## 1ecuea2019004

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### Program context and approval
- A 36-month EFF with access of SDR 3.035 billion (435 percent of quota or about US$4.204 billion) was approved on March 11, 2019.
- Staff supports authorities’ request for completion of the first review. The purchase release upon completion of this review would be in the amount of SDR 180.65 million.
- Key message from IMF Deputy Managing Director: fiscal position improving, reserves increasing, borrowing costs decreasing; planned tax reform decisive to increase revenues; need to strengthen PFM, central bank institutional framework, labor market reforms, and social protection.

### Program implementation and conditionality
- End‑March quantitative targets: All but one were met.
  - Met: performance criteria on non-oil primary balance including fuel subsidies (NOPBS), net international reserves (NIR), and social assistance spending.
  - Met: continuous PCs on external arrears; non‑imposition/non‑intensification of restrictions on payments for current international transactions; non‑introduction/non‑modification of multiple currency practices.
  - Breached (continuous PC): no new gross central bank direct financing of the NFPS — Program: 0; Actual: 120 (Millions of U.S. dollars); breach inadvertent due to rollover; authorities requested a waiver and committed to reverse and repay US$120 million by mid‑September.
- Structural benchmarks (SB):
  - Met: end‑March SB on disclosure of new external NFPS debt.
  - Met: end‑April SB on publication of the PFM action plan.
  - Met: end‑May SB on reform of the central bank.
  - Proposed: modifications to PCs on NOPBS, NIR, and social assistance spending; changes in NIR and social assistance definitions; oil price adjustor; minor modification to SB on COPFP amendments.

### Macroeconomic outlook and key projections
- Real GDP growth (selected): 2016 -1.2; 2017 2.4; 2018 1.4; 2019 -0.5; 2020 0.2.
  - Outlook for 2019: growth forecast remains in the range of negative 0.5 to positive 0.5 percent; program scenario uses -0.5 percent.
  - Medium‑term growth projection: recover to 2.5 percent.
- Inflation (selected): 2018 -0.2; 2019 0.4; 2020 1.2; narrative: inflation at 0.2 percent y‑o‑y in April 2019.
- Current account balance (selected): 2017 -0.4; 2018 -1.3; 2019 0.5; 2020 1.4.
- External position assessment: current account gap estimated at 3.8 percent of GDP; REER judged to be overvalued by around 32 percent.
- Gross external financing requirements in 2019: US$7.6 billion (now estimated to be US$300 million higher than at program approval).
- Public sector amortizations in 2019: about US$4 billion.
- Multilateral support available: about US$3.3 billion to finance amortizations.

### Reserves and debt
- Gross international reserves (GIR) projection: 2019 US$4,679 million; 2020 US$8,446 million (table).
- Net international reserves (current definition): 1,419 (US$ millions, 2018).
- Public sector debt (IMF definition, percent of GDP): 2017 44.6; 2018 45.8; 2019 48.4; 2020 47.4; 2021 45.7; 2022 41.3; 2023 37.1; 2024 33.0.
- Public debt (alternate table): Public debt 2018: 49.2 (percent of GDP, 2018) and Nominal GDP: 108,398 (US$ millions, 2018).

### Fiscal performance, composition, and projections
- End‑March NOPBS PC:
  - Programmed deficit: US$712 million
  - Actual deficit: US$115 million
  - Status: Met — main driver lower spending on capital and goods and services.
- End‑March indicative target on overall fiscal balance:
  - Program: 277 (Millions of U.S. dollars)
  - Actual: 148 (Millions of U.S. dollars)
  - Status: Not met — cause: decline in surplus of oil companies due to lower oil production and oil‑VAT methodology revision.
- Social assistance spending (central government) end‑March:
  - Programmed floor: 175 (Millions of U.S. dollars)
  - Actual: 183 (Millions of U.S. dollars)
  - Status: Met.
- Composition of consolidation: shifted toward lower spending on goods and services and capital (including slower execution of “Casa Para Todos”).
- Expected consolidation: 5 percent of GDP over the program period (2, 2, and 1 percent of GDP in 2019−21).
- Oil and overall balance:
  - Revised oil price forecast: about US$5 per barrel higher than envisaged under the program.
  - Oil balance expected: 3.4 percent of GDP in 2019 (versus 4.1 percent of GDP at program approval).
  - Overall deficit expected to reach 0.3 percent GDP in 2019.
- Wage bill savings:
  - Total savings estimated at 0.5 percent of GDP (0.2 percent in 2019; additional 0.3 percent in 2020).
  - Energy subsidy measures brought forward from 2021 yielding 0.1 percent of GDP.

### Fiscal rules, PFM, and arrears management
- Authorities’ commitments:
  - Publish PFM action plan and amend Organic Code of Planning and Public Finances.
  - Ensure debt ceiling and expenditure rules apply to consolidated NFPS; introduce an annual target for the NFPS non‑oil primary balance; suspend accumulation of assets in the fiscal stabilization fund until public debt ceiling operational.
- Arrears: not legally defined in Ecuador; IMF TA recommendations include:
  - Define expenditure arrears legally; set maximum payment period of 90 days for goods and services; require recording, monitoring and reporting of expenditure arrears; upgrade e‑SIGEF to record payment due dates.
  - Structural benchmark: prepare action plan for arrears clearance at central government level (end‑September SB).
- Under current accounting practices, all accounts payable considered arrears regardless of due date; preliminary information indicates existing arrears appear small.

### Net International Reserves (NIR) program definition and adjustors
- NIR (program measure) = US dollar value of usable gross international reserve assets of the BCE minus (i) gross reserve‑related liabilities to nonresidents of the BCE; (ii) reserve holdings of domestic banks and deposits of other financial institutions held at the BCE.
- Adjustors:
  - Oil price adjustor to NOPBS: US$23.85 million (quarterly) per US$1 per barrel deviation; capped at US$119.33 million (quarterly).
  - Oil price adjustor to NIR: US$21.7 million (quarterly) per US$1 per barrel deviation; capped at US$108.5 million (quarterly).
  - NIR also adjusted for borrowing from non‑residents above/below program assumptions and for shortfalls/excesses in program loan disbursements from multilaterals.
- Monitoring: change in NIR measured relative to stock on December 31, 2018 (negative US$1.7 billion old NIR definition; negative US$2.9 billion new NIR definition). Foreign exchange asset and liability data provided weekly within 5 business days.

### Program financing, liability management, and external arrears
- Program incorporates additional external bilateral financing of US$500 million in 2019; remains to be fully financed in 2020‑2021.
- Higher net financing needs of US$500 million due to larger fiscal deficit (US$315 million) and higher repayment of domestic obligations (about US$1 billion) and higher external amortizations (US$150 million); partially offset by higher multilateral financing including France Development Agency (US$140 million) and lower NFPS deposit accumulation (US$820 million).
- Liability management operation in June exchanged about US$1.2 billion of government bonds maturing in 2020 for bonds maturing in 2029; remainder of US$0.3 billion out of US$1.5 billion maturing in 2020 will be amortized in March 2020.
- External payment arrears ceiling monitored continuously; external payment arrears defined as obligations falling due after March 11, 2019 not paid within 90 days.

### Financial sector resilience and supervisory reforms
- Banking sector indicators (selected):
  - Capital to risk‑weighted assets: 13.2 percent.
  - Non‑performing loans (NPLs): 3 percent of total loans.
  - Liquid assets: 25 percent of short‑term liabilities.
  - Credit growth: 14 percent y‑o‑y in April 2019; deposit growth: 5 percent y‑o‑y.
  - Net foreign assets of other depository institutions declined by 16 percent y‑o‑y in April.
- Program aims:
  - Regulatory upgrade for banking and cooperative sectors.
  - Improve crisis management, preparedness, and safety nets.
  - Establish a functioning macroprudential framework.
  - Phase out the tax on transfers abroad.
- Liquidity regulation changes: June redefinition includes banks’ contributions to the liquidity fund as part of compliance, increasing ability to reallocate assets; staff recommends careful market monitoring and readiness to adjust reserve requirements.

### Central Bank (BCE) institutional reform and reserves goal
- BCE reform objectives:
  - Align BCE objectives and functions with best practices for a dollarized economy.
  - Strengthen BCE autonomy via an independent board with fiduciary responsibilities.
  - Introduce internal and external audit functions; adopt IFRS and publish audited financial statements.
  - Legislate prohibition of all quasi‑fiscal operations and direct/indirect lending to government/public sector.
  - Introduce backing rule: international reserve assets to fully back deposits from other depository institutions at the BCE and coins in circulation.
- Reserve target:
  - Current very low level: 12 percent of the ARA metric at end‑2018.
  - Program target: 64 percent by 2021.

### Social protection and safety nets
- Social assistance programs targeted at bottom 20 percent of income distribution centered around six cash transfer programs; revised definition expands to seven cash transfer programs and includes in‑kind transfers and child development centers.
- Coverage and expansions:
  - Bono de Desarrollo Humano covers about 40 percent of households below poverty line.
  - Authorities plan to cover an additional 37,000 poor and vulnerable households in 2019.
  - Expanded Misión Las Manuelas 2.0 includes Bono Personas con Discapacidades, Bono Joaquín Gallegos Lara, aid for over 66,000 disabled beneficiaries, and child development centers for over 250,000 infants up to age 3.
- Programmatic fiscal package includes a significant increase of around US$400 million on social assistance spending in 2019.
- Floor on social assistance spending of 1.2 percent of GDP will be maintained throughout the program.
- Monitoring: monthly social assistance data provided with a lag of no more than 30 calendar days, including number of beneficiaries and benefit amounts.

### Labor market, competitiveness, and gender
- Labor reforms aim to reduce hiring costs and rigidities, reduce informality, increase female labor force participation.
- Female labor force participation:
  - Increased from 49 percent in 2014 to 55 percent in 2018.
  - Relative female labor force participation reached 69 percent in 2018.
- Gender wage gap:
  - Unconditional gender wage gap: 2.5 percent in 2017.
  - Conditional (controlling for education, age, location): formal sector 12 percent; informal sector 24 percent.
- Policy measures: childcare provision, retraining and job placement prioritizing women, less rigid contractual arrangements, growth of services sector.

### Tax reform and revenue objectives
- Comprehensive tax reform under consideration to simplify regime, reduce administrative burdens, and boost competitiveness.
- Revenue objective: generate additional revenue of 1.5 to 2 percent of GDP per year (consistent with program commitments).
- Complementary measures: strengthen tax and customs administration, increase audits; plan of tax changes to be published by end‑August and legislation submitted by end‑October (structural benchmarks).

### Monitoring framework, TMU, and reporting
- Program monitored by PCs, ITs, and structural benchmarks per TMU.
- Review schedule: Second review on or after September 15; Third review on or after December 15.
- Selected quantitative targets (Millions of U.S. dollars, unless otherwise indicated) — Floor on NOPBS including petroleum subsidies (program vs. proposed):
  - End‑Mar 2019: Prog. PC -712; Actual -115 (status: Met)
  - End‑Jun 2019: Prog. PC -885; Proposed PC -885
  - End‑Sep 2019: Prog. PC -2,450; Proposed PC -2,200
  - End‑Dec 2019: Prog. PC -3,506; Proposed PC -3,148
- Floor on change in stock of NIR — program definition:
  - End‑Mar 2019: Prog. PC 1,823; Actual 2,388 (status: Met)
  - End‑Jun 2019: Proposed PC 2,627; Prog. 1,220
  - End‑Sep 2019: Proposed PC 2,788
  - End‑Dec 2019: Proposed PC 3,097
- TMU program exchange rates (as of January 31, 2019): US Dollar to Euro 0.87; to Renminbi 6.70; to Yen 108.89; to SDR 0.71; to British Pound 0.76; to South Korean Won 1,112.72; to Swiss Franc 0.99; to Canadian Dollar 1.31; to Danish Krone 6.52; to Swedish Krone 9.05; to Norwegian Krone 8.43; to Australian Dollar 1.37; to Mexican Peso 19.11; to Colombian Peso 3,106.50; Gold prices (US$/ounce) 1,321.25.

### Risks and contingency mechanisms
- External risks:
  - Sharp fall in oil prices, tightening global financing conditions, appreciation of the U.S. dollar, weaker global growth, and spillovers from Venezuela (estimated about 300,000 Venezuelan refugees) could strain public services and external position.
- Domestic risks:
  - Political opposition to reforms, shortfalls in oil production (e.g., delays at Ishpingo), weak expenditure controls, large accounts payable, frequent large data revisions.
- Program mechanisms:
  - Oil adjustor for NOPBS and NIR for small/temporary price deviations.
  - Temporary relaxation of NIR targets for small shortfalls; larger/persistent shortfalls require additional fiscal consolidation.
  - PFM and transparency reforms, arrears action plan, and monitoring of central bank balance sheet movements as contingency measures.

### Staff appraisal and support
- Staff notes recent 2018 growth of 1.4 percent and slowdown signs in early 2019; inflation subdued.
- Staff supports authorities’ reforms: restore fiscal prudence; reform PFM and fiscal rules; strengthen BCE institutional framework; upgrade social registry and expand assistance; develop medium‑term debt management strategy; adopt growth‑friendly tax reform generating 1.5 to 2 percent of GDP.

### Key exact figures and indicators (selected)
- SDR 3.035 billion (435 percent of quota or about US$4.204 billion) — program access.
- SDR 180.65 million — purchase release upon completion of the first review.
- Real GDP growth: 2018 1.4 percent; 2019 -0.5 percent (program scenario).
- Non‑oil primary deficit including fuel subsidies (2018): 4.9 percent of GDP.
- Overall fiscal deficit 2018: 1.2 percent of GDP.
- Public debt 2018: 45.8 percent of GDP (alternate table: 49.2 percent of GDP, 2018).
- Sovereign bond spreads fell by 250 basis points since January 1, 2019.
- Gross external financing requirements in 2019: US$7.6 billion (US$300 million higher than at program approval).
- Public sector amortizations in 2019: about US$4 billion.
- Multilateral support to cover amortizations: US$3.3 billion.
- Banking sector ratios: capital to risk‑weighted assets 13.2 percent; NPLs 3 percent; liquid assets 25 percent of short‑term liabilities.
- Credit growth: 14 percent y‑o‑y in April 2019; deposit growth: 5 percent y‑o‑y.
- Population (2018, million): 17.3.
- Quota (current): SDR 697.7 millions/100 percent of quota.
- Main exports: Petroleum, flowers, bananas, shrimp.
- Key export markets: United States, Europe.

*Source: IMF staff report for Ecuador — First Review under the Extended Fund Facility Arrangement (June 14, 2019).*

### 4.204 millones (DEG 3.035 millones), equivalente a 435% de la cuota de Ecuador en el FMI,

### ECUADOR: FIRST REVIEW UNDER THE EXTENDED FUND FACILITY ARRANGEMENT, REQUESTS FOR WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERION, MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW

### Program context and approval
- A 36-month EFF with access of SDR 3.035 billion (435 percent of quota or about US$4.204 billion) was approved on March 11, 2019.
- Staff supports authorities’ request for completion of the first review. The purchase release upon completion of this review would be in the amount of SDR 180.65 million.
- Statement by Mr. Tao Zhang, Deputy Managing Director of the IMF (post-Board meeting):
  - “El programa de reforma de las autoridades respaldado por el acuerdo del FMI está rindiendo fruto. La posición fiscal subyacente está mejorando, las reservas internacionales están en aumento y los costos de endeudamiento están disminuyendo. A pesar de los riesgos a la baja, incluidos los efectos secundarios de los países vecinos, el fortalecimiento de la posición fiscal y las reformas estructurales deberían ayudar a impulsar el crecimiento y crear empleos.
  - “El gobierno ecuatoriano ha demostrado que está resuelto a restablecer la disciplina fiscal mediante la racionalización del gasto público. La reforma tributaria prevista será decisiva para incrementar los ingresos y lograr que el sistema tributario sea más eficiente, simple y equitativo. Estas reformas ayudarán a colocar la deuda pública en una trayectoria sostenible y a reforzar la competitividad externa de Ecuador.
  - “La sostenibilidad fiscal debe apoyarse en reformas de la gestión financiera pública. Las autoridades están tomando medidas para reforzar la elaboración y ejecución del presupuesto, reducir la discrecionalidad, fortalecer la supervisión y los controles, introducir reglas fiscales robustas y mejorar la gestión de la deuda pública.
  - “Apuntalar al sistema financiero es crucial para preservar la estabilidad financiera, mejorar la preparación frente a las crisis y hacer más eficiente la intermediación financiera. La reforma institucional del banco central será fundamental para respaldar el régimen de dolarización y estimular las reservas internacionales.
  - “Las reformas del mercado laboral son esenciales para apoyar la creación de empleo, así como para impulsar la competitividad y el crecimiento. Se necesitan medidas para facilitar la contratación, reducir las rigideces y la informalidad y aumentar la participación de la fuerza laboral femenina. Los esfuerzos para aumentar la transparencia y la gobernabilidad también ayudarán a salvaguardar los recursos públicos y promover un entorno empresarial que favorezca el crecimiento y la creación de empleo.
  - “La protección de los pobres y los más vulnerables sigue siendo una prioridad fundamental. Las autoridades están tomando medidas para modernizar el registro social y ampliar la cobertura de la asistencia social. El gobierno ecuatoriano está preparado para redoblar los esfuerzos a fin de garantizar que los vulnerables sigan estando protegidos.”

### Program implementation and conditionality
- End-March quantitative targets: All but one were met.
  - Met: performance criteria on non-oil primary balance including fuel subsidies (NOPBS), net international reserves (NIR), and social assistance spending.
  - Met: continuous performance criteria on external arrears; non-imposition and non-intensification of restrictions on payments for current international transactions; non-introduction and non-modification of multiple currency practices.
  - Request for waiver: end-March continuous performance criterion on no new gross financing of the government by the central bank.
- Structural benchmarks:
  - Met: end-March SB on provision of detailed information on new external non-financial public sector (NFPS) debt incurred.
  - Met: end-April SB on publication of the PFM action plan.
  - Met: end-May SB on reform of the central bank.
  - Proposed: modifications of PCs on NOPBS, NIR and social assistance spending; changes in the definition of NIR and social assistance spending; an adjustor for oil price fluctuations; minor modifications to SB on amending the Organic Code of Planning and Public Finances.

### Macroeconomic outlook and key projections
- Growth and inflation:
  - Real GDP growth: 2016 -1.2; 2017 2.4; 2018 1.4; 2019 -0.5; 2020 0.2 (table and narrative).
  - Outlook for 2019: growth forecast remains in the range of negative 0.5 to positive 0.5 percent, with the program scenario based on the negative 0.5 percent forecast.
  - Medium-term growth projection: recover to 2.5 percent.
  - Inflation: subdued; 2018 -0.2; 2019 0.4; 2020 1.2 (table). Narrative: inflation at 0.2 percent y-o-y in April 2019.
- External position and financing:
  - Current account balance: 2017 -0.4; 2018 -1.3; 2019 0.5; 2020 1.4 (table).
  - External position assessment: current account gap estimated at 3.8 percent of GDP; REER judged to be overvalued by around 32 percent.
  - Gross external financing requirements in 2019: US$7.6 billion (now estimated to be US$300 million higher than at program approval).
  - Public sector amortizations in 2019: about US$4 billion.
  - Multilateral support available: about US$3.3 billion to finance amortizations.
- Reserves and debt:
  - Gross international reserves (GIR): table shows 2019 projection US$4,679 million; 2020 US$8,446 million.
  - Public sector debt (IMF definition): 2017 44.6 percent of GDP; 2018 45.8; 2019 48.4; 2020 47.4; 2021 45.7; 2022 41.3; 2023 37.1; 2024 33.0.
  - External debt (% GDP): 2016 36.6; 2017 39.7; 2018 41.0; 2019 42.8; 2020 44.3 (from summary table).
- Financial sector indicators:
  - Capital to risk-weighted assets: 13.2 percent.
  - Non-performing loans (NPLs): 3 percent of total loans.
  - Liquid assets: 25 percent of short-term liabilities.
  - Credit growth: 14 percent y-o-y in April 2019; deposit growth: 5 percent y-o-y.
  - Net foreign assets of other depository institutions declined by 16 percent y-o-y in April (narrative).
- Labor market and social indicators:
  - Unemployment: 2016 5.2; 2017 4.6; 2018 3.7; 2019 4.3; 2020 4.7 (table).
  - Narrative: unemployment fell to 3.7 percent in December 2018 then bounced back to 4.6 percent by March 2019 with increased informal employment.
  - Emphasis on reforms to increase female labor force participation and reduce informality.

### Policy priorities, reforms, and risks highlighted in the review
- Key priorities discussed:
  - Achieve fiscal sustainability.
  - Strengthen public financial management.
  - Fortify the social safety net and protect the poor and vulnerable.
  - Reform the central bank to strengthen institutional foundations of dollarization.
  - Remove rigidities in the labor market to boost competitiveness and job creation.
  - Improve transparency and governance.
- Fiscal policy measures and expected effects:
  - Fiscal consolidation and a slowdown in credit growth are projected to weigh on 2019 GDP.
  - The planned tax reform is described as decisive to increase revenues and make the tax system “more efficient, simple and equitable.”
  - Reforms expected to place public debt on a sustainable trajectory and reinforce external competitiveness.
- Financial sector and central bank reform:
  - Institutional reform of the central bank is seen as fundamental to support the dollarization regime and stimulate international reserves.
  - Emphasis on strengthening financial oversight, liquidity management, and crisis preparedness.
- Social protection:
  - Priority to modernize social registry and expand social assistance coverage to protect vulnerable populations amid fiscal consolidation.
- Risks:
  - Downside risks include spillovers from neighboring countries and the fiscal consolidation impact on growth and employment.
  - External vulnerabilities: the external position remains weaker than fundamentals imply and REER overvaluation poses competitiveness risks.

### Selected exact figures and indicators (as presented)
- SDR 3.035 billion (435 percent of quota or about US$4.204 billion) — program access.
- SDR 180.65 million — purchase release upon completion of the first review.
- Real GDP growth: 2018 1.4 percent; 2019 -0.5 percent (program scenario).
- Non-oil primary deficit including fuel subsidies (2018): 4.9 percent of GDP.
- Overall fiscal deficit 2018: 1.2 percent of GDP.
- Public debt 2018: 45.8 percent of GDP.
- Sovereign bond spreads fell by 250 basis points since January 1, 2019.
- Gross external financing requirements in 2019: US$7.6 billion (US$300 million higher than at program approval).
- Public sector amortizations in 2019: about US$4 billion.
- Multilateral support to cover amortizations: US$3.3 billion.
- Banking sector ratios: capital to risk-weighted assets 13.2 percent; NPLs 3 percent; liquid assets 25 percent of short-term liabilities.
- Credit growth: 14 percent y-o-y in April 2019; deposit growth: 5 percent y-o-y.
- Population (2018, million): 17.3.
- Quota (current): SDR 697.7 millions/100 percent of quota.
- Main products and exports: Petroleum, flowers, bananas, shrimp.
- Key export markets: United States, Europe.

*Source: IMF staff report for Ecuador — First Review under the Extended Fund Facility Arrangement (June 14, 2019).*

### 7. The fiscal target on the NOPBS was met. The end-March PC was met with a large

### 7. The fiscal target on the NOPBS was met.

### Fiscal targets and program performance
- End‑March performance criterion (PC) on the non-oil primary balance of the non‑financial public sector (NOPBS):
  - Programmed deficit: US$712 million
  - Actual deficit: US$115 million
  - Status: Met
  - Main driver: lower spending on capital and goods and services.
- End‑March indicative target (IT) on the overall fiscal balance of the non‑financial public sector:
  - Program: 277 (Millions of U.S. dollars)
  - Actual: 148 (Millions of U.S. dollars)
  - Status: Not met
  - Cause: decline in the surplus of oil companies due to lower oil production and a revision in oil‑VAT methodology.
- Social assistance spending (central government) at end‑March:
  - Programmed floor: 175 (Millions of U.S. dollars)
  - Actual: 183 (Millions of U.S. dollars)
  - Status: Met
  - Policy action: May establishment of an upgraded Unit of Social Registry; one‑off payments (Bono Naranja) to conditional cash transfer beneficiaries affected by coastal flooding.

### Monetary targets and net international reserves (NIR)
- Floor on the change in the stock of NIR (program measure):
  - Program: 1,823 (Millions of U.S. dollars)
  - Actual: 2,388 (Millions of U.S. dollars)
  - Status: Met
  - Off‑program negative transactions: central government payments of accounts payable of US$600 million; drawdown of deposits of other financial institutions in the central bank by US$221 million.
  - Positive impacts: authorities’ issuance of domestic securities and other central bank balance sheet movements (amortizations of public bank securities and the reversal of the BIS gold loan) of US$1.4 billion.
  - Resulting margin: target met with a margin of US$565 million.

### Continuous performance criterion breach and authorities’ response
- Continuous PC: No new gross central bank direct financing of the NFPS and indirect financing through public banks:
  - Program: 0
  - Actual: 120 (Millions of U.S. dollars)
  - Status: Not met (breached inadvertently)
  - Cause: rollover of previously contracted debt permitted under the Law for Productive Development; automatic treasury system execution, including a rollover of US$120 million in March 2019.
  - Authorities’ commitments:
    - Request a waiver for the breach.
    - Reverse the rollover and repay US$120 million by mid‑September (earliest legally‑allowed date).
    - Modify repayment schedule to prohibit envisaged rollovers for October 2019 and March 2020 via a draft central bank law explicitly prohibiting new financing and rollovers.

### Structural benchmarks and public financial management (PFM)
- Structural benchmarks (SB) for first review: all complied with.
  - Action plan for PFM reforms published on April 30 (fulfilled end‑April benchmark).
  - Amendments to Central Bank legal framework submitted to Cabinet by end‑May (fulfilled SB).
  - End‑March SB on disclosure of external non‑financial public sector debt: complied.
  - No new collateralized debt or similar arrangements contracted in Q1.
- PFM reforms aim to:
  - Strengthen budget preparation, execution, and cash management practices.
  - Improve transparent fiscal reporting.
  - Strengthen Ministry of Economy and Finance’s fiscal oversight role.

### Fiscal consolidation, composition, and projections
- Overall program consolidation:
  - Expected consolidation: 5 percent of GDP over the program period (2, 2, and 1 percent of GDP in 2019−21).
  - NOPBS level now somewhat higher due to upward revision of 2018 base.
- Oil and overall balance:
  - Revised oil price forecast: about US$5 per barrel higher than envisaged under the program.
  - Oil balance expected: 3.4 percent of GDP in 2019 (versus 4.1 percent of GDP at program approval).
  - Overall deficit expected to reach 0.3 percent GDP in 2019.
- Composition of consolidation shifted toward lower spending on goods and services and capital (including slower execution of “Casa Para Todos”).
- Wage bill savings:
  - Total savings from wage bill reforms estimated at 0.5 percent of GDP.
  - Timing: 0.2 percent of GDP expected in 2019; additional 0.3 percent of GDP in 2020.
  - Energy subsidy measures brought forward from 2021 yielding 0.1 percent of GDP.

### Public debt outlook and fiscal rules
- Public debt projection:
  - Projected to approach 49 percent of GDP by end‑2019.
  - Expected to decline to about 40 percent by end‑2022.
- Authorities’ commitments on fiscal rules and legal changes:
  - Publish PFM action plan and amend Organic Code of Planning and Public Finances.
  - Recommended fiscal rule changes include:
    - Ensure debt ceiling and expenditure rules apply to consolidated NFPS.
    - Introduce mechanisms to support expenditure rule operation and interaction with constitutional golden rule.
    - Introduce an annual target for the NFPS non‑oil primary balance.
    - Suspend accumulation of assets in the fiscal stabilization fund until public debt ceiling becomes operational.

### Identifying and managing payment arrears
- Arrears: not legally defined in Ecuador; no mandatory reporting system.
- IMF technical assistance recommendations include:
  - Introduce a legal definition of expenditure arrears.
  - Establish a maximum payment period of 90 days for expenditures on goods and services.
  - Require recording, monitoring and reporting of expenditure arrears; upgrade e‑SIGEF to record payment due dates.
  - Prepare an action plan for arrears clearance at central government level (end‑September SB).
  - Budget for repayment of arrears.
- Authorities are working on including legal definition of arrears in the Organic Code (SB June 2019) and upgrading information system (SB January 2020).
- Under existing accounting practices, all accounts payable are considered arrears regardless of due date; preliminary information indicates existing arrears appear small.

### Debt management and domestic debt market development
- Past focus: raising funds to cover short‑term financing needs, limiting sound debt management practices.
- Domestic debt market: underdeveloped; limited investor participation and low secondary market volumes.
- Policy priorities:
  - Promote development of local debt markets.
  - Enhance investor relations activities.
  - Formulate a medium‑term debt management strategy.

### Central Bank (BCE) institutional reforms and reserves goal
- Objectives of BCE reform:
  - Align BCE objectives and functions with best practices.
  - Strengthen BCE autonomy via an independent board with fiduciary responsibilities.
  - Introduce strong internal and external audit functions.
  - Legislate prohibition of all quasi‑fiscal operations and direct and indirect lending to the government/public sector (explicit prohibition of no new gross financing by the BCE).
  - Introduce a backing rule: international reserve assets to fully back deposits from other depository institutions at the BCE and coins in circulation.
- Reserve target:
  - Current very low level: 12 percent of the ARA metric at end‑2018.
  - Program target: 64 percent by 2021.

### Financial sector resilience and regulatory changes
- Program aims for financial sector reforms to:
  - Fortify crisis preparedness and management frameworks.
  - Remove impediments to efficient intermediation.
  - Break sovereign‑financial linkages.
- Planned reforms include:
  - Regulatory upgrade for banking system and cooperative sector.
  - Improvement of crisis management, preparedness, and safety nets.
  - Establishment of a functioning macroprudential framework.
  - Phasing‑out of the tax on transfers abroad.
- Liquidity and reserve regulations:
  - Existing requirements impose significant obligations to hold government and public bank paper (minimum liquidity requirements and floors on balances in domestically issued instruments).
  - Under the program these regulations need to be phased out gradually.
  - June redefinition: inclusion of banks’ contributions to the liquidity fund as part of compliance, increasing banks’ ability to reallocate assets and support private sector lending.
  - Staff recommendations: careful market monitoring (lending standards, NPLs, liquidity) and readiness to adjust reserve requirements to manage domestic demand and reserve pressures.
  - A macroprudential framework will provide a structured policy response.

### Competitiveness, labor market reforms, and gender issues
- Structural reforms planned to boost competitiveness and job creation; authorities plan to submit labor, tax, PFM, and central bank reforms to the National Assembly in 2019.
- Labor reform goals: reduce hiring costs, reduce rigidities and informality, increase female labor force participation.
- Female labor force participation and wage gaps:
  - Female participation: relatively high internationally but significant gaps persist versus men.
  - Gender wage gap (accounting for education, age, location):
    - Formal sector: 12 percent
    - Informal sector: 24 percent
- Authorities’ policies to address gender gaps:
  - Support for families with young children, childcare provision.
  - Retraining and job placement programs prioritizing women.
  - Proposed labor reforms (less rigid contractual arrangements) and growth of services sector to support female participation.
  - Commitment to raise awareness about women’s rights and reduce gender‑based violence (cited 2018 Comprehensive Organic Law to Prevent and Eradicate Gender Violence against Women).

### Tax reform and revenue objectives
- Comprehensive tax reform under consideration with goals to simplify the regime, reduce administrative and tax burdens on investment, and boost competitiveness and job creation.
- Revenue objective of tax reform: generate additional revenue of 1.5 to 2 percent of GDP per year (consistent with program commitments).
- Complementary measures: strengthen tax and customs administration, increase audits.

*Source: Central Bank of Ecuador, Ministry of Finance, IMF staff calculations.*

### 25. The authorities reaffirmed their

### 25. The authorities reaffirmed their

### Social safety net: coverage, reforms, and programs
- Social assistance programs are targeted at the bottom 20 percent of the income distribution and are centered around six cash transfer programs that span the life cycle.
- Current coverage gaps and planned expansions:
  - Bono de Desarrollo Humano currently covers just about 40 percent of households living below the poverty line.
  - Authorities plan to supplement existing social assistance to cover an additional 37,000 poor and vulnerable households in 2019.
  - Expansion of social assistance for the disabled via Misión Las Manuelas 2.0, which includes:
    - Bono Personas con Discapacidades (cash transfers for the disabled).
    - Bono Joaquín Gallegos Lara (cash transfers for primary caretakers).
  - Revised social assistance definition expands from six to seven cash transfer programs and includes:
    - In-kind transfers for mobility devices and services for over 66,000 disabled beneficiaries.
    - Child development centers for over 250,000 poor and vulnerable infants up to age 3.
  - Plans to upgrade and expand the Social Registry; a Presidential Decree created a new institute to oversee and manage the expanded Social Registry in collaboration with the World Bank.

### Improving transparency, governance, and anticorruption measures
- Fiscal transparency efforts:
  - Plans to publish quarterly fiscal reports consistent with program definition to facilitate monitoring of budget execution versus program targets.
  - Progress toward increasing fiscal transparency of state-owned oil companies (end-June SB).
  - Reforms aimed at strengthening PFM and central bank governance to reduce vulnerabilities to corruption.
- Anticorruption institutional actions:
  - Transitional Citizens’ Participation and Social Control Council completed mandate; evaluated past performance, designated new authorities, and is producing final recommendations.
  - President designated an Anticorruption Secretary and established an International Experts Commission.
  - Planned concrete actions include:
    - (i) submitting to the National Assembly revisions to the anticorruption legal framework (end-September structural benchmark);
    - (ii) strengthening anticorruption institutions ensuring effective coordination and collaboration efforts;
    - (iii) starting work on enhancing the asset declaration regime in line with international good practices.
- AML/CFT framework:
  - Development of an AML/CFT national risk assessment forthcoming to help prioritize mitigation efforts.
  - Emphasis on ensuring banks and relevant entities monitor business relationships with politically exposed persons and implement a risk-based approach to AML/CFT supervision.

### Program financing, revisions, and key fiscal numbers
- Program financing status:
  - Program incorporates additional external bilateral financing of US$500 million in 2019 and remains to be fully financed in 2020-2021.
  - Higher net financing needs of US$500 million stem from:
    - larger-than-anticipated fiscal deficit (US$315 million);
    - higher repayment of domestic obligations, including triangular transaction with central bank and CFN, repayment of Convenios de Liquidez to the public electricity company, and other net domestic obligations (about US$1 billion);
    - higher external debt amortizations (US$150 million);
    - partially offset by higher net financing from multilaterals, including France Development Agency (US$140 million) and lower accumulation of NFPS deposits (US$820 million).
  - Liability management operation in June exchanged about US$1.2 billion of government bonds maturing in 2020 for bonds maturing in 2029.
    - Remainder of US$0.3 billion out of the total outstanding amount of US$1.5 billion of bonds maturing in 2020 will be amortized as scheduled earlier, in March 2020.
  - Indicators of IMF credit remain in line with forecasts at program approval.

### Program modalities: performance criteria (PCs), definitions, and adjustors
- Requested modifications and rationale:
  - Performance criteria on NOPBS, NIR, and social assistance spending to be modified; definitions of NIR and social assistance spending changed; introduction of adjustors to cushion oil price changes.
- NOPBS targets:
  - Q2 2019 target unchanged; Q3 and Q4 2019 targets are more ambitious than at program approval reflecting upward revision to the base (2018) while maintaining unchanged size of consolidation between the years.
- NIR targets and definition changes:
  - Downward revisions of the end-June and end-September PCs proposed to reflect seasonality of payments to domestic suppliers (about US$1 billion expected to be repaid to suppliers in the first half of the year with similar accumulation of accounts payable in the second half).
  - Overall balance projected to be about US$830 million lower in Q2 and US$746m lower in Q3 compared with the original program.
  - End-December target remains in line with original program due to offsetting accumulation of accounts payable in 2019H2 and other movements on the central bank balance sheet (including repayments of credit by public banks and higher deposits of public entities outside of the NFPS).
  - Proposed revision of program NIR measure to exclude certain components outside direct control of authorities and short-term liabilities of the central government, aligning NIR more closely with accumulation of NFPS savings at the central bank. Specifically, proposal to exclude deposits of other financial institutions (in addition to deposits of depository institutions).
- Social spending definition and targets:
  - Technical definition revised to include seven cash transfer programs, social services to beneficiaries, and direct monitoring and implementation costs; continues to reflect spending on the Social Registry.
  - Expanded definition includes in-kind transfers and child development centers described above; program targets revised to align with new definition while preserving original fiscal effort.
- Oil Price Adjustor:
  - A symmetric adjustor to the NOPBS and to NIR targets is proposed to accommodate small (below US$5 per barrel) and temporary (one quarter) oil price fluctuations.
  - Adjustor calculation: per each US$ deviation of the actual simple average oil price of dated Brent, West Texas intermediate, and the Dubai Fateh from the most recent reference price in the TMU.
  - Caps: US$119.33 million for the NOPBS target and US$108.5 million for the NIR target per quarter.
  - Larger and more persistent deviations (more than one quarter) will be handled in quarterly program reviews.

### Safeguards assessment, arrears, and exchange restrictions
- Safeguards assessment (finalized June 2019) recommendations to restore BCE autonomy and strengthen dollarization credibility:
  - (i) legal reforms to strengthen BCE institutional framework;
  - (ii) establishment of a new governance arrangement (Board and Audit Committee);
  - (iii) enhanced transparency via adoption of International Financial Reporting Standards and publication of full audited financial statements;
  - (iv) restoration of the internal audit function.
  - Draft legal amendments prepared with IMF technical assistance and submitted to Cabinet incorporate safeguards recommendations.
- Financing assurances and arrears:
  - Authorities continue good faith efforts to resolve outstanding arrears to external private creditors.
  - Around US$52 million (including accrued interest) remains outstanding to international private bondholders from bonds repudiated in 2008/2009, the majority of which were subsequently repurchased by the government.
  - Staff views authorities’ actions as good faith efforts under the Fund’s Lending into Arrears policy.
- Exchange restrictions:
  - Existing 5 percent tax on transfers abroad (impuesto a la salida de divisas) creates an exchange restriction on current international transactions; temporarily approved by the Board until March 2020.
  - A new exchange restriction identified arising from the SUCRE regional payments arrangement; staff does not recommend approval of the exchange restriction arising from the SUCRE mechanism since it is discriminatory.

### Risks and contingency mechanisms
- External risks:
  - Sharp fall in oil prices could necessitate larger and accelerated economic adjustment, weighing on incomes and job creation; unexpected increase in oil prices is an upside risk.
  - Unanticipated tightening of global financing conditions coupled with appreciation of the U.S. dollar would undermine competitiveness and exacerbate external vulnerabilities.
  - Weaker-than-anticipated global growth, including due to rising protectionism, would reduce export demand and strain the external position.
  - Continued labor migration from Venezuela could pressure health and education spending, worsen labor market indicators, and increase informality.
- Domestic risks:
  - A complicated political landscape could increase political and social opposition to reforms; bringing forward key reforms carries two-way risks to confidence and market sentiment.
  - Shortfalls in oil production, including delays at the Ishpingo oil field, could negatively affect oil revenue.
  - Weak expenditure controls and a large stock of accounts payable (year-to-year and intra-year) could undermine program targets.
  - Frequent and large data revisions due to weak fiscal accounting and reporting create risks for program monitoring.
  - Composition of the 2019 NIR target includes sizeable components from central bank balance sheet changes (repayment of credit by public banks, reversal of BIS gold loan); risk that some gains may be reversed.
- Program mechanisms for risk management:
  - Oil adjustor to handle small and temporary oil revenue shortfalls.
  - Temporary small shortfalls may be accommodated by relaxing NIR program targets; larger and persistent shortfalls would require additional fiscal consolidation.
  - Public financial management and transparency reforms (including changes to the organic code of budget and planning) aim to address weak expenditure controls and frequent data revisions.
  - Staff and authorities will monitor central bank balance sheet movements and identify contingency measures to safeguard NIR targets if realized gains fall short.

### Staff appraisal: macro outlook and policy priorities
- Recent developments and outlook:
  - Real GDP grew by 1.4 percent in 2018 with signs of broad-based deceleration in Q4 2018; preliminary indicators suggest continued slowdown in early 2019 with signs of weakening labor market conditions.
  - External position deteriorated in 2018 partly due to strong imports growth and one-off factors but is expected to strengthen in 2019.
  - Inflation remains subdued; external financing costs declined sharply on the back of increased oil prices and IMF program approval.
- Policy priorities and recommendations:
  - Restoring fiscal prudence is key to reinforcing institutional foundations for dollarization and supporting growth.
    - Authorities committed to rationalizing the public sector wage bill.
    - Gradual optimization of fuel subsidies while shielding vulnerable groups recommended.
    - A tax reform aimed at raising revenue and making the tax system more efficient, simple, and equitable is recommended.
  - Strengthening legal framework for public financial management and fiscal rules to safeguard fiscal sustainability:
    - Reforms would strengthen budget formulation and execution, introduce a robust cash-management framework, reduce discretion, strengthen fiscal oversight and controls, and introduce robust fiscal rules.
    - Identifying the existing stock of domestic payment arrears is an urgent priority.
    - Developing a strategic medium-term debt management vision and taking steps to develop a domestic debt market recommended to reduce borrowing costs and improve resource allocation.
  - Staff supports authorities’ social protection priorities:
    - Upgrading the social registry, expanding social assistance coverage, and increasing spending for the disabled are endorsed.
    - Staff encourages plans to supplement existing social assistance programs targeted at the extreme poor with new programs for those affected by fiscal adjustment but not covered by the existing safety net.
  - Strengthening BCE institutional framework:
    - Reforms aim to align BCE objectives and functions with best international practices for a dollarized regime, strengthen autonomy and governance, and boost and safeguard international reserves to support rebuilding international reserves.

*IMF staff summary of chapter content.*

### 41. Fortifying the financial system will help safeguard financial stability and improve the

### 41. Fortifying the financial system will help safeguard financial stability and improve the efficiency of financial intermediation

### Financial stability assessment
- The financial sector appears stable, but the divergence between credit and deposit growth warrants vigilance.
- System-wide financial sector indicators appear adequate, but liquidity conditions are tightening.

### Recent policy actions and staff guidance
- Recent modifications to the liquidity regulation will help support intermediation.
- Staff encourages the authorities to carefully monitor the situation and raise reserve requirements promptly if signs of:
  - weakening in international reserve position,
  - acceleration of credit growth, and
  - cross-border flows emerge.

### Supported reform plans
- Staff strongly supports authorities’ financial sector reform plans, which include:
  - (i) a regulatory upgrade for the banking system and the cooperative sector;
  - (ii) improvement of crisis management, preparedness, and safety nets;
  - (iii) a functioning macroprudential framework; and
  - (iv) phasing-out the tax on transfers abroad.

### Key excerpt identifiers
- Paragraph number: 41

---

### 42. Structural reforms will help boost competitiveness and create jobs

### Labor market reforms and expected effects
- Staff supports authorities’ efforts to improve the functioning of the labor market through measures aimed at:
  - reducing hiring costs and reducing rigidities,
  - reducing labor informality, and
  - increasing female labor force participation.
- The labor reform should be carefully designed in consultation with various stakeholders to generate conditions for a dynamic and robust labor market.

### Infrastructure and productivity measures
- The development of the framework for PPPs and asset monetization can help:
  - improve efficient resource management,
  - reduce fiscal costs, and
  - increase productivity and growth.

### Key excerpt identifiers
- Paragraph number: 42

---

### 43. Restoring transparency and good governance

### Fiscal transparency and anti-corruption efforts
- Staff welcomes authorities’ efforts to restore transparency and good governance.
- Efforts to increase fiscal transparency, including in state enterprises, will help reduce vulnerabilities to corruption and help safeguard public resources.

### International standards and institutional strengthening
- Staff is encouraged by the plans and ongoing work towards compliance with:
  - United Nations Convention Against Corruption (UNCAC), and
  - Financial Action Task Force (FATF) standards to combat corruption and AML/CFT,
  - and towards adopting an anti-corruption legislation.
- Continued strengthening of anticorruption institutions and tools, such as the asset declaration regime, will be important.

### Key excerpt identifiers
- Paragraph number: 43

*ECUADOR 22 INTERNATIONAL MONETARY FUND*

### 44. The authorities have demonstrated strong commitment to their economic reform

### 44. The authorities have demonstrated strong commitment to their economic reform

### Reform measures and institutional progress
- The authorities have taken difficult measures to rationalize the public sector wage bill and reduce fuel subsidies, while efforts are under way to strengthen protection of vulnerable groups.
- Steadfast progress on public financial management reform and the reform of the central bank are noted as laudable.
- These measures are described as yielding results and underpin continued program support.

### Fund-supported program status and staff position
- Performance under the Fund-supported program remains on track.
- Staff fully supports the authorities’ requests for:
  - a waiver on the continuous performance criterion on no new gross direct or indirect central bank financing to the NFPS;
  - modification of the performance criteria on the non-oil primary balance, social spending, and net international reserves;
  - completion of the first review under the Extended Fund Facility Arrangement.

### Key fiscal and macro indicators (selected)
- Revenue: 35.9 (percent of GDP, 2018)
- Overall balance (deficit -): -1.2 (percent of GDP, 2018)
- Non-oil primary balance: -1.9 (percent of GDP, 2018)
- Non-oil primary balance (incl. fuel subsidies): -4.9 (percent of GDP, 2018)
- Public debt: 49.2 (percent of GDP, 2018)
- Gross international reserves: 4,999 (US$ millions, 2018)
- Net international reserves (current definition): 1,419 (US$ millions, 2018)
- Nominal GDP: 108,398 (US$ millions, 2018)

### Fiscal operations and financing (selected)
- Revenue (US$ millions, 2018): 38,866
- Expenditure (US$ millions, 2018): 40,166
- Overall balance (US$ millions, 2018): -1,300
- Gross financing needs (US$ millions, 2018): 9,169
- Public sector amortization (US$ millions, 2018): 7,868
- Identified external financing (US$ millions, 2018): 10,011
- IMF disbursements under prospective arrangements (2019‒2028): disbursement entries show 1,011 (2019) and cumulative program phasing up to 3,035.0 (SDR million) shown in IMF phasing table.

### Program implementation milestones (selected)
- Staff supports completion of the first review under the Extended Fund Facility Arrangement.
- Tables indicate phasing under the Extended Fund Arrangement with a Board approval date of March 11, 2019 and scheduled reviews (First Review: June 15, 2019) and cumulative access entries in SDR and US$ terms.

*Source: IMF staff report and statistical tables as presented in the content unit.*

### Annex I. Legal Reform on Public Financial Management and Fiscal

### Annex I. Legal Reform on Public Financial Management and Fiscal Rules in Ecuador

### Consolidation and evolution of the legal PFM framework
- Constitutional reforms of 2008 introduced a new fiscal policy regime; established requirements and procedures for borrowing; revised the budget formulation, approval, and execution procedures; and envisaged the creation of a Treasury Single Account.
- Adoption of the COPFP (Organic Code of Planning and Public Finances) in 2010, an instrument that for the first time ranked above ordinary statutes and consolidated the legal framework on public finance.
- The COPFP governs all fundamental aspects of PFM, including macroeconomic and fiscal policy, budget preparation and approval, budget execution and cash management, and accounting reports and internal control.

### Identified weaknesses in the COPFP and PFM framework
- Fragmented budget preparation process with a lack of a top-down orientation.
- Excessive power of the Executive to increase the budget approved by the National Assembly.
- Weak monitoring of expenditure arrears.
- Reliance on cash management instruments to finance part of the budget execution.
- Weak fiscal oversight mandate of the Ministry of Economy and Finance (MEF).
- Fiscal rules shortcomings:
  - Inadequate coverage of debt and expenditure rules.
  - Potential inconsistencies between the expenditure rule and the constitutional golden rule.
  - Weak monitoring and enforcement mechanisms.
  - Rigid funding rules for the stabilization fund, which could hamper compliance with the fiscal rules.

### Authorities’ Action Plan and main reform areas (as identified by MEF)
- PFM reforms:
  - (i) strengthen the top-down budget formulation process including by introducing an aggregate expenditure ceiling and eliminating the fragmentation between capital and recurrent budgets;
  - (ii) limit the Executive’s discretion to amend the budget approved by the National Assembly;
  - (iii) for the current stock of CETES, prepare a plan for a gradual reduction and for the future flow introduce a robust framework for the use of cash management instruments;
  - (iv) enhance budget execution by limiting advances, incorporating past-year non-accrued commitments, and removing the Cuenta de Financiamiento de Derivados Deficitarios (CFDD) from the budget;
  - (iv) enhance control and monitoring of expenditure arrears and prepare a plan for the clearance of the stock;
  - (v) strengthen the MEF fiscal risk oversight role.
- Fiscal rules reforms:
  - (i) modify the institutional coverage for the fiscal rules to the consolidated NFPS;
  - (ii) introduce a binding non-oil primary balance target for the NFPS;
  - (iii) enhance the enforcement and monitoring mechanisms by clearly defining the escape clauses, automatic correction mechanisms, and in-year fiscal reporting;
  - (iv) suspend the accumulation of assets for the fiscal stabilization fund until the public debt ceiling becomes operational.

*Prepared by Karla Vasquez.*

---

### Annex II. Progress on the Reform of the Legal Framework of Banco Central del Ecuador (BCE)

#### Central bank role in a dollarized economy — objectives and functions
- In dollarized economies, the central bank’s primary objective typically should be to foster and maintain a stable financial system (in contrast to price stability).
- Core functions listed for inclusion in the BCE’s revised legal framework:
  - (a) conducting macro-prudential policies to ensure financial stability;
  - (b) providing liquidity to banks within a predetermined ceiling;
  - (c) ensuring sufficient cash currency (banknotes and coins) needed in the economy;
  - (d) performing a lender of last resort function within prescribed limits;
  - (e) holding and managing all the country’s international reserves;
  - (f) providing a centralized clearing function for the payment system;
  - (g) performing an oversight of other payments and security settlement systems;
  - (h) compilation and dissemination of statistics necessary for the other core functions;
  - (i) acting as financial adviser and fiscal agent of the state;
  - (j) reporting to the government and National Assembly (accountability).
- A limited number of additional functions specific to Ecuador (e.g., the BCE certifies electronic signatures) will also be added.

#### Operational constraints and implications of dollarization
- Full dollarization relinquishes an independent monetary policy; typical central bank responsibilities such as conducting an independent interest rate policy become constrained.
- The central bank can still act as a market maker and influence banks’ liquidity through reserve requirements and market operations, subject to limits.
- Practical implications: define a cap for liquidity management operations with local banks; adopt prudential restrictions (e.g., collateral, terms); align with US$ interest rates and balance of payments’ sustainability limits.

#### Legal and governance reforms the authorities plan
- Prohibit all central bank financing of the public sector, including quasi-fiscal spending and all forms of indirect lending to the government and public sector.
- Require BCE balance sheet to have at a minimum the full backing of specific central bank liabilities with freely usable international reserves; authorities intend to reintroduce the so-called four balances system and define appropriate transitional arrangements.
- Align BCE with international good practices on central bank autonomy and sound governance:
  - Autonomy to decide on substance and implementation of core functions; third parties cannot block decisions.
  - Decision-making bodies should not seek instructions from other authorities; members should have security of tenure.
  - Financial autonomy, including a capital level that covers key risks and a commitment to seek recapitalization if capital is eroded.
  - A sound governance structure providing internal checks and balances and effective oversight.
  - Acceptance of collegial decision-making in the BCE.

*Prepared by Hans Weenink.*

---

### Annex III. Gender Wage Gap in Ecuador

#### Unconditional and conditional wage gap findings
- The unconditional gender wage gap (difference in average hourly wages between men and women, as a percentage of the average male hourly wage) in Ecuador reached 2.5 percent in 2017.
- Female labor force participation:
  - Increased from 49 percent in 2014 to 55 percent in 2018.
  - Relative female labor force participation (ratio of female to male labor force participation rates) reached 69 percent in 2018.
- Cross-country pattern: countries with lower relative female participation tend to exhibit lower unconditional wage gaps; positive correlation between relative female labor force participation and the unconditional wage gap.
- Once controlling for worker characteristics (education and age) and geographic location, the gender wage gap is larger:
  - Reaches 12 percent in the formal sector.
  - Reaches 24 percent in the informal sector.
- Worker qualifications: almost 28 percent of female workers have at least some college education, compared to 16 percent of male workers.

*Prepared by Fernanda Brollo.*

---

### Appendix I & Attachment I — Letter of Intent and Memorandum of Economic and Financial Policies (high-level fiscal commitments and financing requests)

#### Letter of Intent (June 14, 2019)
- Request for completion of the first review of the extended arrangement under the IMF's Extended Fund Facility and disbursement of the associated amount equivalent to SDR 180.65 million (the equivalent of US$250.14 million).
- Request that the full amount of this Fund financing be made available for budget support.
- Authorities secured additional international financing commitments of about US$6 billion over the course of the next three years.
- Request for a waiver of non-observance of the continuous performance criteria on new gross central bank financing of the non-bank public financial sector, and modifications of the performance criteria on the non-oil primary balance, floor on social spending, and floor on net international reserves.
- Commitment to provide timely and accurate data and to consult with the IMF on policy decisions.

#### Fiscal context and targets (Memorandum of Economic and Financial Policies)
- Public debt trajectory and target:
  - Total public debt rose from 24 percent of GDP in 2008 to 46 percent of GDP in 2018 according to IMF metrics and institutional coverage.
  - Government goal to bring public debt below the benchmark target of 40 percent of GDP; that target will once again become a legally binding limit on future public indebtedness.
- Fiscal adjustment target:
  - Intention to reduce the Non-Financial Public Sector non-oil primary deficit including fuel subsidies, by 5 percent of GDP during 2019-2021.
- 2019 measures to achieve a significant down-payment through primary spending reduction:
  - Realignment of the wage bill: balanced strategy of wage restraint and prudent decisions on renewal of occasional contracts and new hiring; renew only one of every two expiring contracts in the non-social sectors; harmonize wages of newly hired public employees with those in the private sector.
  - Continued optimization of fuel subsidies: normalization of diesel prices for industrial purposes; continue to benefit from savings resulting from the increases in gasoline prices implemented in 2018; policy decisions designed not to affect the poor and vulnerable and not to have a major impact on retail consumer price levels.
  - Improving procurement of goods and services via competitive bidding, framework and wholesale agreements, greater transparency, timeliness, and improved inventory management.
  - Updating schedule of fees charged for government services to more accurately reflect their costs and the markets they serve.
  - Leasing concession rights of public assets to private partners while ensuring public ownership, transparent processes, maximized benefit to the state, coverage of services preserved, and protection of the budget from contingent liabilities.

*Attachments listed: 1. Memorandum of Economic and Financial Policies; 2. Technical Memorandum of Understanding.*

*Prepared by IMF mission — Annex I source material.*

### 8. Part of the savings and revenue generated from these measures will allow the government

### 1ecuea2019004 - 8. Part of the savings and revenue generated from these measures will allow the government

### Strengthening social assistance and protection
- Plan Toda Una Vida will be strengthened to ensure access to health, education, safe and healthy habitat, housing and water with emphasis on the most vulnerable, women, the elderly and disabled.
- The programmatic fiscal package includes a significant increase (of around US$400 million) on social assistance spending in 2019.
- A floor on social assistance spending of 1.2 percent of GDP will be maintained throughout the life of the program.
- Expand coverage and raise benefits for the “Bono de Desarrollo Humano” conditional cash transfer program; increase spending for “Misión Las Manuelas” (disabled) and “Mis Mejores Años” (elderly); expand non-contributory pensions; modernize the social registry to improve targeting and information management.

### Contingency and fiscal consolidation measures
- If fiscal outcomes fall short of program targets, contingency measures will be deployed, including further rationalization of spending on goods and services, capital, and fuel subsidies.
- Complement 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 ensure effective operation of the expenditure rule and its interaction with the constitutional “golden rule”;
  - rules on accumulation of assets for the stabilization fund do not jeopardize fiscal rule compliance;
  - escape clauses, automatic correction mechanisms (e.g. for past deviations), and in-year fiscal reporting are strengthened.

### Public financial management reforms
- Strengthen data disclosure, provision and monitoring at all stages of the budget cycle; institute clear automatic enforcement mechanisms and effective sanctions for non-adherence to the law.
- Work with technical assistance experts to modernize budget processes.
- Amendments to the Código Orgánico de Planificación y Finanzas Públicas to:
  - strengthen role of Minister of Economy and Finance as fiscal oversight authority;
  - ensure annual budgets follow best international practices;
  - introduce binding expenditure ceilings aligned with overall fiscal framework;
  - limit government discretion to amend approved budgets and introduce robust contingency allocation framework;
  - ensure comprehensive, timely government accounting and reporting, improved cash management and commitment controls.
- Structural benchmarks by end-June and end-September: create system for information collection on domestic expenditure arrears, assess stock of expenditure arrears, implement institutional arrangements to better report and control expenditure commitments.
- Action plan to strengthen public financial management published end-April; intend to submit relevant legislative amendments to the National Assembly by end of June (structural benchmarks).

### Central Bank institutional strengthening and dollarization
- Prohibit new government international borrowing arrangements based on repurchase agreements or the pledging of Central Bank assets to safeguard creditworthiness.
- Reinforce institutional basis for dollarization with clear legal framework to protect purchasing power, financial value of homes and assets, and ensure stability and predictability for credit access.
- Ley de Fomento Productivo has prohibited the Central Bank from investing in securities issued by public sector entities.
- Monetary Board regulation prohibits future quasi-fiscal activities and direct/indirect lending to government or public sector; intent to codify these changes into Código Orgánico Monetario Financiero by end-September (structural benchmark).
- Central Bank may provide temporary liquidity support to public banks for prudential purposes.
- Intend to unwind past transactions that resulted in the Central Bank holding government debt or equity in public banks.
- Goal to gradually build international reserves over the administration so that, by the end of this arrangement, international reserve assets fully back:
  - (i) the reserves held at the Central Bank of private financial institutions and public financial institutions that receive deposits from the public; and
  - (ii) national coins in circulation.
- End-May structural benchmark: submitted to Cabinet an overhaul of legislative underpinnings of Central Bank activities to ensure clear objectives and limited functions, strengthen operational autonomy via an independent Central Bank Board with fiduciary responsibilities, and build strong internal and external audit functions.
- Published past externally-audited financial statements of the Central Bank; intend to produce 2019 financial statements in conformance with International Financial Reporting Standards and begin publishing under this standard starting in 2021.

### Financial system resilience and supervision
- Financial system described as strong, liquid, and well-capitalized, but the economic slowdown could strain the system and the BOP via imports; cooperative sector growth requires greater supervisory scrutiny.
- Strengthen monitoring of household indebtedness and housing prices; consider a new macroprudential framework to mitigate risk accumulation.
- New requirements under consideration, including loan-to-value ratios for mortgage lending.
- Re-examine banking resolution procedures, crisis preparedness framework, adequacy of liquidity fund and deposit insurance scheme.
- Gradually diversify deposit insurance fund’s assets away from sovereign debt under a revised portfolio strategy based on best international practice.
- Simplify various 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.

### Policies to boost competitiveness, job creation and growth
- Publish a plan of tax changes by end-August and submit legislation to the National Assembly by end-October to upgrade taxation (structural benchmarks).
  - 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 system from direct to indirect taxation; (v) phase out distortionary turnover taxes and levies on transfers abroad.
  - Revenue yield enhanced by strengthening tax and customs administration, including merger of tax and customs authorities.
- Entrepreneurship: discuss an Entrepreneurship Law to eliminate obstacles to business formation and operation.
- Housing: “Casa Para Todos” program to promote job creation in construction and broaden home ownership for low and middle-income households.
- Labor market reform: reduce implicit hiring costs, improve access to formal jobs (especially for women and young workers), introduce a broader range of employment contracts to support part-time and temporary work.
- Public-Private Partnerships: legislate an institutional framework guided by best international practices to increase productivity and lessen budget pressures.
- Capital market regulations: examine legal framework to increase flow of resources from investors to corporations.
- Trade: Ley de Fomento Productivo ensures companies access to international arbitration; recent trade agreements with the European Union and EFTA; process of joining the Pacific Alliance is underway.

### Promoting shared prosperity, human capital, and priorities in social sectors
- Commit to expand Plan Toda Una Vida coverage and reduce poverty, with special attention to rural and indigenous populations.
- Strengthen efficiency and quality of primary education and health spending; prioritize learning, preventive health and stunting.
- Identify efficiency gains in sectoral budgets without sacrificing coverage and quality; prioritize investments with high human capital returns.
- Publication of an action plan by end-September is a structural benchmark under the program.

### Transparency, governance and anti-corruption measures
- Broad anti-corruption law to be submitted to the National Assembly later this year (end-September structural benchmark).
  - Enhance independence and power of law enforcement agencies and judiciary; strengthen anti-corruption institutions and coordination; improve access to information to facilitate civil society oversight.
- Increase transparency in fiscal management: publication of public debt data in conformity with international standards; publish greater information on draft budget; strengthen public procurement processes and require procurement contracts to be published in compliance with personal data regulations.
- Provide detailed information on external non-financial public-sector debt, including collateralized debt and debt with similar arrangements to the IMF on a regular basis (quarterly structural benchmarks for end-March, end-June, end-September, and end-December).
- Publish 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).
- Intend to merge operations of the two state-owned oil companies in coordination with the Inter-American Development Bank and seek technical assistance to pursue membership of the Extractive Industries Transparency Initiative.

### Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT)
- Develop an AML/CFT national risk assessment that properly prioritizes corruption-related threats by 2020 (in line with FATF standards).
- By end-September 2019 begin upgrading regulatory and risk-based supervisory tools to ensure banks and other relevant entities adequately monitor business relationships with senior officials and strengthen asset declaration regime for senior government officials.
- Submit draft legislation to the National Assembly by end-September 2019 to strengthen framework for freezing, seizing and confiscating proceeds of corruption in line with the Constitution and the United Nations Convention Against Corruption.

*Source: 1ecuea2019004 (IMF).*

### 27. The program will be monitored based on performance criteria, indicative targets, and

### 1ecuea2019004 - 27. The program will be monitored based on performance criteria, indicative targets, and

### Monitoring framework
- The program will be monitored based on performance criteria (PCs), indicative targets (ITs), and structural benchmarks as set out in tables 1 and 2 and definitions in the TMU attached.
- Review schedule expectations:
  - Second review: on or after September 15.
  - Third review: on or after December 15.

### Quantitative performance criteria and indicative targets (summary of Table 1)
- Fiscal targets (Millions of U.S. dollars, unless otherwise indicated):
  - Floor on non-oil primary balance of the non-financial public sector, including petroleum subsidies:
    - End-Mar 2019: -712 (Prog. PC 1/)
    - End-Mar 2019: -115 (Actual Prog. PC 1/)
    - End-Jun 2019: -885 (Prog. PC 1/)
    - End-Jun 2019: -885 (Proposed PC)
    - End-Sep 2019: -2,450 (Prog. 1/)
    - End-Sep 2019: -2,200 (Proposed PC)
    - End-Dec 2019: -3,506 (Prog. 1/)
    - End-Dec 2019: -3,148 (Proposed PC)
    - End-Dec 2020: 245 (Proposed IT)
  - Floor on social assistance spending of the central government - program definition:
    - End-Mar 2019: 175 (Prog. PC 1/)
    - End-Mar 2019: 183 (Actual Prog. PC 1/)
    - End-Jun 2019: 440 (Proposed PC)
    - End-Jun 2019: 343 (Prog. 1/)
    - End-Sep 2019: 705 (Proposed PC)
    - End-Sep 2019: .. (Prog. 1/)
    - End-Dec 2019: 1,040 (Proposed PC)
    - End-Dec 2019: .. (Prog. 1/)
    - End-Dec 2020: .. (Proposed IT)
  - Floor on social assistance spending of the central government - revised program definition:
    - End-Mar 2019: .. (Prog. PC 1/)
    - End-Mar 2019: .. (Actual Prog. PC 1/)
    - End-Jun 2019: .. (Proposed PC)
    - End-Jun 2019: 380 (Prog. 1/)
    - End-Sep 2019: .. (Proposed PC)
    - End-Sep 2019: 695 (Prog. 1/)
    - End-Dec 2019: .. (Proposed PC)
    - End-Dec 2019: 1,202 (Prog. 1/)
    - End-Dec 2020: 315 (Proposed IT)
- Indicative targets:
  - Floor on overall fiscal balance of the non-financial public sector:
    - End-Mar 2019: 277 (Prog. PC 1/)
    - End-Mar 2019: 148 (Actual Prog. PC 1/)
    - End-Jun 2019: 890 (Proposed PC)
    - End-Jun 2019: 59 (Prog. 1/)
    - End-Sep 2019: 354 (Proposed PC)
    - End-Sep 2019: -392 (Prog. 1/)
    - End-Dec 2019: 24 (Proposed PC)
    - End-Dec 2019: -291 (Prog. 1/)
    - End-Dec 2020: 1,241 (Proposed IT)
- Monetary targets (Millions of U.S. dollars):
  - Floor on the change in the stock of NIR - program definition 3/:
    - End-Mar 2019: 1,823 (Prog. PC 1/)
    - End-Mar 2019: 2,388 (Actual Prog. PC 1/)
    - End-Jun 2019: 2,627 (Proposed PC)
    - End-Jun 2019: 1,220 (Prog. 1/)
    - End-Sep 2019: 2,788 (Proposed PC)
    - End-Sep 2019: .. (Prog. 1/)
    - End-Dec 2019: 3,097 (Proposed PC)
    - End-Dec 2019: .. (Prog. 1/)
    - End-Dec 2020: .. (Proposed IT)
  - Floor on the change in the stock of NIR - revised program definition 4/:
    - End-Mar 2019: .. (Prog. PC 1/)
    - End-Mar 2019: .. (Actual Prog. PC 1/)
    - End-Jun 2019: .. (Proposed PC)
    - End-Jun 2019: 1,284 (Prog. 1/)
    - End-Sep 2019: .. (Proposed PC)
    - End-Sep 2019: 2,057 (Prog. 1/)
    - End-Dec 2019: .. (Proposed PC)
    - End-Dec 2019: 3,132 (Prog. 1/)
    - End-Dec 2020: 716 (Proposed IT)
- Continuous performance criteria (must be observed at all points in time):
  - Ceiling on the change in external payment arrears 6/: 00 000000 (value shown as "0" in table).
  - Ceiling on the new gross central bank direct financing of the NFPS and indirect financing to the NFPS through the public banks: 0120 000000 (value shown as "0" in table).
- Sources for Table 1: Central Bank of Ecuador, Ministry of Finance, IMF staff calculations.
- Notes and definitions referenced in Table 1:
  - 1/ Staff Report for the 2019 Article IV Consultation and Request for an Extended Arrangement Under the Extended Fund Facility (March 20, 2019, CR 19/79).
  - 2/ Cumulative flow from January, 1 to the test date.
  - 3/ Based on program exchange rates as defined in the TMU.
  - 4/ Excluding deposits of Other Financial Institutions and short-term liabilities of the central government.
  - 5/ Continuous performance criteria must be observed at all points in time.
  - 6/ 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.

### Prior actions and structural benchmarks (summary of Table 2)
- Past prior actions (implementation status: Met):
  - 1. Passage by the Monetary Board of a regulation that prohibits quasi-fiscal spending by the Central Bank and any direct or indirect lending to the non-financial public sector, including via public banks. (Met)
  - 2. Publication of the Central Bank’s financial statements. (Met)
  - 3. Provision of detailed information on external non-financial public-sector debt, including all collateralized debt and debt with similar arrangements. (Met)
- Structural benchmarks (selected items, objectives, dates, and implementation status):
  - 1. Provision of detailed information on new external non-financial public-sector debt incurred during the previous quarter (to ensure transparency of new debt operations).
    - Dates: End-March, June, September, and December 2019.
    - Implementation status: Met at end-March.
  - 2. Publication of an action plan, in coordination with IMF technical assistance, to strengthen public financial management (to improve budget processes).
    - Date: End-April 2019.
    - Status: Met.
  - 3. Submission to the Cabinet, in coordination with Fund staff, of amendments to the Central Bank’s legal framework to introduce autonomous governance arrangements, phased-in recapitalization, a backing rule, prohibition on quasi-fiscal activities, and allow publication of external auditor's opinion and notes (to strengthen institutional underpinnings of dollarization).
    - Date: End-May 2019.
    - Status: Met.
  - 4. Submission to the National Assembly of amendments to the Organic Code of Planning and Public Finances and other relevant laws to strengthen fiscal management and clarify fiscal rules framework (including binding annual targets for the NFPS non-oil primary balance and a 90-day payment deadline for current and capital expenses).
    - Date: End-June 2019.
    - Status: Proposed to be modified.
  - 5. Adoption of a government regulation to ensure publication of audited, annual financial statements by all state-owned enterprises starting in fiscal year 2019 (to strengthen transparency of state enterprises).
    - Date: End-June 2019.
    - Status: (no explicit status shown).
  - 6. Modernize computer systems at the level of the central government to collect information on domestic payment arrears of the central government (to strengthen expenditure controls).
    - Date: End-January 2020.
    - Status: Dates proposed to be reset.
  - 7. Publication of a plan, in coordination with IMF technical assistance, to upgrade the tax system aiming at revenue mobilization increasing by 1½ to 2 percent of GDP by 2021 (to improve the tax system).
    - Date: End-August 2019.
    - Status: (no explicit status shown).
  - 8. Define and publish eligibility thresholds for social assistance (non-contributory) cash transfer programs included in the social assistance spending floor (to strengthen social protection).
    - Date: End-September 2019.
    - Status: Newly proposed benchmark.
  - 9. Submission of anti-corruption legislation to the National Assembly including measures aligned with UNCAC and FATF Recommendations (to improve governance and tackle corruption).
    - Date: End-September 2019.
    - Status: (no explicit status shown).
  - 10. Submission to the National Assembly, in consultation with Fund staff, of amendments to the Central Bank’s legal framework as in item 3 (to strengthen institutional underpinnings of dollarization).
    - Date: End-September 2019.
    - Status: (no explicit status shown).
  - 11. Submit to IMF staff a plan of arrears clearance based on the survey of arrears at the central government level (to strengthen expenditure controls).
    - Date: End-September 2019.
    - Status: (no explicit status shown).
  - 12. Publication of an action plan, in coordination with World Bank technical assistance, to strengthen the efficiency and quality of primary education and health spending (to improve education and health outcomes).
    - Date: End-December 2019.
    - Status: Dates proposed to be reset.
  - 13. Submission to the National Assembly, in consultation with Fund staff, of a broad-based growth-friendly tax reform targeting an increase in revenues of 1½ to 2 percent of GDP by 2021 (to improve the tax system).
    - Date: End-October 2019.
    - Status: (no explicit status shown).
  - 14. Submission of a plan to IMF staff, prepared jointly by the Ministry of Economy and Finance and the Central Bank, for divesting shares in public banks received by the BCE in 2017 (to strengthen institutional underpinnings of dollarization).
    - Date: End-December 2019.
    - Status: Newly proposed benchmark.
  - 15. Establishment by the BCE of an audit committee, consisting of non-executive directors including at least one member with accounting expertise (to strengthen institutional underpinnings of dollarization).
    - Date: End-March 2020.
    - Status: Newly proposed benchmark.
  - 16. Approval of an internal audit charter by the new BCE audit committee that adheres to IIA standards and covers all BCE activities (to strengthen institutional underpinnings of dollarization).
    - Date: End-March 2020.
    - Status: Newly proposed benchmark.

### Technical Memorandum of Understanding (TMU) — definitions and program exchange rates
- TMU purpose:
  - Sets out definitions of the PCs, ITs, and methods for assessing program performance and information requirements.
  - Any variable not explicitly defined is defined in accordance with the Fund's standard statistical methodology, such as Government Finance Statistics.
  - For omitted variables relevant to program targets, Ecuador authorities will consult Fund staff to reach an understanding based on the Fund's standard statistical methodology.
- Program exchange rates (Table 1 in TMU; 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
- Additional standard Fund performance criteria included in the arrangement (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 inconsistent with Article VIII of the IMF Articles of Agreement;
  - (iv) no imposition or intensification of import restrictions for balance of payments reasons.
- Definition highlights for fiscal target "Floor of the Non-Oil Primary Balance of the Non-Financial Public Sector, Including Petroleum Subsidies":
  - NFPS composition: central government (PGE, including universities), Decentralized Autonomous Governments (municipal, provincial, parish boards), Social Security Funds (including IESS, ISSFA, ISSPOL and BIESS), Non-Financial Public Corporations (listed below), and Development Bank of Ecuador (BDE).
  - Non-oil primary balance of NFPS, including petroleum subsidies = non-oil primary balance of the NFPS minus spending on subsidies on petroleum products.
  - Non-oil primary balance of NFPS = total non-oil revenues minus primary non-oil spending.
  - 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 is recorded on accrual basis and comprises:
    - 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;
    - 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 Energía y Recursos Naturales no Renovables).
- Non-Financial Public Sector Corporations covered under NFPS definition (listed in TMU):
  - 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

*Source: IMF staff report and Technical Memorandum of Understanding, as presented in the provided content unit.*

### 10. Subsidies on petroleum products include, among others, subsidies on gasoline, kerosene,

### 1ecuea2019004 - 10. Subsidies on petroleum products include, among others, subsidies on gasoline, kerosene,

### Definition and accounting of petroleum subsidies
- Subsidies on petroleum products include subsidies on gasoline, kerosene, diesel, natural gas and liquified petroleum gas.
- Subsidies are 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 public-private partnerships and related obligations
- Government-funded public-private partnerships treated as traditional public procurements.
- NFPS government obligations accrued on public private partnerships:
  - 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 will be transparently recorded either as public debt or as a contingent liability of the government (e.g. public guarantees) depending on the nature of the obligation.

### Other expenditure treatments
- Costs associated with divestment operations or liquidation of public entities (e.g., cancellation of existing contracts, severance payments) will be recorded as spending.
- All expenditures recorded as a credit in “Account 99” (due to the lack of corresponding budget allocations) will be recorded as spending above-the-line on an accrual basis as the spending obligations accrue.

### Adjustor to the floor of non-oil primary balance including petroleum subsidies
- The floor on non-oil primary balance including petroleum subsidies will be adjusted by:
  - Downward/upward by US$23.85 million (quarterly) for each US$1 per barrel that the quarterly average APSP crude oil price is above/below the program assumption.
  - This adjustor is capped at US$119.33 million (quarterly).
- Program petroleum spot crude price (APSP) forecast (US$ per barrel) for 2019:
  - Q1: 51.78
  - Q2: 51.47
  - Q3: 52.21
  - Q4: 52.53
- Note: APSP is defined as a simple average of dated Brent, West Texas Intermediate, and the Dubai Fateh prices.

### Monitoring requirements (fiscal data)
- All fiscal data needed for program monitoring will be provided to the Fund within 60 calendar days from the end of each quarter.
- Preliminary monthly data will be provided with a lag of no more than 45 days after the end of each month.
- For social assistance programs, monthly data to be provided with a lag of no more than 30 calendar days after the end of each month (see social assistance monitoring below).

### Floor on social assistance spending — definitions and included programs
- Social assistance spending (central government) is computed as the sum of:
  - (i) benefits payments;
  - (ii) financial transaction costs;
  - (iii) costs related to monitoring, accompaniment, and implementation (gastos conexos) where applicable;
  - (iv) one-off payments to beneficiaries (e.g. bonos de emergencia);
  - (v) capital costs related to Centros de Desarrollo Infantil (CDI), Centros Infantiles del Buen Vivir (CIBV) and the Social Registry.
- Social assistance programs included:
  - Mission Less Poverty, More Development
    - Bono de Desarrollo Humano
    - Bono de Desarrollo Humano – Variable
  - Mission My Best Years
    - Pensión Adultos Mayores
    - Pensión Mis Mejores Años
    - Servicio de Atención Domiciliar para Adultos Mayores en Extrema Pobreza, Pobreza, y Vulnerabilidad
  - Mission Las Manuelas
    - Pensión Para Personas Con Discapacidad
    - Bono Joaquín Gallegos Lara
    - Brigada Las Manuelas
    - Ayudas Técnicas
  - Mission Tenderness
    - Centros de Desarrollo Infantil (CDI)
    - Centros Infantiles del Buen Vivir (CIBV)
  - Social Registry
  - Stronger Social Protection (programs aimed at protecting poor and vulnerable households)
- Monitoring for social assistance:
  - Monthly data provided with a lag of no more than 30 calendar days after the end of each month.
  - Data will include expenditure execution broken down by program and expenditure type (benefits payments, financial transaction costs, costos conexos, one-off payments, capital costs if any).
  - Monthly data must also include number of beneficiaries and benefit amount.
  - Authorities will report any changes to eligibility requirements under each program.

### Floor on the change in the stock of Net International Reserves (NIR) — definitions
- NIR of the central bank (program measure) = US dollar value of usable gross international reserve assets of the BCE minus:
  - (i) gross reserve-related liabilities to nonresidents of the BCE;
  - (ii) reserve holdings of domestic banks and deposits of other financial institutions held at the BCE.
- Non-U.S. dollar denominated foreign assets and liabilities converted into U.S. dollar at program exchange rates.
- Usable gross international reserve assets include:
  - (i) currency and deposits;
  - (ii) monetary gold;
  - (iii) holdings of SDRs;
  - (iv) the reserve position in the IMF;
  - (v) securities (including debt and equity securities);
  - (vi) financial derivatives;
  - (vii) other claims (loans and other financial 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 (to the extent not already excluded), including assets 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 remaining maturity of one year or less;
  - Short-term liabilities of the central government with maturity of less than 30 days;
  - 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 banks held at the BCE comprise all liabilities of the BCE to other depository institutions (otras sociedades de depósitos).
- Deposits of other financial institutions at the BCE comprise all liabilities of the BCE to other financial institutions (otras sociedades financieras), with the exception of deposits of the BIESS, including those held in trust funds.

### Adjustors to the floor on the change in the stock of NIR
- The floor on NIR will be adjusted upward/downward by the amount of borrowing from non-residents above/below program assumptions, net of issuances related to liability-management operations that have no net impact on outstanding NFPS debt. International borrowing comprises issuance of international bonds.
- The floor on the change in the stock of NIR will be adjusted downward/upward by the shortfall/excess in program loan disbursements from the IMF and other multilaterals (IADB, World Bank, CAF, and FLAR) and grants relative to the baseline projection.
- The floor on the change in net international reserves will be adjusted upward/downward by US$21.7 million (quarterly) for each US$1 per barrel that the quarterly average APSP crude oil price is above/below the program assumption.
  - This adjustor is capped at US$108.5 million (quarterly).
- Monitoring and measurement:
  - Change in NIR measured relative to the stock on December 31, 2018:
    - negative US$1.7 billion according to old NIR definition;
    - negative US$2.9 billion according to new NIR definition.
  - Foreign exchange asset and liability data will be provided to the Fund at weekly frequency within 5 business days.

### Program market issuance and program loan disbursements (2019)
- Expected program market issuance (2019): Q1: 0.0, Q2: 0.0, Q3: 0.0, Q4: 0.0
- Expected disbursement of program loans by multilaterals (2019):
  - Q1: 651.7
  - Q2: 750.6
  - Q3: 900.6
  - Q4: 440.6

### Ceiling on external payment arrears by the non-financial public sector — definitions and coverage
- Debt defined by residency criterion, except for debt securities where criterion is place of issuance.
- “Debt” means a current (not contingent) liability created under a contractual arrangement through provision of value that requires future payments in assets or services to discharge principal and/or interest.
- Forms of debt include:
  - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits) and repurchase agreements and official swap arrangements;
  - (ii) suppliers’ credits;
  - (iii) leases (debt measured as present value at inception of lease payments excluding operation, repair or maintenance payments).
- Arrears, penalties and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- External payment arrears (program monitoring) 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 contractual grace periods.
- Coverage:
  - This performance criterion covers the non-financial public sector.
  - Excludes: (i) arrears on short-term trade credit or letters of credits; (ii) arrears on debt subject to renegotiation or restructuring; (iii) arrears from nonpayment of commercial claims that are the subject of litigation initiated prior to March 11, 2019.
- Monitoring: This performance criterion will be monitored on a continuous basis.

### Ceiling on new gross central bank direct financing and indirect financing to the NFPS
- Definitions:
  - Central bank (BCE) direct financing to the NFPS and indirect financing through public banks includes:
    - overdraft transfers from the BCE to NFPS entities;
    - advance distribution of unrealized profits from the BCE;
    - BCE acquisition of government debt on the primary market or by purchase from public institutions;
    - BCE lending to public banks for purpose of acquisition of government debt on the primary market or by purchase from public institutions.
- Monitoring:
  - This performance criterion will be monitored on a continuous basis.
  - Monthly data on amortizations and disbursements of credit to NFPS and to publicly-owned banks for financing the NFPS will be provided within 5 business days to the Fund.

### Indicative targets (IT) — overall balance of the NFPS and definitions
- NFPS defined as above.
- Overall balance of the NFPS = non-oil primary balance of the NFPS + oil balance of the NFPS + interest revenues of the NFPS − interest expenditures of the NFPS.
- Oil balance of the NFPS defined as:
  - (i) revenues from oil exports;
  - (ii) revenues from domestic sales of oil derivatives;
  - (iii) operating surplus of state oil companies (PetroAmazonas and PetroEcuador)
  - minus:
    - (i) expenditures on investment in the oil sector;
    - (ii) expenditures on imports of petroleum derivatives (de Financiamento de Derivados Deficitarios);
    - (iii) payments to private oil companies (Ministerio de Energia y Recursos Naturales no Renovables).
- NFPS interest expenditures measured on cash basis; all other expenditures measured on accrual basis.
- Monitoring:
  - All fiscal data needed for program monitoring provided within 60 calendar days after end of each quarter; preliminary data with lag no more than 45 days after end of each month.

### NFPS debt definition and reporting requirements
- NFPS debt stock defined in accordance with IMF GFSM 2014 and Public Sector Debt Guide.
- Total gross NFPS debt covers all liabilities that are debt instruments. Debt instruments include:
  - Special drawing rights (SDRs);
  - Currency and deposits;
  - Debt securities;
  - Loans;
  - Insurance, pension, and standardized guarantee schemes;
  - Other accounts payable.
- Exclusions from debt: liabilities in the form of equity and investment fund shares, financial derivatives, and employee stock options.
- Ecuador’s debt should include:
  - Debt securities (held by non-residents and residents, not included in NFPS entities);
  - Bonds;
  - Treasury certificates;
  - Loans;
  - Other accounts payables;
  - Advanced oil sales;
  - Schlumberger deal;
  - Arrears with resident suppliers.
- Inter-NFPS holdings:
  - Liabilities issued by NFPS entities held as assets by other NFPS entities should be netted out; consolidation at NFPS level includes central bank lending to the government in NFPS debt stock.
- Reporting:
  - NFPS stock of debt in U.S. dollars will be provided to the Fund monthly with a lag of no more than 30 calendar days after the end of each month.

### Data frequency and other reporting requirements
- Weekly (within 5 business days):
  - Consolidated balance sheets of the banking system by main accounts (including deposits, available funds, credit to 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.
- Monthly:
  - NFPS financing data based on detailed information on financial assets and liabilities, including amortizations, disbursements and arrears accumulation when 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; includes expected monthly amortizations and repayments on NFPS debt.
- Within 2 weeks of signing new contracts:
  - Detailed information on collateralized debt and debt with similar arrangements (repo transactions, etc.), including contracts, escrow accounts overseas used as collateral, detailed creditor-level information on stock of debt, terms (amounts pledged/sold/encumbered), related commitments or purchase obligations, and expected repayment schedules.
- Quarterly:
  - Detailed balance of payments data, no later than 90 days.

*Source: IMF staff report content (June 28, 2019).*

### 1.      On behalf of the Ecuadorian authorities, we thank the mission team for the report and the

### On behalf of the Ecuadorian authorities, we thank the mission team for the report and the unwavering support to Ecuador’s economic transformations.

### Program performance and financing
- Ecuador’s economic program is supported by a three-year Extended Fund Facility (EFF).
- All but one of the quantitative targets for this first review have been met.
- The performance criterion for the non-oil primary balance, including fuel subsidies—the main fiscal indicator under the program—has been met with a significant margin.
- All structural benchmarks for this review have been met.
- The continuous performance criterion regarding no new gross financing of the government by the central bank was unintentionally missed due to the automatic roll over of previous debt; corrective actions have been taken and the authorities request the Executive Board to consider a waiver of non-observance.
- The program remains fully financed, with significant financial assistance provided by other multilateral and bilateral partners.

### Recent macroeconomic performance
- Real GDP in Q4 2018 expanded by 0.1 percent quarter-on-quarter.
- Household consumption in Q4 2018 grew by 0.8 percent quarter-on-quarter.
- For 2018 as a whole, GDP grew by 1.4 percent (staff’s projection at program approval in March was 1.1 percent).
- Household consumption and capital investment expanded by 1.6 and 0.5 percent in 2018, respectively.
- Imports rose by +5.8 percent in 2018; net exports contributed negatively to growth.
- The oil sector contracted by 4 percent in value-added terms in 2018.

### Early-2019 indicators
- Economic activity slowed in initial months of 2019, but leading indicators were encouraging:
  - Index of business confidence (ICE) was up 3.2 percent in the year to April and 8.8 percent up compared to April 2018.
  - Growth in credit to the private sector: +12.8 percent in May, year-on-year.
  - Robust growth in bank deposits, retail sales, VAT collection, and non-oil traditional exports.
- Authorities remain confident that real GDP will grow in 2019, albeit very modestly.

### Inflation and external competitiveness
- Consumer prices declined by 0.2 percent in 2018.
- In the 12 months to May 2019, consumer prices rose by 0.5 percent.
- First-round effects of fuel-subsidy withdrawal contributed to inflation; high octane gasoline rose by 32.3 percent in the May CPI reading.
- Authorities agree with staff’s projection that inflation will remain subdued over the medium term, contributing to a gradual depreciation of the real effective exchange rate in a fully dollarized economy to restore external competitiveness.

### Fiscal outturns and near-term fiscal policy
- The non-oil primary balance including fuel subsidies (NOPBS) for Q1 2019 has been met by a large margin.
- For 2019, the authorities are committed to ensure a decline of the NOPBS by about 2 percent of GDP, as agreed under the program.
- Consolidation to be achieved mostly via reductions in expenditure, including measures already taken on fuel subsidies and the wage bill, and cuts in other current and capital spending.

### Medium-term fiscal framework and tax reform
- Over the medium-term, authorities reiterate commitment to improve the NOPBS by 5 percent of GDP between 2018 and 2021, through revenue and spending actions.
- Objective to bring public debt to below 40 percent of GDP over the medium term.
- Consolidation strategy seeks to minimize impact on the real economy and the most vulnerable.
- A growth-friendly and broad-based tax reform under development is expected to contribute additional revenue of about 1.5 to 2 percent of GDP from 2020 onwards, while helping attract private investment and boost competitiveness.

### Social protection and poverty mitigation
- Priority to mitigate effects of economic transformation on the poor; efforts to strengthen the social safety net continue.
- Work with World Bank support to upgrade the social registry to extend coverage to all vulnerable households; a new institution was established to manage the upgraded registry.
- Commitment to expand and strengthen the social protection network and implement “Plan Toda Una Vida” and programs including:
  - Mission “Less Poverty, More Development”
  - “Human Development Bonds”
  - Pension and home care services to older adults
  - Pension for people with disabilities
  - Children’s development and day care centers

### Public financial management and transparency
- Authorities published their PFM action plan, a structural benchmark for this review.
- New framework will improve budget formulation, limit discretionary spending, enhance expenditure controls, clarify scope of the fiscal rule, and improve fiscal transparency.
- Implementation is ongoing with IMF technical assistance to align Ecuador’s fiscal reporting and transparency with international best practices.

### Debt management and liability operations
- Improving the debt profile and debt management framework remain high priority.
- Recent focus historically was on raising resources to cover immediate financing needs.
- In early June, authorities launched a successful liability management operation:
  - Sale of around US$1.2 billion in bonds maturing in 2029 that allowed the buyback of most of the outstanding bonds due next year.
  - Operation reduced 2020 financing needs considerably.
- With improved fiscal position, reduced short-term financing needs, and increased fiscal credibility, authorities are positioned to start formulating a medium to long-term debt management strategy.

### Monetary safeguards and central bank autonomy
- Authorities thank staff for recently completed safeguards assessment with recommendations to strengthen BCE’s role and autonomy.
- Reforms will include strengthening the bank’s operational autonomy by:
  - Establishing an independent Board,
  - Creating strong internal and external audit functions,
  - Prohibiting all lending of the BCE to the public sector.

### Structural reforms: labor and governance
- Labor reforms aim to boost job creation, reduce informality, attract private investment, and increase competitiveness.
  - Preparations at advanced stage; measures to encourage female and youth employment and diminish hiring and excessive firing costs.
- Governance and anti-corruption:
  - Formation of an International Experts Commission operating in coordination with UN, OAS, IDB, and Transparency International to support domestic institutions in detecting, investigating, and prosecuting corruption.
  - Establishment of an Anticorruption Secretary to coordinate the anti-corruption agenda.
  - Additional initiatives to strengthen the anticorruption framework to be announced in coming months.

### External risks and refugee spillovers
- Authorities remain concerned about the impact of the Venezuelan crisis, particularly refugee inflows.
- Authorities estimate that there are about 300,000 Venezuelan refugees in Ecuador, placing substantial burden on public services and adding pressures on the labor market.
- Spillovers may require additional financial support from the international community.

### Conclusion
- The EFF program has had a good start; strong implementation so far provides confidence that the program will fully meet its objectives.
- Program implementation has coincided with political and social normalcy.
- Authorities are optimistic that the economic transformation program will generate growth, competitiveness, jobs and prosperity for the Ecuadorian people.

*Source: Ecuadorian authorities’ statement to the IMF mission.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ecuea2019004.pdf_