).
  - Enhancing effectiveness of financial oversight by monitoring household indebtedness, collecting information on housing prices, and possibly imposing prudential limits on loan-to-value and debt-to-income ratios; and examining the need for cyclical factors in certain regulatory requirements.
  - Supporting the recently-started diversification of the deposit insurance fund’s assets away from Ecuadorian sovereign risks.

### Reducing labor market rigidities and improving competitiveness
- Supply-side measures intended to strengthen the external position:
  - Allow less-rigid labor contracts to support increased female labor force participation and youth employment; continue policies supporting families with young children and provision of childcare programs.
  - Increase the probation period prior to an open-ended contract to make hiring more attractive and support job creation.
  - Reduce hiring and firing costs by eliminating severance payments for workers that voluntarily resign.
- Public policy to foster higher private sector productivity:
  - Total factor productivity growth in Ecuador has been negative for much of the past decade.
  - Government role to support private investment through:
    - Building a framework for public private partnerships to attract private capital into infrastructure investments.
    - Allowing private sector companies to operate certain public functions as concessions while retaining public ownership.
    - Continuing trade liberalization and seeking trade agreements with regional and international partners (Ecuador is committed to join the Pacific Alliance in the near future).

### Program modalities, balance of payments need, and reserves
- Balance of payments assessment:
  - Ecuador faces high gross external financing needs, low international reserves, significant BOP vulnerabilities, and an overvalued real effective exchange rate.
  - Fund resources, in the form of direct budget support, would provide near-term balance of payments financing as fiscal position improves.
  - With better fiscal outturn, gross international reserves are expected to increase to 63 percent of the ARA metric by the end of the arrangement.

### Access, phasing, and budget support
- Access and phasing:
  - Access for the 3-year Extended Arrangement is proposed at US$4.209 billion (435 percent of quota, SDR 3.035 billion, or about 4 percent of GDP).
  - Access will be made available upon completion of quarterly reviews with the first review to be considered by the Board in June 2019, based on end-March performance criteria.
- Budget support:
  - The full amount of Fund access under the arrangement is proposed to be used for direct budget support.
  - Fund resources would be deposited in the Treasury’s account at the Central Bank of Ecuador and drawn down as needed to finance the budget.
  - A memorandum of understanding will be established between the central bank and the government on respective roles and obligations.

### Conditionality and monitoring
- Program performance monitored by quarterly reviews with instruments including:
  - A floor on the non-oil primary balance, inclusive of spending on fuel subsidies, of the nonfinancial public sector (quantitative performance criterion, QPC).
  - Non-accumulation of external payment arrears by the nonfinancial public sector (continuous performance criterion (PC)).
  - A floor on the change in the stock of central bank’s net international reserves (NIR), excluding bank deposits held at the Central Bank (QPC). If there is new market financing, an adjustor to the NIR floor would require those resources be held in the nonfinancial public sector’s deposits at the central bank.
  - Zero new gross central bank financing of the non-financial public sector, either directly or indirectly through publicly owned banks (continuous PC).
  - A floor on social assistance spending of the central government (QPC).
  - A floor on the overall balance of the nonfinancial public sector (indicative target (IT)).
- Prior actions already taken by government:
  - Prohibited quasi-fiscal operations of the Central Bank, as well as any direct or indirect lending to the non-financial public sector, including via public banks, through a decision of the Monetary Board (Junta de Política y Regulación Monetaria y Financiera).
  - Published the Central Bank’s financial statements.
  - Provided detailed information on external non-financial public-sector debt, including information on all collateralized debt and debt with similar arrangements, enabling consolidated non-financial public debt compilation based on GFSM2014.

### Selected borrowing arrangements (Box 4)
- Ecuador does not have borrowing arrangements that are legally collateralized but has non-standard borrowing arrangements:
  - Repurchase Agreements and Derivatives Agreements (current debt stock less than US$1.5 billion).
  - Derivatives transaction: government received a loan of US$500 million from the international bank; both the derivatives transaction and the loan have a term of 35-months, expiring in September 2020. The derivatives transaction involved delivery of a combination of gold and bonds with gold replaced on the central bank’s balance sheet with derivatives; this gold is excluded from measurement of gross and net international reserves for program conditionality purposes.
  - Two repurchase agreements: government received a total of US$1 billion in the course of the two transactions.
  - Borrowing with restricted funds (current stock of approximately US$3.5 billion) from certain Chinese banks related to off-take agreements and tied project tranches.

### Financing assurances, capacity to repay, and arrears
- Financing assurances:
  - Program is fully financed with firm commitments for financing in the first 12 months and good prospects thereafter; remainder of gross external financing need in 2019 expected to be met from IFI disbursements, including Fund budget support.
- Capacity to Repay:
  - If all purchases are made as scheduled, Ecuador’s projected payments obligations to the Fund would peak in 2026 at SDR 0.586 billion.
  - Obligations relative to exports and reserves are at the high end compared with other program cases due to full dollarization.
  - Assuming steadfast program implementation, public debt is expected to be sustainable.
- Lending into arrears:
  - Residual arrears to international private bond holders amount to US$52 million (including accrued interests) arising from outstanding claims repudiated in 2008/2009; authorities contracted an international advisor to search for and negotiate with these creditors.
  - Authorities indicate no outstanding arrears to bilateral or multilateral creditors.

### Safeguards, statistical support, and macro-financial analysis
- Safeguards Assessment:
  - The BCE safeguards assessment will be updated before the first program review; the June 2017 assessment raised serious concerns about BCE’s institutional framework, including subordination to the government and lack of autonomous objectives. Program includes structural reforms to restore BCE’s autonomy and strengthen governance and accountability.
- Statistics:
  - Authorities will continue to receive technical assistance on government finance statistics, national accounts, balance of payments, and monetary and financial sector statistics.
- Determinants of Ecuador’s spreads (summary of Box 5):
  - EMBI spread in Ecuador is negatively correlated with oil prices and positively correlated with global risk-aversion.
  - An improvement in the cyclically adjusted primary balance of 1 percent of GDP can reduce the EMBI spread by about 34bps.
  - A 1 percent of GDP reduction in public debt reduces the EMBI spread by 7bps.
  - Fiscal consolidation and reduction in the debt-to-GDP ratio under the authorities’ policy plan could lower Ecuador’s sovereign spread by 175 basis points.

### Staff appraisal — policy priorities and expected outcomes
- Planned actions to strengthen the fiscal position and increase competitiveness will help reduce vulnerabilities, put dollarization on a stronger footing, and support growth and job creation over time.
- Restoring prudence to fiscal policy:
  - Government plans to reduce non-oil primary deficit including fuel subsidies by 5 percent of GDP over the next three years.
  - Fiscal reform should address excessive public spending and inefficiencies in the tax system; realignment of the public sector wage bill, optimization of fuel subsidies, and reduction in public spending on capital and goods and services are important.
  - Tax reform should aim to be more equitable, growth-friendly, and simpler.
  - Near-term headwinds to growth from fiscal efforts are acknowledged but viewed as laying the foundation for more sustainable and equitable growth.

*IMF staff summary based on the provided chapter text.*

### 53.      The efforts being taken to lower the debt-to -GDP ratio and to complement the

### 1ecuea2019001 - 53.      The efforts being taken to lower the debt-to -GDP ratio and to complement the

### Fiscal framework and credibility
- Efforts to lower the debt-to -GDP ratio and to complement the existing expenditure growth rule with annual targets for the non-oil primary balance will strengthen confidence in the government’s fiscal plans.
- The intention to increase transparency and accountability through the publication of timely and periodic in-year fiscal reports to assess compliance with fiscal rules will further strengthen the credibility of the fiscal responsibility framework.
- Over time, better public financial management systems, improved budget procedures, improved procurement practices, and more rigorous fiscal controls will increase the effectiveness and efficiency of fiscal operations.

### Social protection and equity
- It is essential to maintain the government’s strong commitment to protecting the poor.
- To prevent a deterioration of social conditions and maintain societal support for their economic plan, the government should:
  - move as quickly as possible to expand eligibility for social assistance,
  - improve targeting, and
  - increase the generosity of social assistance programs.
- Expanding and improving social assistance is an important prerequisite for further steps in phasing out the existing system of untargeted fuel subsidies.
- Over time, greater access to high quality primary education and health care will help build human capital and offer a path of opportunity and upward social mobility to all of Ecuador’s citizens.

### Supply-side reforms and competitiveness
- Increasing competitiveness and productivity needs to be at the core of supply-side efforts.
- Recommended reforms include:
  - create a more efficient tax system,
  - maintain restraint in public wages,
  - eliminate rigidities in wages and prices,
  - improve the reliability and efficiency of the energy sector and capital markets, and
  - tackle corruption.
- There is scope to remove trade barriers, improve the business climate, and create opportunities for greater private sector involvement both in infrastructure provision and in a range of services currently provided by public entities.

### Financial sector, dollarization, and central bank governance
- Building financial resilience, removing impediments to effective financial intermediation, and strengthening the governance framework of the central bank will support the dollarized system.
- Planned efforts include:
  - further strengthen oversight for banks and cooperatives,
  - build up crisis-preparedness and contingency-planning capabilities,
  - redesign the complex system of bank liquidity regulations and interest rate ceilings to simplify the system and support greater access to financial intermediation.
- Proposed steps to make the central bank more operationally independent, to strengthen its governance, and to prohibit it from providing fiscal financing will have an important impact in bolstering dollarization.

### IMF support and program actions
- Staff fully supports the authorities’ request for a 36-month Extended Fund Facility.
  - The government’s economic plans are described as well-designed to reduce Ecuador’s vulnerability to downside risks, protect society’s most vulnerable, and support growth and job creation.
- Staff also supports Board approval for the retention for a one-year period of the exchange restriction arising from the foreign exchange outflow tax given that it is maintained for BOP reasons, is temporary and non-discriminatory.

*Document: 1ecuea2019001 - 53.*

### 59.      It is recommended that the next Article IV consultation takes place on a 24-month

### It is recommended that the next Article IV consultation takes place on a 24-month cycle.

### Recent economic developments and outlook
- Real GDP: historical and projected series show 2014–2018 and projections through 2023, including values such as "3.8", "0.1", "-1.2", "2.4", "1.1", "-0.5", "0.2", "1.2", "2.7", "2.3" (percent change, unless otherwise indicated).
- Consumer price index (period average): "3.6", "4.0", "1.7", "0.4", "-0.2", "0.6", "1.2", "1.6", "1.3", "1.1" (percent).
- Unemployment rate: series includes "3.8", "4.8", "5.2", "4.6", "3.7", "4.3", "4.7", "4.8", "4.6", "4.5" (percent).
- Oil and non-oil exports: exports series and oil-specific volatility (e.g., oil export volumes and oil price Ecuador mix: various annual values including "84.0", "42.1", "34.5", "45.6", "60.4", "47.8", "48.7", "49.4", "50.0", "50.7" (US$ per barrel)).

### Fiscal developments and public finances
- Revenue and expenditure trends (millions of U.S. dollars and percent of GDP):
  - Revenue (percent of GDP): "39.2", "38.4", "33.6", "30.3", "32.0", "36.3", "35.2", "38.3", "35.5", "34.8", "34.7".
  - Expenditure (percent of GDP): "43.7", "43.6", "39.7", "38.6", "36.6", "37.2", "35.2", "34.6", "32.6", "32.0", "31.8".
  - Overall balance (deficit -) (percent of GDP): "-4.6", "-5.2", "-6.1", "-8.2", "-4.5", "-0.9", "0.0", "3.8", "2.9", "2.8", "2.9".
- Primary balance (percent of GDP): e.g., "-3.5", "-4.2", "-4.7", "-6.7", "-2.4", "1.5", "2.7", "6.5", "5.5", "5.1", "5.0".
- Non-oil primary balance (percent of GDP): "-7.3", "-7.4", "-4.0", "-6.7", "-4.2", "-1.8", "-1.5", "0.7", "1.1", "1.1", "1.2".
- Public debt (percent of GDP, gross consolidated NFPS): "20.0", "27.1", "33.8", "43.2", "44.6", "46.1", "49.2", "46.8", "45.2", "40.8", "36.6".
- Public debt (millions of US$): series including "19,056", "27,543", "33,558", "43,139", "46,533", "49,597", "52,293", "50,393", "49,986", "46,824", "43,383".

### Fiscal operations and financing
- NFPS revenue and expenditure levels (millions of US$): revenue and expenditure rows show annual numbers such as revenue "37,260", "39,032", "33,322", "30,314", "33,426", "38,991", "37,465", "41,291", "39,215", "39,924", "41,080"; expenditure "41,607", "44,346", "39,398", "38,540", "38,154", "40,011", "37,441", "37,238", "36,034", "36,762", "37,639".
- Gross financing needs (millions of US$): e.g., "6,741", "11,035", "14,181", "19,086", "17,475", "8,889", "5,903", "2,523", "1,442", "3,149", "2,933".
- Amortization schedule (millions of US$): total amortization draws out annual external amortization levels such as "1,706", "3,549", "3,985", "3,336", "4,012", "4,871", "3,715", "4,880", "2,547", "4,979", "4,262".
- Net financing (millions of US$): NFPS net financing series includes "4,348", "5,314", "6,076", "8,226", "4,728", "1,020", "-24", "-4,053", "-3,181", "-3,162", "-3,441".

### External position and balance of payments
- Current account (millions of US$): series includes "-944", "-678", "-2,223", "1,324", "-373", "-766", "427", "1,557", "1,706", "1,730", "1,966".
- Trade balance and components (millions of US$):
  - Trade balance: e.g., "-529", "-63", "-1,650", "1,567", "311", "-174", "1,341", "2,248", "2,091", "1,950", "1,966".
  - Exports, f.o.b.: "25,587", "26,596", "19,049", "17,425", "19,618", "22,141", "22,122", "23,121", "23,396", "24,098", "24,928".
  - Imports, f.o.b.: "26,115", "26,660", "20,699", "15,858", "19,307", "22,315", "20,781", "20,873", "21,304", "22,147", "22,962".
- Financial account and other flows:
  - Financial account (millions of US$): series includes "-2,869", "-411", "-769", "-798", "1,542", "-920", "-1,007", "468", "-588", "1,358", "945".
  - Other public sector flows and disbursements: disbursements row shows large movements (e.g., disbursements " -5,172", "-8,013", "-7,105", "-9,430", "-9,252", "-7,819", "-5,006", "-2,013", "-1,551", "-1,887", "-2,302"; amortizations shown separately).
- Overall balance and financing (millions of US$): overall balance series "1,846", "-424", "-1,488", "1,207", "-1,859", "225", "1,508", "1,162", "2,369", "448", "1,100".
- Gross international reserves (GIR, millions of US$): values include "3,762", "2,351", "4,216", "2,006", "2,158", "4,999", "7,761", "11,397", "11,845", "12,944".
- Net international reserves (program definition, US$ millions): series includes "1,065", "423", "-961", "-2,271", "-1,677", "1,419", "3,935", "7,455", "7,596", "8,380".

### External financing and financing gaps
- Gross external financing requirements (millions of US$): "4,328", "6,844", "8,802", "5,092", "8,075", "9,481", "7,263", "7,344", "4,942", "7,203", "6,121".
- Identified external financing (millions of US$): "6,174", "6,419", "7,313", "6,299", "6,217", "9,706", "8,771", "8,506", "7,311", "7,651", "7,221".
- IMF financing and exceptional financing: IMF net financing and exceptional financing lines appear for specific years (e.g., IMF Net Financing entries with values including "365", "1,357", "1,222", "1,267" in projections tables).
- Financing gap (millions of US$): series includes "321", "335", "556", "510", "1,357", "1,222", "1,267", "0", "0", "0", "0" (difference between total external financing sources and identified external financing).

### Monetary, banking, and financial system recovery
- Gross international reserves and net foreign assets (millions of US$): GIR and net foreign assets rising in projections to GIR "11,397", "11,845", "12,944", and net foreign assets series e.g., "10,750", "10,426", "8,355", "10,261", "9,218", "8,875", "10,794", "12,148", "15,267", "15,865", "17,097".
- Credit to the private sector (millions of US$ and percent of GDP): values show expansion: e.g., "26,812", "29,157", "28,169", "29,910", "34,805", "39,994", "41,756", "44,137", "47,753", "51,128", "54,557"; credit-to-GDP percent series includes "28.2", "28.7", "28.4", "29.9", "33.4", "37.2", "39.3", "41.0", "43.2", "44.5", "46.0".
- Financial soundness indicators (selected, end-of-period):
  - Regulatory capital to risk-weighted assets (CAR): "12.4", "13.0", "12.8", "11.9", "12.7", "14.4", "13.9", "13.7", "13.2", "12.7", "12.9", "13.4" (percent).
  - Nonperforming loans to gross loans: "2.2", "2.2", "2.8", "2.6", "2.9", "3.7", "3.5", "3.0", "3.2", "3.0", "3.1", "2.6" (percent).
  - Return on average assets (ROA): series including "1.3", "1.7", "1.1", "0.9", "1.0", "0.9", "0.6", "1.0", "1.2", "1.3", "1.4", "1.4" (percent).

### IMF support, Fund credit projections, and program phasing
- Existing and prospective Fund arrangements, disbursements and stock (SDR million / US$ million):
  - Disbursements (annual row): "1,011", "1,011", "1,011", "0", "0", "0", "0", "0", "0", "0" (SDR million implied pattern in projections).
  - Stock of existing and prospective Fund credit (US$ million): series "1,241", "2,121", "3,035", "3,035", "2,981", "2,770", "2,391", "1,885", "1,379", "873".
- Proposed access and phasing under the Extended Fund Arrangement (disbursement schedule, SDR million and US$ million):
  - Board approval of EFF (March 11, 2019): "469.70" SDR / "651.47" US$ million (disbursement cumulative "67.32" US$ million? — table entries list disbursement and cumulative columns as presented).
  - Subsequent scheduled reviews and availability dates include First Review (June 15, 2019), Second Review (September 15, 2019), Third Review (December 15, 2019), and up to Eleventh Review (December 15, 2021) with repeated periodic disbursement amounts such as "180.65" SDR / "250.57" US$ million and later "252.92" SDR / "350.79" US$ million entries, culminating in a Total "3035.04" SDR / "2,209.54" US$ million and Total US$ "435.0" million in the final column per table formatting.
- Indicators of Fund credit (percent of GDP, percent of reserves, and other ratios) include:
  - Obligations relative to quota and reserves: rows showing Quota percentages such as "7.5", "24.8", "25.1", "14.5", "22.5", "45.1", "69.0", "84.1", "80.4", "77.1" (percent of quota across projection years).
  - Fund credit outstanding relative to GDP and reserves: e.g., "1.6", "2.7", "3.8", "3.7", "3.5", "3.1", "2.6", "2.0", "1.4", "0.9" (percent of GDP).

### Key structural and memorandum items
- Nominal GDP (US$ millions): series includes "106,289", "107,730", "110,571", "114,783", "118,502", "122,025", "126,326", "130,778", "135,387", "140,159".
- GDP per capita (US$): values include "6,347", "6,099", "6,046", "6,217", "6,316", "6,155", "6,152", "6,227", "6,375", "6,490".
- Gross international reserves (US$ millions, projection table): "4,999", "7,761", "11,397", "11,845", "12,944", "13,260", "18,060", "21,177", "22,263", "24,227".
- Gross international reserves (as a percent of ARA metric): values in table include "284", "363", "657", "173", "98", "114", "119", "128" (as presented).

*Source: IMF staff calculations, Ministry of Finance, Central Bank of Ecuador, Haver, World Bank Development Indicators (tables and figures as presented in the source content).*

### Annex I. Implementation of Past Fund Policy Advice

### Annex I. Implementation of Past Fund Policy Advice

### Fiscal policy
- 2016 Article IV recommendations: reduce government wage bill via revision of public compensation package; eliminate fuel subsidies with automatic adjustment of retail prices to international prices; make a temporary VAT increase permanent and eliminate exemptions; prioritize expenditure; improve fiscal transparency.
- Implementation status:
  - The government has not reduced the wage bill to date but has announced a 10 percent reduction in the number of state enterprise workers.
  - Plan to renew only one of every two expiring contracts in the non-social sectors of the government, and to bring wages of newly hired public employees into line with those prevailing in the private sector.
  - On fuel subsidies:
    - Subsidy on high octane gasoline has been eliminated.
    - Subsidy for diesel for industrial use has been eliminated.
    - Subsidy on regular and ecological gasoline has been reduced.
    - A process of public dialogue has begun on the remaining subsidies, expected to result in better targeting.
  - The temporary increase in VAT was removed in 2017 rather than made permanent, and the most recent Productive Development Law introduced further tax exemptions.
  - Fiscal transparency: some progress with the revision and publication of more accurate public debt numbers, and more open communication channels with financial markets.

### Financial sector policy
- 2016 Article IV recommendations: curtail central bank financing of the budget; reduce unnecessary financial regulation; introduce more tools to enhance crisis preparedness.
- Implementation status:
  - The Moreno administration ended direct central bank budget financing, but the BCE continued lending to public banks for budget financing purposes (public banks used central bank funds partly to buy government-issued paper).
  - The Productive Development Law introduced a prohibition:
    - (i) for the BCE to purchase new public securities and bonds, and
    - (ii) for public financial institutions holding domestic investment funds from the BCE to invest in securities issued by public sector entities.
  - The central bank has continued to issue Títulos del Banco Central (TBCs); the outstanding stock had diminished to less than US$1 million by the end of January 2019.
  - Interest rate ceilings remain in place.
  - Regulations on minimum liquidity requirements remain as complex as in 2016, although there is an intention to review the regulatory gaps.
  - Initial steps taken to introduce risk management tools; a more comprehensive framework for macroprudential policy is needed.
  - Authorities agree with the objective of diversifying the deposit insurance fund away from government paper; the fiscal financing imperative requires a gradual approach.
  - Productive Development Law provides for phasing out the capital exit tax (Impuesto a la Salida de Divisas) and a reduction in the rate is planned as part of the program.

### Structural reforms
- 2016 Article IV recommendations: reduce public sector and minimum private sector compensation; shift from direct to indirect taxes; allow for less rigid working hours and contracts; increase productivity by easing regulations, enhancing competition, and improving institutions.
- Implementation status:
  - Introduction of different types of labor contracts in certain sectors to eliminate rigidities; private sector slow to embrace the new contracts.
  - Modifications to oil and mining legislation to address past disincentives to foreign investment, including improving oil production-sharing contracts.
  - Productive Development Law eliminated the burdensome minimum corporate tax.
  - Private sector representatives report a significantly less hostile regulatory environment compared with the recent past.

### Statistics
- 2016 Article IV emphasis: strengthen data provision and revise official growth projections more frequently.
- Implementation status:
  - Financial Soundness Indicators and monetary statistics are now regularly provided to the IMF, although with some gaps in coverage.
  - Authorities are working on the transition to the sixth BOP manual and expect to have revised BOP figures by September 2019.
  - Authorities recently received technical assistance on government finance statistics and public debt statistics to help with transition to GFSM 2001.
  - A recent Fund TA mission on national accounts statistics provided support to a GDP rebasing project.

*Annex I. Implementation of Past Fund Policy Advice (1ecuea2019001)*

### 28.3 percent of GDP by 2023, from 37.3 percent in 2017. The external debt trajectory is sensitive to

### 1ecuea2019001 - 28.3 percent of GDP by 2023, from 37.3 percent in 2017. The external debt trajectory is sensitive to

### Debt trajectory and vulnerability
- External debt projected to decline to 28.3 percent of GDP by 2023, from 37.3 percent in 2017.
- The external debt trajectory is sensitive to the non-interest current account shock (e.g. terms of trade shock).
- A large (30 percent) real exchange rate depreciation would create unstable debt dynamics, although that scenario is characterized as improbable in a dollarized system.
- Relatively large external financing requirements over the medium term leave Ecuador vulnerable to sudden-stops in access to external capital markets that would require a painful domestic adjustment.

### Composition of public and external debt (end-2018 / consolidation context)
- External debt (consolidated NFPS level): 32.4 percent of GDP.
- Domestic (consolidated within NFPS): 13.9 percent of GDP.
- Domestic (aggregate): 14.3 percent of GDP.
- Oil Related financing: 1.6 percent of GDP (Advanced oil sales 0.8; Schlumberger deal 0.8).
- Bonds (consolidated within the NFPS): 8.7 percent of GDP.
- Bonds (outside NFPS): 5.7 percent of GDP.
- IESS / BIESS liabilities: 7.8 percent of GDP.
- Other liabilities (domestic): 5.8 percent of GDP.
- IMF Definition (total consolidated): 46.2 percent of GDP.

### Public DSA baseline projections and key assumptions (selected)
- Real GDP growth (baseline): 2018: 1.1; 2019: -0.5; 2020: 0.2; 2021: 1.2; 2022: 2.7; 2023: 2.3 (in percent).
- Inflation (GDP deflator, baseline): 2018: 2.0; 2019: -0.7; 2020: 1.2; 2021: 1.4; 2022: 1.1; 2023: 0.9 (in percent).
- Effective interest rate (baseline): 2018: 5.8; 2019: 5.7; 2020: 5.7; 2021: 5.7; 2022: 5.4; 2023: 5.3 (in percent).
- Primary Balance (baseline): 2018: 1.5; 2019: 2.7; 2020: 6.5; 2021: 5.5; 2022: 5.1; 2023: 5.0 (in percent of GDP) under one table; alternative rows also show other scenarios (e.g., constant primary balance = 1.5 each year).
- Public gross financing needs: average 6.6 percent of GDP for 2018−23 (noted as relatively large external financing requirements).

### Stress tests, scenarios, and outcomes (selected results)
- Stress tests include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Oil Shock; Combined Macro-Fiscal Shock.
- Real Exchange Rate Shock scenario: inflation spike in 2019 to 6.0 (from baseline -0.7), effective interest rate modestly higher in some years; scenario results indicate elevated debt metrics under a one-time 30 percent real depreciation.
- External Debt Sustainability bound tests:
  - Baseline external debt around 37 percent (box figures show Baseline: 37).
  - Combined shock increases external debt (example combined shock box: 41).
  - Real depreciation shock (30 percent one-time) increases external debt substantially (example box: 52).
- Gross financing needs under baseline and shocks illustrated to exceed early-warning benchmarks in some shock scenarios (benchmarks: 15 percent of GDP for gross financing needs; external financing requirement benchmarks of 5 and 15 percent of GDP used in risk assessment).

### Risk assessment indicators (2017 / baseline context)
- Gross financing needs (2017): 19.1 percent of GDP (Table 1: Public gross financing needs 2017 = 19.1).
- Nominal gross public debt (2017): 43.2 percent of GDP.
- Net public debt (2017): 38.5 percent of GDP.
- EMBIG (bp) reported: 726 (Table 1, Sovereign Spreads: EMBIG (bp) 726).
- External debt (baseline series): 2013: 19.4; 2014: 25.2; 2015: 29.4; 2016: 36.6; 2017: 39.5; 2018: 40.5; 2019: 42.8; 2020: 42.9; 2021: 42.9; 2022: 39.4; 2023: 36.5 (external debt in percent of GDP, Table 2).
- Gross external financing need (in percent of GDP, Table 2): 2013: 4.5; 2014: 6.7; 2015: 8.9; 2016: 5.1; 2017: 7.7; 2018: 10-Year10-Year (table formatting retained from source).

### Implications emphasized in the chapter
- The combination of medium-term external financing needs averaging 6.6 percent of GDP and sensitivity to non-interest current account shocks creates vulnerability to sudden stops in external capital markets.
- A large real depreciation (30 percent) would materially worsen debt dynamics, but is deemed improbable in Ecuador’s dollarized environment.
- Under adverse shocks (exchange rate, combined macro-fiscal, or oil shocks), gross debt and external debt ratios rise substantially in stress-test scenarios, signaling limited buffers against adverse external developments.

*Source: IMF staff calculations and Ministry of Finance data as presented in the provided IMF chapter.*

### Annex III. Risk Assessment Matrix

### Annex III. Risk Assessment Matrix

### Risk Assessment Matrix — Overview
- The RAM shows events that could materially alter the outlook (both the current policies and staff’s proposed scenarios).
- The relative likelihood of risks listed is the staff’s subjective assessment: “low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
- Based on the July 2018 GRAM.

### Country-specific risks
- External financing shortfalls due to Ecuador-specific events
  - Likelihood: Medium
  - Impact: High
  - Rating channel: Balance of payments and fiscal financing pressures
  - Policy advice: Fiscal, financial and supply side policies (described in the report) to restore stability.
- Political and social opposition to policy changes under the program
  - Likelihood: Medium
  - Impact: High
  - Rating channel: A rolling back of commitments to fiscal measures could result in a failure to meet program targets
  - Policy advice: Careful calibration of fuel subsidy, tax, and wage reforms, and a well-thought-out communication strategy
- Natural disaster (earthquake or eruption of the Cotopaxi volcano)
  - Likelihood: Low
  - Impact: High
  - Rating channel: Negative impact on investment, exports, and growth.
  - Policy advice: Fiscal, financial and supply side policies (described in the report) to create space to respond. Seek international financial support in recovery efforts.

### Regional risks
- Increase in flow of migrants from Venezuela
  - Likelihood: Medium
  - Impact: Medium
  - Rating channel: Fiscal and social pressures.
  - Policy advice: Fiscal policies in the near term to create space to respond.

### External risks
- Sharp tightening of global financial conditions
  - Likelihood: High
  - Impact: High
  - Rating channel: Balance of payments and fiscal financing pressures
  - Policy advice: Fiscal, financial and supply side policies (described in the report) to restore stability.
- Weaker-than-expected global growth / Significant U.S. slowdown / Significant China slowdown
  - Likelihoods: Medium / Medium / Low / Medium
  - Impact: High
  - Rating channel: Negative impact on investment, exports, and growth.
  - Policy advice: Fiscal, financial and supply side policies (described in the report) to restore stability.
- Rising protectionism and retreat from multilateralism
  - Likelihood: High
  - Impact: Medium
  - Rating channel: Negative impact on investment, exports, and growth.
  - Policy advice: Fiscal, financial and supply side policies to strengthen competitiveness.
- Unsustainable macroeconomic policies in systemically important countries
  - Likelihood: Medium
  - Impact: Medium
  - Rating channel: Impact on investment, exports, and growth.
  - Policy advice: Fiscal, financial and supply side policies to strengthen competitiveness.
- Lower energy prices
  - Likelihood: Medium
  - Impact: High
  - Rating channel: Pressure on fiscal and external accounts.
  - Policy advice: Fiscal, financial and supply side policies (described in the report) to restore stability.

### Notes on the RAM presentation
- Non-mutually exclusive risks may interact and materialize jointly.
- The RAM shows the source of risk, likelihood, impact, rating channel, and policy advice as summarized above.

---

### External Sector Assessment — Key findings and projections (excerpted)
### Overall assessment
- The country’s external position is assessed to be weaker than the level consistent with medium-term fundamentals and desirable policies.
- The real effective exchange rate is assessed to be about 30 percent overvalued.
- Ecuador’s non-oil export share has been declining through time as high wage inflation has eroded Ecuador’s international competitiveness.
- Over the medium term as result of the fiscal adjustment and the structural reforms that will be undertaken during the program period the current account is expected to reach a surplus of around 1.7 percent of GDP. This will realign the current account and the real exchange rate with the medium-term fundamentals.

### Current account position — historical movements and 2018 outlook
- 2016: Current account recorded a surplus of 1.4 percent of GDP. Adjustment of 3.6 percent of GDP was underpinned by a recession and temporary tariffs on imports. Trade surplus reached 1.6 percent of GDP notwithstanding a reduction of 1½ percent of GDP in exports (relative to 2015).
- 2017: Exports grew by 12 percent; trade balance turned into a small surplus of 0.3 percent of GDP; current account close to balance with a deficit of 0.3 percent of GDP.
- 2018 (expected): Trade balance expected to be close to balance while the current account is expected to turn into a deficit of 0.7 percent of GDP.
- Underlying/current-account adjustments:
  - 2016 underlying current account was a deficit of 0.4 percent of GDP after adjusting for temporary measures.
  - 2017 underlying current account deficit rose to 1.6 percent of GDP.
  - 2018 imports grew at 13.5 percent, implying a 3.7 percent of GDP current account gap that would need to be closed by fiscal adjustment and productivity and labor-cost measures.

### REER and competitiveness
- REER movements:
  - REER depreciated by 6.6 percent in 2017 due to inflation remaining below trading partners (Ecuador’s average inflation fell to -0.2 percent, from 0.4 percent in 2016) and a depreciation of the U.S. dollar.
  - In 2018 the REER appreciated by 1.8 percent despite low inflation, due to appreciation of the U.S. dollar.
  - The nominal effective exchange rate (NEER) depreciated by 4.0 percent during 2017 but such depreciation fully reversed during 2018.
- REER overvaluation assessments:
  - Consumption-based allocation rules model: REER assessed to be about 31 percent overvalued.
  - EBA-lite current account model (ELCA): overvaluation of 27 percent.
  - EBA-lite real exchange rate model (ELRER): overvaluation of 6 percent.
  - Investment-based allocation rules model: overvaluation of 7 percent (current account norm of 0.1 percent of GDP).
- Implication: Ecuador requires either a sustained period of deflation or a significant rise in productivity to reverse the assessed overvaluation.

### Competitiveness drivers
- Non-oil export market share: Ecuador lost around one-tenth of its global non-oil export market share in the wake of the U.S. dollar appreciation of 2014−16.
- Wages and productivity:
  - Ecuador’s minimum wage is one of the highest in Latin America, more than 60 percent higher than the LA6 average and more than 40 percent higher than the average for Latin America and the Caribbean.
  - Real wages have trended upward since 2003; labor productivity mostly stagnated and began to decline in 2013, increasing unit labor costs.
  - Staff estimates: between 2009 and 2016 real wages annual growth rate on average outpaced labor productivity annual growth by 4.6 percentage point (37 percent total growth rate over the 7 years).
- Business environment: Global Competitiveness Index places Ecuador behind the LA6 countries and behind 70 percent of the 138 countries covered; Doing Business Index places Ecuador behind 60 percent of the 190 countries covered. Main weaknesses: difficulty in starting a business, resolving insolvencies, and availability of credit.

### Policy and reform implications for external adjustment
- Structural reforms and fiscal adjustment expected to realign current account and REER with fundamentals:
  - Reforms to create a more efficient tax system.
  - Maintain restraint in public wages and eliminate rigidities in wages and prices.
  - Improve reliability and efficiency of the energy sector and capital markets.
  - Tackle corruption to restore international competitiveness.
- Over the medium term the current account is expected to reach a surplus of 1.7 of GDP under the consumption-based allocation rules model.

### Trade and tariff measures
- Ratification of trade agreement with the European Union (January 2017) — Ecuador joined the EU-Colombia/Peru Trade Agreement:
  - Envisages eventual elimination of tariffs for all industrial and fisheries products, greater market access for agricultural products, public procurement and services, and reduction in technical barriers to trade.
  - Tariff cuts to be implemented over 17 years; EU liberalizing almost 95 percent of tariff lines upon entry into force, and Ecuador about 60 percent.
- Import surcharges imposed in November 2017 (per unit surcharge fee of US$0.10 to 6000 products) were eliminated by June of 2018:
  - Staff estimates suggested the surcharge was approximately equivalent to an average increase of 2.25 percent in tariffs and could have reduced imports by US$400 million per year.
  - The measure could also have reduced exports by approximately US$50 million per year because 45 to 50 percent of imports are inputs into exported goods.
  - The government eliminated the surcharge under pressure from the Andean Community.

### Capital flows, reserve adequacy, and stock position
- Financial transfer tax:
  - Ecuador has a five percent tax on financial transfers abroad above specific thresholds (including payments for certain imports).
  - Revenues from this tax amounted to 0.8 percent of GDP in 2016.
  - The tax constitutes both an exchange restriction subject to Fund approval under Article VIII and a CFM on capital outflows.
  - The government announced plans to phase out the tax on financial transfers.
  - The tax provisions include exemptions and thresholds; a July 2016 revision introduced a waiver for transactions of up to US$5,000 annually related to trips abroad paid via credit or debit card, and extended application of the 5 percent tax to cash carried abroad in excess of US$1,098 per adult and US$366 per minor.
  - Staff view: Given the balance of payments outlook and Ecuador seeking a Fund program, removing the tax immediately may not be appropriate, but the measure should not be permanent and plans should be made for phasing it out once macroeconomic stability is restored and reserves strengthened.
- International reserves and fiscal dominance:
  - Ecuador’s international reserves have been on a downward path since early 2014, reflecting fiscal dominance, typical of fully dollarized economies, in a scenario of strong terms of trade shock.
  - The declining trend in the stock of reserves has been heavily influenced by BCE financing of the central government.
  - All assets, including reserves, in the BCE balance sheet are funded by deposits of banks, nonbanks, and public institutions (mainly the central government, local governments, SOEs, and the social security).

### Selected numerical assessments (from staff calculations table)
- Consumption-based allocation rules CA Norm: 3.0
  - Underlying CA: -0.7
  - CA GAP: -3.7
  - REER GAP (Elasticity -12%): 30.6
- Investment-based allocation rules CA Norm: 0.1
  - Underlying CA: -0.7
  - CA GAP: -0.8
  - REER GAP (Elasticity -12%): 6.7
- EBA-lite Current Account (ELCA) CA Norm: 2.2
  - Underlying CA: -1.1
  - CA GAP: -3.3
  - REER GAP (Elasticity -12%): 27.0
- EBA-lite REER (ELRER): 5.7

*Source: IMF staff calculations.*

### 14.       Partly determined by legal

### 14.       Partly determined by legal

### BCE balance sheet and deposit coverage
- Until the latest reform of the monetary framework in 2014 the BCE had an accounting system that avoided the comingling of public and private funds.
- Until 2014, most depositing entities at the BCE maintained fairly stable or increasing net-depositor positions, supported by legal requirements and the positive commodity cycle.
- At end-2017:
  - International reserves fell to critical lows: US$2 billion (52 percent of banks deposits at the BCE).
  - Recovery occurred only with an international loan disbursement in January 2018.
- Since 2018:
  - Banks have been drawing down their BCE deposits to fund credit to the private sector.
  - Foreign financing allowed the central government to improve at times its position with the central bank.
- Composition shift:
  - Since late in the last decade Ecuador chose not to accumulate significant reserves, in part due to a robust public investment plan directing proceeds from the positive commodity cycle to investment projects.
  - After 2014, mounting government financing needs and drying external financing resulted in significant pressures on the BCE balance sheet, shifting composition towards domestic assets (e.g. lending to the central government) and lowering coverage of banks’ deposits with reserves.

### Reserve adequacy and liquid reserves
- Definitions used for assessing adequacy:
  - Gross reserves include: cash, deposits in foreign banks, investments, gold, SDRs, reserve position at the IMF.
  - Liquid net reserves include: cash, deposits abroad, investments, and gold.
- At end-2018:
  - Gross international reserves (GIR) stood at US$2.1 billion (representing about 1¼ months of imports or 12 percent of the Fund’s ARA metric).
  - This amount was funded by US$3.2 billion of deposits of other depository institutions held at the central bank and US$0.363 billion in obligations to the Fund, creating a reserve coverage gap.
- Supplemental staff floor on reserves:
  - Staff estimated a floor comprising minimum liquidity buffers to confront potential reserve drains from the banking and fiscal sectors.
  - Up until 2015 all these claims were comfortably covered by NIR, including a fiscal buffer based on the volatility of the credit to the public sector and contingent liabilities.
  - Since 2016, as public financing needs ballooned and external financing to the government dwindled, the margin of coverage of these requirements faded.
  - At end-2017, liquid reserves stood at 50 percent of staff’s supplemental metric, although it has recovered somewhat since then on the basis of sovereign debt issuance.

### Gross external financing needs and medium-term vulnerability
- Gross external financing requirement estimates:
  - 2018: about US$9.4 billion, or 8.8 percent of GDP (about half stemming from debt service obligations of the private sector).
  - 2019 (forecast): US$7.3 billion, or 6.8 percent of GDP.
- Public sector amortizations in percent of GDP are expected to rise over the medium term.
- Large principal repayments on external debt over the medium term are an estimated 4.0 percent of GDP on average for 2018−24.
- Risk assessment:
  - These repayments leave Ecuador vulnerable to sudden stops in access to external capital markets.
  - Risk is mitigated by Ecuador’s decision of seeking a Fund program.

### Net International Investment Position (NIIP)
- NIIP reached -12.9 percent of GDP in 2017 and is forecasted to maintain this level during 2018.
- Official IIP statistics show large increases in debt liabilities in recent years—for which sectorization is not available but likely primarily driven by government borrowing—mostly offset by an accumulation of foreign assets by the private sector.

### Program request and key fiscal and institutional reforms (from Letter of Intent and Memorandum)
- IMF financing request:
  - A three-year extended arrangement under the IMF's Extended Fund Facility in the amount equivalent to SDR3.035 billion (435 percent of quota and the equivalent of US$4.21 billion).
  - Request that the full amount of this Fund financing be made available for budget support.
  - Additional international partner financing secured: about US$6 billion over the next three years.
- Fiscal framework and targets:
  - Total public debt rose from 24 percent of GDP in 2008 to 46 percent of GDP in 2018 (IMF metrics and institutional coverage).
  - Government goal: quickly reverse the upward trajectory of the public debt-GDP ratio and, over time, bring debt below the benchmark target of 40 percent of GDP; that target will become a legally binding limit on future public indebtedness.
  - Intention to reduce the Non-Financial Public Sector non-oil primary deficit, including fuel subsidies, by an additional 5 percent of GDP over the next three years.
- 2019 measures to achieve fiscal goals (major items):
  - Realignment of the wage bill via wage restraint, prudent hiring (renew only one of every two expiring contracts in the non-social sectors), and harmonize wages of newly hired public employees with private sector.
  - Continued optimization of fuel subsidies through normalization of diesel prices for industrial purposes and benefit from prior gasoline price increases implemented in 2018.
  - Improve procurement terms and conditions, competitive bidding, framework and wholesale agreements, transparency, timely processes, and better inventory management.
  - Update schedule of fees for government services to reflect costs and markets served.
  - Lease concession rights of public assets to private partners while keeping public ownership, ensuring transparent processes and protecting the budget from contingent liabilities.
  - Part of savings and revenue will increase social assistance spending and strengthen Plan Toda Una Vida.
- Strengthening fiscal institutions and rules:
  - Complement the expenditure growth rule with binding annual targets for the non-oil primary balance.
  - End-June structural benchmark: review the Law and regulations to ensure public debt is comprehensively defined and measured on a consolidated basis in line with international standards; institutional coverage of debt and expenditure rule applies to the nonfinancial public sector; mechanisms for effective operation of the expenditure rule and interaction with the constitutional “golden rule”; ensure rules dictating accumulation of assets for the stabilization fund do not jeopardize compliance; strengthen escape clauses, automatic correction mechanisms, and in-year fiscal reporting.
  - Publish an action plan to strengthen public financial management by end-April and submit relevant legislative amendments to the National Assembly by end of June (structural benchmarks).
  - Create system for information collection on domestic expenditure arrears, assess current stock of expenditure arrears, and implement institutional arrangements to better report on and control expenditure commitments (structural benchmarks by end-June and end-September).
  - Amendments to the Código Orgánico de Planificación y Finanzas Públicas to strengthen the role of the Minister of Economy and Finance, introduce binding expenditure ceilings, limit government discretion to amend approved budgets, and improve accounting, reporting, cash management, and commitment controls.
  - Commit to refrain from new government international borrowing arrangements based on repurchase agreements or the pledging of Central Bank assets.
- Strengthening Central Bank institutional framework:
  - Ley de Fomento Productivo has prohibited the Central Bank from investing in securities issued by public sector entities.
  - Monetary Board regulation issued to prohibit all future quasi-fiscal activities of the Central Bank as well as direct and indirect lending to the government or public sector (including loans, advances, guarantees or transactions that indirectly support lending operations of the public sector).
  - Intention to incorporate these changes into legislation (Código Orgánico Monetario Financiero) by end-September (structural benchmark).
  - Central Bank will continue to be able to provide temporary liquidity support to public banks, if needed for prudential purposes.
  - Intention to unwind past transactions that resulted in the Central Bank holding directly or indirectly government debt (including recent transfer of equity in public banks to the Central Bank’s balance sheet).

*Source: Ecuador — International Monetary Fund (content unit 1ecuea2019001).*

### 16.      To further strengthen the basis for dollarization, our goal is to gradually build international

### 1ecuea2019001 - 16.      To further strengthen the basis for dollarization, our goal is to gradually build international

### Strengthening the basis for dollarization and international reserves
- Goal: gradually build international reserves over the remainder of this administration so that, by the end of this arrangement, international reserve assets of the Central Bank fully back both the reserves of private and public financial institutions held at the Central Bank and coins in circulation.
- Structural benchmark (End-May 2019): submit to Cabinet an overhaul of the legislative underpinnings of Central Bank activities to ensure clear objectives and limited functions designed to fully support the dollarization regime.
- Legal overhaul elements to be submitted:
  - establish an independent Central Bank Board with fiduciary responsibilities to the Central Bank;
  - strengthen operational autonomy and build a strong internal and external audit function;
  - introduce a backing rule requiring a timetable to cover specific Central Bank liabilities with international reserve assets;
  - prohibit quasi-fiscal activities and monetary financing of the government (see Table 2 structural benchmark language).

### Central Bank transparency and reporting
- Action already taken: published past externally-audited financial statements of the Central Bank (2017).
- Commitments:
  - produce Central Bank financial statements in conformance with International Financial Reporting Standards in 2019;
  - begin publishing Central Bank financial statements under IFRS starting in 2021.
- Prior Actions:
  - Publication of the Central Bank’s financial statements (listed as Prior Action 2).

### Boosting resilience of the financial system
- Assessment: financial system is strong, liquid, and well-capitalized; private credit has been growing rapidly.
- Risks: economic slowdown likely to put strains on the system, calling for greater supervisory scrutiny—particularly of cooperatives which have grown rapidly.
- Planned actions:
  - strengthen monitoring of household indebtedness and housing prices;
  - consider macroprudential requirements such as loan-to-value ratios for mortgage lending;
  - re-examine banking resolution procedures, crisis preparedness framework, and adequacy of the liquidity fund and deposit insurance scheme;
  - diversify the deposit insurance fund’s assets away from sovereign debt over time;
  - simplify liquidity requirements to better align minimum and domestic liquidity requirements with international best practice;
  - gradually remove liquidity constraints to achieve a simpler and more efficient reserve requirement system;
  - improve interest rate policies to foster savings, investment and production.

### Supporting job creation, competitiveness, and growth — policy pillars
- Tax Regime:
  - Government will publish a plan of tax changes by end-August and submit legislation to the National Assembly by end-October.
  - Tax reform goals: (i) simplify the tax system, (ii) broaden the tax base, (iii) eliminate unwarranted and unequitable tax exemptions, special regimes and preferences, (iv) rebalance from direct to indirect taxation, and (v) phase out distortionary turnover taxes and levies on transfers abroad.
  - Strengthen tax and customs administration, including merger of tax and customs authorities.
- Entrepreneurship:
  - Discussing an Entrepreneurship Law to eliminate obstacles to business formation and operation and provide a strong legal framework for new businesses.
- Housing:
  - “Casa Para Todos” program to promote job creation in construction and broaden home ownership for low and middle-income households.
- Labor Markets:
  - Urgent labor market reform to improve access to formal jobs (especially for women and young workers), reduce implicit hiring costs, and adapt to different industries; introduce a broader range of employment contracts.
- Public-Private Partnerships:
  - Legislate an institutional framework for PPPs guided by best international practices to increase productivity and lessen budget pressures.
- Capital Market Regulations:
  - Examine legal framework for capital markets to increase flow of resources from investors to corporations.
- Trade:
  - Steps taken: Ley de Fomento Productivo; trade agreements with the European Union and EFTA; in the process of joining the Pacific Alliance.
- Gender equality:
  - Continue policies supporting families with young children and childcare programs; expand employment contract types to benefit women; commit to reduction of gender-based violence (recently approved legislation).

### Promoting shared prosperity and social protection
- Social spending commitments:
  - Increase social assistance spending in 2019 by around US$400 million.
  - Maintain a floor on social assistance spending of 1 percent of GDP throughout the life of the program.
- Programs and expansions:
  - Work with international partners to extend coverage and raise benefits for “Bono de Desarrollo Humano” CCT program.
  - Increase spending for disabled population (“Bono Joaquín Gallegos Lara”) and the elderly (“Mis Mejores Años”).
  - Expand coverage of non-contributory pensions and design a plan to better target social programs.
  - Update and modernize the social registry for better targeting and information management.
- Human capital:
  - Strengthen efficiency and quality of primary education and health spending; prioritize investments with high human capital returns.
  - Structural benchmark: publication of an action plan by end-September (to identify efficiency gains without sacrificing coverage and quality).

### Transparency, good governance, and anti-corruption
- Anti-Corruption Legislation:
  - Broad anti-corruption law to be submitted to the National Assembly later this year (end-September structural benchmark).
  - Legislation will enhance independence and power of law enforcement and judiciary; strengthen coordination of anti-corruption efforts; improve access to information about government operations.
  - Prior step: appointment of a transitional Citizens Participation and Social Control Council.
- Fiscal transparency:
  - Publication of public debt data in conformity with international standards already undertaken.
  - Commit to publish greater information on the draft budget, strengthen public procurement processes, and require publication of all procurement contracts (consistent with personal data protection).
  - Improve budget management practices for transparency, timeliness, quality and efficiency; encourage observatories to hold the government accountable.
  - Commitment to provide detailed information on external non-financial public-sector debt, including collateralized debt and similar arrangements, on a regular basis (prior action and quarterly structural benchmarks for end-March, end-June, end-September, and end-December).
- Oil sector transparency and governance:
  - Begin publishing externally-audited financial statements of state-owned enterprises, including oil companies (adoption by end-June of the regulation to ensure publication is a structural benchmark).
  - Increase transparency of employment policies in oil companies.
  - Intend to merge operations of the two state-owned oil companies in coordination with the Inter-American Development Bank.
  - Seek technical assistance to pursue membership of the Extractive Industries Transparency Initiative during the extended arrangement.
- AML/CFT:
  - Develop an AML/CFT national risk assessment in line with the FATF standard that properly prioritizes corruption-related threats.
  - Use regulatory and supervisory tools to ensure banks and other entities monitor business relationships with senior officials.
  - Strengthen existing asset declaration regime for senior government officials.
  - Government has recently sent draft legislation to the National Assembly to strengthen the framework to freeze, seize and confiscate proceeds of acts of corruption in line with the Constitution and the United Nations Convention Against Corruption.

### Program monitoring, quantitative targets, and timing
- Program monitoring: based on performance criteria, indicative targets, and structural benchmarks (tables 1 and 2; definitions in the TMU attached).
- Expected review dates:
  - first review on or after June 15;
  - second review on or after September 15;
  - third review on or after December 15.

- Table 1 key 2019 fiscal and monetary targets (in millions of US$, unless otherwise indicated) — cumulative flow from January 1 to the test date:
  - Fiscal Targets — Quantitative Performance Criteria
    - Floor on non-oil primary balance of the non-financial public sector, including petroleum subsidies:
      - End-Mar: -712
      - End-Jun: -885
      - End-Sep: -2,450
      - End-Dec: -3,506
    - Floor on social assistance spending of the central government:
      - End-Mar: 175
      - End-Jun: 440
      - End-Sep: 705
      - End-Dec: 1,040
  - Indicative Targets
    - Floor on overall fiscal balance of the non-financial public sector:
      - End-Mar: 277
      - End-Jun: 890
      - End-Sep: 354
      - End-Dec: 24
  - Monetary Targets — Quantitative Performance Criterion
    - Floor on the change in the stock of NIR - program measure:
      - End-Mar: 1,823
      - End-Jun: 2,627
      - End-Sep: 2,788
      - End-Dec: 3,097
  - Continuous Performance Criteria
    - Ceiling on the change in external payment arrears (excluding interest on earlier obligations resulting from the 2008 swap that have not been claimed by creditors even though authorities pursued them in good faith): 0 at all test dates.
    - Ceiling on the new gross central bank direct financing of the NFPS and indirect financing to the NFPS through the public banks: 0 at all test dates.

### Prior Actions and Structural Benchmarks (high-level)
- Prior Actions:
  1. Passage by the Monetary Board of a regulation prohibiting quasi-fiscal spending by the Central Bank and any direct or indirect lending to the non-financial public sector, including via public banks (does not cover trade credits).
  2. Publication of the Central Bank’s financial statements.
  3. Provision of detailed information on external non-financial public-sector debt, including collateralized debt and debt with similar arrangements, with contract-level and creditor-level details.
- Structural Benchmarks (selected objectives and dates):
  - Provision of detailed information on new external non-financial public-sector debt incurred during the previous quarter, including collateralized debt and similar arrangements — Objective: ensure transparency of new debt operations — Date: End-March, June, September, and December 2019.
  - Publication of an action plan, in coordination with IMF technical assistance, to strengthen public financial management — Objective: to improve budget processes — Date: End-April 2019.
  - Submission to the Cabinet, in coordination with Fund staff, of amendments to the Central Bank’s legal framework to introduce autonomous governance arrangements; improve objectives and functions; phased-in recapitalization; backing rule timetable; prohibition on quasi-fiscal activities and monetary financing; and allow publication of external auditor's opinion and detailed notes — Objective: to strengthen the institutional underpinnings of dollarization — Date: End-May 2019.

*Source: Excerpt provided from the IMF staff report content unit 1ecuea2019001.*

### 4. Submission to the National Assembly of amendments to

### 4. Submission to the National Assembly of amendments to the Organic Code of Planning and Public Finances and other relevant laws

### Prior actions and structural benchmarks (items 4–12)
- Objective: To strengthen fiscal management and clarify the fiscal rules framework. Deadline: End-June 2019.
  - Submit amendments, in consultation with Fund staff, to:
    - (i) limit the discretion of the Executive to amend the annual budget approved by the National Assembly and introduce a robust framework for a contingency reserve in the budget;
    - (ii) restrict the use of CETES (treasury certificates) for short-term financing and develop a plan of reducing the current stock of CETES;
    - (iii) explicitly define the institutional coverage of the public debt and expenditure rules to be the consolidated nonfinancial public sector (NFPS);
    - (iv) adopt binding annual targets for the NFPS non-oil primary balance;
    - (v) introduce the necessary mechanisms to support the effective operation of expenditure rule and its interaction with the Constitutional “golden rule”;
    - (vi) adopt a standardized definition of arrears and strengthen the commitments control system; and
    - (vii) introduce clear deadlines for the submission of invoices by the provider and payment date, which could vary by the type of goods and service provided to the government.

- Objective: To strengthen transparency of state enterprises. Deadline: End-June 2019.
  - Adoption of a government regulation to ensure the publication of audited, annual financial statements by all state-owned enterprises starting in fiscal year 2019.

- Objective: To strengthen expenditure controls. Deadline: End-June 2019.
  - Modernize computer systems to introduce necessary changes to collect information on domestic payment arrears of the central government.

- Objective: To improve governance and tackle corruption. Deadline: End-September 2019.
  - Submission of an anti-corruption legislation to the National Assembly including measures to:
    - (i) ensure that acts of corruption are criminalized in line with the UNCAC and that preventive measures, in particular with a focus on public officials, are implemented;
    - (ii) freeze, seize and confiscate proceeds of acts of corruption in line with FATF Recommendation 4; and
    - (iii) ensure that banks and other relevant institutions and professions are required to implement enhanced customer due diligence on senior officials in line with FATF Recommendation 12.

- Objective: To improve the tax system. Deadline: End-August 2019.
  - Publication of a plan, in coordination with IMF technical assistance, to upgrade the current system of taxation to make it more growth-friendly, simpler, and more equitable. The tax reform will be aimed at improving revenue mobilization, increasing efficiency, simplicity, and equity, shifting from direct to indirect taxes, and reducing exemptions and preferential treatment. This reform will target an increase in revenues of 1½ to 2 percent of GDP by 2021.

- Objective: To strengthen the institutional underpinnings of dollarization. Deadline: End-September 2019.
  - Submission to the National Assembly, in consultation with Fund staff, of amendments to the Central Bank’s legal framework to:
    - (i) introduce autonomous governance arrangements;
    - (ii) improve its objectives and functions in line with best practice;
    - (iii) provide for the phased-in recapitalization of the Central Bank;
    - (iv) introduce a backing rule that requires a timetable to cover specific Central Bank liabilities with international reserve assets;
    - (v) introduce a prohibition on quasi-fiscal activities of the Central Bank and on monetary financing of the government that prohibits quasi-fiscal spending by the Central Bank, as well as any direct or indirect lending to the non-financial public sector, including that via public banks (this covers the purchase of securities, advances, or guarantees, or financial transactions that are a condition precedent for lending operations entered into by the government but not trade credits); and
    - (vi) introduce modifications to allow for the publication of external auditor's opinion and detailed notes.

- Objective: To strengthen expenditure controls. Deadline: End-September 2019.
  - Submit to IMF staff a plan of arrears clearance based on the survey of arrears at the central government level.

- Objective: To improve education and health outcomes. Deadline: End-September 2019.
  - Publication of an action plan, in coordination with World Bank technical assistance, to strengthen the efficiency and quality of primary education and health spending.

- Objective: To improve the tax system. Deadline: End-October 2019.
  - Submission to the National Assembly, in consultation with Fund staff, of a broad-based growth-friendly tax reform aimed at improving revenue mobilization, increasing efficiency, simplicity, and equity, shifting from direct to indirect taxes, and reducing exemptions and preferential treatment. This reform will target an increase in revenues of 1½ to 2 percent of GDP by 2021.

### Technical Memorandum of Understanding — Program exchange rates and market data
- Program exchange rates (Table 1; Source: Bloomberg, as of January 31, 2019):
  - US Dollar to Euro 0.87
  - US Dollar to Renminbi 6.70
  - US Dollar to Yen 108.89
  - US Dollar to SDR 0.71
  - US Dollar to British Pound 0.76
  - US Dollar to South Korean Won 1,112.72
  - US Dollar to Swiss Franc 0.99
  - US Dollar to Canadian Dollar 1.31
  - US Dollar to Danish Krone 6.52
  - US Dollar to Swedish Krone 9.05
  - US Dollar to Norwegian Krone 8.43
  - US Dollar to Australian Dollar 1.37
  - US Dollar to Mexican Peso 19.11
  - US Dollar to Colombian Peso 3,106.50
  - Gold prices (US$/ounce) 1,321.25

- Standard Fund performance criteria to be monitored continuously:
  - (i) no imposition or intensification of restrictions on the making of payments and transfers for current international transactions;
  - (ii) no introduction or modification of multiple currency practices;
  - (iii) no conclusion of bilateral payments agreements that are inconsistent with Article VIII of the IMF Articles of Agreement;
  - (iv) no imposition or intensification of import restrictions for balance of payments reasons.

### Quantitative performance criteria: Definitions and coverage
- Non-Financial Public Sector (NFPS) composition for the program:
  - Central government (PGE, including universities)
  - Decentralized Autonomous Governments (including municipal governments, provincial governments and parish boards)
  - Social Security Funds (including IESS, ISSFA, ISSPOL and BIESS)
  - Non-Financial Public Corporations (listed below)
  - Development Bank of Ecuador (BDE)

- Non-Financial Public Sector Corporations covered:
  - Empresa Pública de Exploración y Explotación de Hidrocarburos Petroamazonas EP
  - Empresa Pública de Hidrocarburos del Ecuador Petroecuador EP
  - Empresa Pública Flota Petrolera Ecuatoriana-EP FLOPEC
  - Ferrocarriles del Ecuador Empresa Pública - FEEP
  - Empresa Pública TAME Línea Aérea del Ecuador TAME EP

- Non-oil primary balance of the NFPS, including petroleum subsidies:
  - Defined as the non-oil primary balance of the NFPS minus spending on subsidies on petroleum products.

- Non-oil primary balance of the NFPS:
  - Defined as total non-oil revenues (ingresos no petroleros) minus primary non-oil spending (gastos primarios no petroleros).
  - Primary non-oil revenues are recorded on cash basis.
  - Revenues explicitly included:
    - Tax revenues (ingresos tributarios), but excluding corporate income tax paid by state-owned oil companies;
    - Social security contributions (contribuciones sociales);
    - Other revenues (otros ingresos);
    - Proceeds from asset monetization (i.e. revenues from the leasing of assets owned by the non-financial public sector).
  - Revenues explicitly excluded from primary non-oil revenues:
    - Interest income (recorded on cash basis);
    - Proceeds from the sale of financial assets;
    - Revenues from the privatization of government-owned entities;
    - Revenues from oil exports;
    - Revenues from the domestic sales of oil derivatives;
    - The operating surplus of state-owned oil companies (PetroAmazonas and PetroEcuador).

- Primary non-oil spending:
  - Recorded on accrual basis and comprises spending on wages and salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios), social security benefits (prestaciones sociales), other current spending, capital expenditures not related to oil investment, and net lending.
  - Other current spending excludes cost of imports of petroleum derivatives (Cuenta de Financiamento de Derivados Deficitarios) and payments to private operators of oil concessions (Ministerio de Energia y Recursos Naturales no Renovables).

- Petroleum subsidies:
  - Include subsidies on gasoline, kerosene, diesel, natural gas and liquified petroleum gas.
  - Defined as the difference between the retail sales price of a product and the cost of this product.
  - Cost definitions:
    - For imported petroleum derivative products: import price plus transportation, storage and commercialization costs;
    - For domestically-produced petroleum products: refinery gate price plus transport, storage and commercialization costs.

- Treatment of PPPs and other items:
  - Government-funded public-private partnerships treated as traditional public procurements; accrued obligations recorded transparently in budget data and measured as part of the NFPS government deficit as they accrue.
  - Accrued but not settled obligations related to PPPs recorded either as public debt or as contingent liabilities depending on the nature of the obligation.
  - Costs associated with divestment operations or liquidation (e.g., cancellation of contracts, severance) recorded as spending.
  - Expenditures recorded as a credit in “Account 99” will be recorded as spending above-the-line on an accrual basis as the spending obligations accrue.

### Monitoring and reporting lags
- Fiscal data for program monitoring:
  - All fiscal data needed for program monitoring to be provided to the Fund within 60 calendar days from the end of each quarter.
  - Preliminary monthly data to be provided with a lag of no more than 45 days after the end of each month.

### Floor on central government social assistance spending
- Definition:
  - Social assistance spending is computed as the sum of all central government spending (both recurrent and capital) on the following programs:
    - Bono de Desarrollo Humano
    - Bono de Desarrollo Humano Variable
    - Pensión Adultos Mayores
    - Pensión Mis Mejores Años
    - Pensión Para Personas Con Discapacidad
    - Bono Joaquín Gallegos Lara
    - Registro Social
- Monitoring:
  - Data recorded at monthly frequency will be provided to the Fund with a lag of no more than 30 calendar days after the end of each month.

### Floor on the change in the stock of Net International Reserves (NIR) — program measure
- Definitions:
  - NIR of the central bank (program measure) are defined as the balance of payments concept of NIR and computed as the US dollar value of the usable gross international reserve assets of the BCE minus (i) gross reserve-related liabilities to nonresidents of the BCE, and (ii) the reserve holdings of domestic commercial banks held at the BCE.
  - Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates.
  - Usable gross international reserve assets comprise:
    - (i) monetary claims, (ii) free gold, (iii) holdings of SDRs, (iv) the reserve position in the IMF, and (v) holdings of fixed income instruments.
  - Specifically excluded from gross international reserves:
    - Any precious metals or metal deposits, other than monetary gold, held by the BCE;
    - Assets in nonconvertible currencies and illiquid assets;
    - Claims on residents;
    - Any reserve assets that are pledged, collateralized or otherwise encumbered (in so far as those assets are not already excluded), including assets tied up in repurchase agreement transactions;
    - Net positions with ALADI and SUCRE.
  - Gross reserve-related liabilities comprise:
    - All short-term liabilities of the BCE vis-à-vis non-residents denominated in convertible foreign currencies with an original maturity of one year or less;
    - The stock of IMF credit outstanding but excluding credit transferred by the Fund into a Treasury account to meet the government’s financing needs directly;
    - The nominal value of all derivative positions (including swaps, options, forwards, and futures) of the BCE, implying the sale of foreign currency or other reserve assets.
  - Reserve holdings of domestic commercial banks held at the BCE comprise all liabilities of the BCE to other depository institutions (“otras sociedades de depositos”, as defined in the BCE’s Metodología: Informacion Estadística Mensual, 4th Edition of May 2017).

- Adjustors to the floor on the change in NIR:
  - The floor on NIR will be adjusted upward/downward by the amount of borrowing from non-residents above/below that envisioned under the program (Table 3) and net of issuances related to liability-management operations that have no net impact on the outstanding stock of NFPS debt. International borrowing will comprise issuance of international bonds.
  - The floor on NIR will be adjusted downward/upward by the shortfall/excess in program loan disbursements from the IMF and other multilateral institutions (the IADB, World Bank, CAF, and FLAR) as well as grants, relative to the baseline projection reported in Table 4.
  - Program loan disbursements are defined as external loan disbursements (excluding project financing disbursements) from official creditors that are freely usable for the financing of the NFPS budget operations.

- Program market issuance and expected disbursements (2019):
  - Expected program market issuance Q1 Q2 Q3 Q4: 0.0 0.0 0.0 0.0
  - Expected disbursement of program loans by multilaterals (2019) Q1 Q2 Q3 Q4: 651 529 125 140 1

- Monitoring:
  - The change in NIR will be measured as the change in the stock of NIR at each test date relative to the stock on December 31, 2018 which stood at negative US$1.7 billion.
  - Foreign exchange asset and liability data will be provided to the Fund at weekly frequency within 5 business days.

### Ceiling on external payment arrears by the NFPS — debt definition and arrears
- Debt determination:
  - External debt is determined according to the residency criterion except in the case of debt securities for which the criterion is the place of issuance of the instrument.
  - “Debt” is defined as a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
  - Primary forms include:
    - (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets equivalent to fully collateralized loans (repurchase agreements and official swap arrangements);
    - (ii) suppliers’ credits (contracts where the supplier permits the obligor to defer payments until sometime after delivery of goods or services); and
    - (iii) leases (present value at inception of lease payments expected to be made during the agreement period, excluding payments covering operation, repair or maintenance).
- Arrears:
  - Under the debt definition above, arrears, penalties and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

*1ecuea2019001 - 4. Submission to the National Assembly of amendments to (IMF PDF).*

### 23.      External payment arrears for program monitoring purposes are defined as external debt

### 1ecuea2019001 - 23.      External payment arrears for program monitoring purposes are defined as external debt

### External payment arrears: definition, coverage, and monitoring
- Definition:
  - External payment arrears for program monitoring purposes are defined as external debt obligations (principal and interest) falling due after March 11, 2019 that have not been paid within 90 days of the due date, considering the grace periods specified in contractual agreements.
- Coverage (exclusions):
  - This performance criterion covers the non-financial public sector.
  - This performance criterion does not cover:
    - (i) arrears on short-term trade credit or letters of credits;
    - (ii) arrears on debt subject to renegotiation or restructuring; and
    - (iii) arrears resulting from the nonpayment of commercial claims that are the subject of any litigation initiated prior to March 11, 2019.
- Monitoring:
  - This PC will be monitored on a continuous basis.

### Ceiling on central bank financing to the NFPS: definitions and monitoring
- Definitions:
  - Central bank (BCE) direct financing to the NFPS and indirect financing to the NFPS through the public banks includes:
    - overdraft transfers from the BCE to the entities of the NFPS as defined above;
    - advance distribution of unrealized profits from the BCE;
    - the BCE acquisition of government debt on the primary market or by purchase from public institutions;
    - the BCE lending to public banks for the purpose of acquisition of government debt on the primary market or by purchase from public institutions.
- Monitoring:
  - This PC will be monitored on a continuous basis.
  - Monthly data on amortizations and disbursements of credit to NFPS and to publicly-owned banks for the purpose of financing the non-financial public sector will be provided within five business days to the Fund.

### Indicative target: overall balance of the NFPS — definitions and measurement
- Definitions:
  - The Non-Financial Public Sector (NFPS) is defined as above.
  - The overall balance of the NFPS is defined as:
    - the non-oil primary balance of the NFPS plus the oil balance of the NFPS plus interest revenues of the NFPS minus interest expenditures of the NFPS.
  - The oil balance of the NFPS is defined as the sum of:
    - (i) revenues from oil exports,
    - (ii) revenues from the domestic sales of oil derivatives, and
    - (iii) the operating surplus of state oil companies (PetroAmazonas and PetroEcuador)
    - minus the sum of:
      - (i) expenditures on investment in the oil sector,
      - (ii) expenditures on imports of petroleum derivatives (de Financiamento de Derivados Deficitarios), and
      - (iii) payments to private oil companies (Ministerio de Energia y Recursos Naturales no Renovables).
  - NFPS interest expenditures are measured on cash basis while all other expenditures are measured on accrual basis.
- Monitoring:
  - All fiscal data referred to above and needed for program monitoring purposes will be provided to the Fund with a lag of no more than 60 calendar days after the end of each quarter and preliminary data with the lag of no more than 45 days after the end of each month.

### NFPS debt definition and instruments (GFSM 2014 alignment)
- NFPS debt stock definition:
  - For the purpose of the program, NFPS debt stock will be defined in accordance with IMF Government Finance Statistics Manual (GFSM) 2014 and Public Sector Debt Guide for compilers and users.
  - Total gross NFPS debt will cover all liabilities that are debt instruments.
  - A debt instrument is defined as a financial claim that requires payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates, in the future.
- Instruments considered debt instruments (listed verbatim):
  - Special drawing rights (SDRs);
  - Currency and deposits;
  - Debt securities;
  - Loans;
  - Insurance, pension, and standardized guarantee schemes; and
  - Other accounts payable.
- Exclusions from debt:
  - Liabilities in the form of equity and investment fund shares and financial derivatives and employee stock options are not considered debt.
  - Equity and investment fund shares are not debt instruments because they do not require the payment of principal or interest.
  - Financial derivatives are not considered debt liabilities because no principal is advanced that is required to be repaid, and no interest accrues on any financial derivative instrument.
- Ecuador-specific instruments that should be included in debt:
  - Debt Securities
    - (hold by nonresidents, and by residents non-included in the Non-Financial Public-Sector entities)
    - Bonds
    - Treasury certificates
  - Loans
  - Other Accounts Payables
  - Advanced oil sales
  - Schlumberger deal
  - Arrears with resident suppliers
- Consolidation rule:
  - Any liabilities issued by entities of the NFPS, held as an asset by other entity of the NFPS should be netted out.
  - Since the consolidation is done at the level of NFPS, central bank lending to the government is included in the stock of NFPS debt.
- Monitoring:
  - The data on NFPS stock of debt in US$ will be provided to the Fund monthly with a lag of no more than 30 calendar days after the end of each month.

### Reporting frequencies, data requirements, and other information provision
- Weekly reporting items:
  - Consolidated balance sheets of the banking system, by main accounts, including deposits in the banking system, available funds, and credit to the private sector;
  - BCE balance sheet;
  - Financial indicators: interest rates, deposits of banks at the BCE, interbank rates.
  - Monetary data in the template agreed with Fund staff, no later than 5 business days.
- Monthly reporting items:
  - NFPS financing data compiled based on detailed information on financial assets and liabilities, namely, deposits, loans, securities, equities, other accounts payable including oil related, and their amortizations, disbursements and arrears accumulation when the information on the latter becomes available.
  - NFPS cash flow data from the beginning to the end of the current fiscal year, with a lag of no more than 60 days after the closing of each month. This will include expected monthly amortizations and repayments on NFPS debt as defined above.
- Two-week requirement:
  - Provision of detailed information on collateralized debt and debt with similar arrangements, such as repo transactions and other similar debt involving the pledge, sale/resale, or encumbrance of assets within 2 weeks of signing new contracts.
  - This information will include all contracts related to such debt; information on the escrow accounts overseas that serve as collateral; and detailed information for each creditor on the stock of debt, its terms (including on the amounts pledged, sold/resold, or encumbered, as well as any related commitments or obligations to purchase related or unrelated goods and/or services from the lender), and expected repayment schedules.
- Quarterly reporting:
  - Detailed balance of payments data, no later 90 days.

### Statistical issues, quality, and recommended improvements
- General assessment:
  - In spite of some shortcomings, macroeconomic data are broadly adequate for surveillance purposes.
- National Accounts:
  - BCE disseminates GDP series with base year 2007.
  - Quarterly and annual National Accounts data are published based on the expenditure and production approaches, both in current and constant 2007 prices.
  - For 2017, the size of the GDP revision between the last two estimates (disseminated in March and July 2018) was significant.
  - Income-based National Accounts are published on an annual basis, up to 2017 (data for 2016 are semi-definitive and for 2017 are provisional).
  - The BCE has started a project to update the base year of the national accounts.
- Price statistics:
  - CPI has national coverage of urban cities and is based on 2011/2012 weights.
  - Since January 2015, the CPI base year has been changed to 2014.
  - PPI is a fixed base Laspeyres-type index with weights based on the 2013 figures of the national accounts.
  - International good practices recommend updating price weights every five years.
- Government Finance Statistics:
  - Authorities publish central government and nonfinancial public sector operation statistics based on the 1986 GFS Manual.
  - Recommendation: switch to the 2014 GFSM Manual and improve classification of expenditures and revenues.
  - Suggestion: report oil revenues and expenditures on gross bases and explicitly show gross revenue from exports and domestic sales separately.
  - Ministry of Finance has begun consolidating NFPS statistics and plans to release detailed Debt Statistics Data; advisable to disseminate consolidated NFPS Debt Statistics Data broken down by sector.
- Monetary and Financial Statistics:
  - BCE compiles monetary statistics generally following the Monetary and Financial Statistics Manual methodology.
  - BCE reports detailed monthly monetary data for the central bank and other depository corporations using standardized report forms (SRFs).
  - Data for other financial corporations are being compiled but not yet available for publication.
  - Core FSIs for deposit-takers and five (out of 13) encouraged FSIs are reported to STA monthly; no FSIs on other sectors/markets are reported.
- External sector statistics:
  - Ecuador compiles and disseminates quarterly balance of payment and annual IIP statistics.
  - Authorities should strengthen compilation and dissemination and migrate to the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).
  - As an SDDS subscriber, Ecuador reports prescribed quarterly external debt data to the World Bank and disseminates monthly data on the Template on International Reserves and Foreign Currency Liquidity in its National Summary Data Page, but:
    - it does not submit the template to STA;
    - data are not timely;
    - dissemination format slightly differs from the standardized format;
    - the national definition of reserve assets is not fully aligned with the BPM6.
  - Recommended improvements include: strengthen coverage of the non-financial private sector and estimates of currency and deposits, compile quarterly IIP, improve classification and detail, and use source stock data (not accumulated flows) for the IIP.
  - Emphasized need to improve interdepartmental and interinstitutional cooperation to make better use of available source data for compiling ESS.
- Data dissemination timeliness table highlights (selected dates from table):
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of Latest Observation: 2/15/2019; Date Received: 2/20/2019; Frequency: W.
  - Reserve/Base Money — Date of Latest Observation: 1/31/2019; Date Received: 2/13/2019; Frequency: M.
  - Consumer Price Index — Date of Latest Observation: 01/2019; Date Received: 2/2019; Frequency: M.
  - Stocks of Central Government and Central Government-Guaranteed Debt — Date of Latest Observation: Q4/2018; Date Received: 2/2019; Frequency: M.
  - International Investment Position — Date of Latest Observation: 2017; Date Received: 4/06/2018; Frequency: A.

### Fund relations, safeguards, exchange rate, and technical assistance (select highlights)
- Safeguards assessment:
  - A safeguards assessment of the BCE was concluded in June 2017 in connection with the 2016 disbursement under the RFI.
  - Findings: following legal changes in 2014, BCE’s institutional framework did not provide sound safeguards for independent management of its resources; internal audit mandate and capacity needed strengthening.
  - BCE has published the financial statements for 2017 and 2018 but not the auditor’s notes or opinions.
  - The safeguards assessment will be updated before the first program review.
- Exchange rate arrangement:
  - On February 12, 1999 the central bank abandoned the exchange rate band and floated the sucre.
  - On March 9, 2000 the economy was dollarized at 25,000 sucres per U.S. dollar.
  - The de jure and de facto exchange rate arrangement is an arrangement with no separate legal tender; local coins in circulation amount to about US$80 million.
  - Ecuador has accepted the obligations of Article VIII, Sections 2, 3, and 4 but maintains an exchange restriction subject to Fund approval arising from a 5 percent tax on transfers for the making of payments and transfers on current international transactions.
  - Waivers and adjustments noted: waivers for outflows relating to bank loans of over one year for specific sectors; waivers added for transactions up to US$5,000 annually related to trips abroad paid using a debit or credit card; tax extended so cash taken abroad for tourism in excess of US$1,098 for each adult and US$366 for each minor will also be taxed at 5 percent.
- Technical assistance (selected):
  - FAD   Non-Resource Revenues, January/February 2019
  - STA   External Sector Statistics, January/February 2019
  - FAD   Wage Bill Reform, January 2019
  - MCM  Debt Management, December 2018
  - STA   National Accounts Statistics, November 2018
  - FAD   Public Financial Management, September 2018
  - STA   Government Finance Statistics and Public Debt Statistics, August 2018
  - STA   Monetary and Financial Statistics, August/September 2017
  - STA   Balance of Payments Statistics, August/September 2017
  - MCM  Network Analysis Toolkit, January 2016

*Source: IMF staff report informational annex text (March 4, 2019) provided in content unit 1ecuea2019001.*

### 2.      After years of excessive government intervention and large public spending, the

### 2.      After years of excessive government intervention and large public spending, the Ecuadorian authorities have initiated a fundamental change of the country’s economic structure.

### Overview and international support
- International community commitment: US$10.2 billion to Ecuador over the next three years from the World Bank, the Inter-American Development Bank (IDB), the Development Bank of Latin America (CAF), the Latin American Reserve Fund (FLAR) and other international financial institutions, in addition to the IMF.
- IMF contribution (contingent to Executive Board approval): about USD 4.2 billion (435 percent of quota) under an Extended Fund Facility (EFF) arrangement.
- Authorities’ four main pillars: (i) restoring the foundations of the dollarization regime; (ii) improving competitiveness, growth, and job creation; (iii) promoting shared prosperity while protecting the poor and the vulnerable; and (iv) fostering transparency, public accountability, and good governance.
- Recent policy actions: Productive Development Law (August 2018) forbidding BCE financing of the budget, strengthening fiscal framework, stimulating private investment via tax incentives; reduction of discretionary public spending; beginning to unwind fuel subsidies.
- Fiscal outcome to date: non-oil primary deficit (including fuel subsidies) lowered by an estimated 2.3 percent of GDP from 2016 to 2018.

### Fiscal Policy
- Overarching objective: quickly reverse the recent upward trend in public debt and, over time, bring it below 40 percent of GDP.
- Deficit reduction target: continue reducing the non-oil primary deficit (including fuel subsidies) by an additional 5 percent of GDP over the course of the EFF arrangement through expenditure and revenue measures.
- Social protection in consolidation:
  - Part of fiscal savings in 2019 to provide space to increase social spending by around 0.4 percent of GDP.
  - Maintain a floor on social assistance spending of about 1 percent of GDP until 2021.
- Upfront 2019 measures to achieve savings:
  - Streamlining of the wage bill through wage restraint, limits to new hires and temporary contracts, and alignment of wages of new hires with private sector.
  - Optimization of fuel subsidies for industrial use.
  - Improvement of public procurement processes and update of certain public fees.
  - Target revenue gains from concessions to the private sector.
- Tax reform plan: submit a broad-based and growth-friendly tax reform in the second half of 2019 targeting an increase in revenues of 1.5 to 2 percent of GDP by 2021 via simplification and reduction of exemptions.
- Public financial management: authorities to publish an action plan by the end of April including improved controls for expenditure commitments and domestic expenditure arrears.
- Fiscal framework strengthening:
  - Complement current expenditure growth rule with binding annual targets for the non-oil primary balance.
  - Review legislation to ensure public debt ratio defined and measured in line with best practices, eliminate inconsistencies, ensure prompt disclosure of budget execution data, and impose effective sanctions for future breaches.
- Financing plan: with international financial assistance, the program anticipates no need, in principle, to access international capital markets.

### Central Bank Policy
- Institutional modernization: rebuild and modernize the BCE institutional basis and structure; consolidate new institutional framework in legislation with clear objectives and functions to support dollarization.
- Governance measures: strengthen operational autonomy, establish an independent Board with fiduciary responsibilities, create strong internal and external audit functions.
- Transparency: publication of BCE’s past externally-audited financial statements (recently completed).
- Monetary financing: monetary financing of the deficit has been eliminated; regulation approved prohibiting all quasi-fiscal activities of the BCE, including direct and indirect lending to the public sector; intend to incorporate these changes into legislation by the end of 2019.
- Prudential liquidity support: BCE may provide temporary liquidity support to public banks for prudential and financial stability purposes.
- Reserve objective: intention to ensure that, by the end of 2021, international reserves fully back the monetary reserves of private and public financial institutions held at the BCE plus coins in circulation.

### Financial Sector
- System soundness: Ecuadorian financial system remains sound, liquid, and well-capitalized.
- Risks and monitoring:
  - Acknowledge risks from relatively rapid credit growth in some segments.
  - Plan to improve monitoring of household indebtedness and house prices; may consider macroprudential measures.
- Resilience measures: reassess banking resolution procedures, crisis preparedness, and adequacy of the liquidity fund and deposit insurance scheme.
- Structural reforms: simplify and establish more efficient liquidity requirements for banks to deepen financial intermediation and align with international best practice; improve interest rate policies to foster competition, savings, investment and production.

### Competitiveness and Job Creation
- Objectives: restore international competitiveness and attract private sector investment via labor market, infrastructure, business environment, capital markets development, and external trade openness.
- Labor market reforms:
  - Reduce informality, remove rigidities, and facilitate access to jobs—especially for women and youth.
  - Roll back restrictions on labor contracts and eliminate rigidities that increase hiring costs; promote part-time and temporary employment to benefit women and young workers.
  - Expected outcome: incentives for firms to create new jobs and migration of workers from informal to formal sector.
- Entrepreneurship and capital markets:
  - Discussing an Entrepreneurship Law to improve legal framework for business formation and operation.
  - Reassessing capital markets’ legal framework to provide capital for new ventures.
  - Considering an institutional framework for public-private partnerships (PPPs) guided by best international practices.
- Trade and integration:
  - Recent trade agreements with the European Union and EFTA; in process of joining the Pacific Alliance.
  - Interest in closing negotiations with other partners, including the United States.
  - Conversations with the OCDE aimed at future accession.

### Social Policies and Governance
- Poverty progress: share of population below poverty line fell to 21.5 percent in 2017 from 64.4 percent in 2000, with most improvement between 2000 and 2006.
- Social protection under EFF: social assistance spending protected.
- Social program expansions:
  - Plan Toda Una Vida established and to be expanded.
  - Expanding coverage and raising benefits of Human Development Bond conditional cash transfer program.
  - Strengthening specific programs for the disabled and the elderly.
- Targeting and institutional improvements: preparing a comprehensive strategy to better target social programs, including improvements in beneficiary registration and other institutional enhancements.
- Human capital: long-term commitment to strengthen efficiency and quality of primary education and health spending to tailor human capital to needs of a dynamic economy.
- Anti-corruption and governance:
  - Continue advancing good governance and combating corruption to improve business climate and lower public financing costs.
  - Intend to submit a broad anti-corruption law to the National Assembly later this year to enhance independence and power of law enforcement and judiciary, strengthen coordination, and improve access to information.
  - Transitional Citizens Participation and Social Control Council appointed last year.
- Fiscal transparency and procurement: enhance transparency of the draft budget process; publish more timely data on budget execution and fiscal outturns; strengthen public procurement processes and require future procurement contracts to be published.
- Oil sector transparency:
  - Begin publishing externally-audited financial statements of the two state-owned oil companies; increase transparency of employment policies and practices.
  - Intend to merge operations to achieve synergies and improve governance.
  - Seek technical assistance during the EFF period to pursue membership of the Extractive Industries Transparency Initiative (EITI).
- AML/CFT and corruption priorities:
  - Develop an AML/CFT national risk assessment in line with FATF standards prioritizing corruption-related threats.
  - Use regulatory and supervisory tools to ensure banks monitor relationships with senior public officials.
  - Strengthen existing asset declaration regime.
  - Plan to submit legislation later this year to ensure proceeds of acts of corruption can be seized.

### Economic Prospects and Final Considerations
- Authorities’ view: confident the economic program will generate growth, jobs and prosperity; regard staff’s short and medium-term GDP projections as highly conservative.
- Expected near-term effects:
  - Recognize fiscal consolidation can be contractionary.
  - Expect offsetting factors: improvement in business and consumer confidence, better expectations on future economic developments, reduction in private and public financing costs, and increase in bank liquidity and credit stemming from elimination of the external financing gap for the next three years.
- Research opportunity: Ecuador presents an opportunity for the Fund to better understand the workings and idiosyncrasies of a dollarized economy, especially in the context of a positive confidence shock.

*Source: 1ecuea2019001 - 2.      After years of excessive government intervention and large public spending, the*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ecuea2019001.pdf_