## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2019/1ecuea2019005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1ecuea2019005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1ecuea2019005.pdf.json) --- ### Program Context - A 36-month Extended Fund Facility (EFF) arrangement with access of SDR 3.035 billion (435 percent of quota or about US$4.189 billion) was approved on March 11, 2019. The first review was concluded on June 28, 2019. - On October 1, 2019, the government announced elimination of gasoline and diesel subsidies; Decree 883 was repealed on October 13, 2019 after protests and unrest. - The government is negotiating a revised fuel subsidy decree with civil society and considers upgrading the social safety net a priority and prerequisite for fuel subsidy reform. - On November 17, 2019, 70 out of 133 legislators voted to reject an urgent package of economic laws. A revised tax code was approved with minor modifications on December 9, 2019. Revised drafts of the central bank and organic budget codes will be submitted separately. The government intends to submit a labor reform in the coming months. ### Program Implementation and Reviews - All end-June and end-September quantitative performance criteria (QPCs) and indicative targets (ITs) were met, except the end-September QPC on net international reserves (NIR). - Authorities request a waiver of nonobservance of the end-September QPC on NIR. - Structural benchmarks (SBs) and prior actions: - End-June SB on submission of amendments to COPLAFYP was replaced by a prior action and met when amendments were submitted on October 18, 2019. - End-October SB on submission of tax reform was replaced by a prior action (submission and non-rejection of a revised tax reform yielding at least 0.5 percent of GDP in both 2020 and 2021); met following the December 9, 2019 approval vote. - End-September SB on COMYF amendments fell short because the draft did not incorporate the double veto procedure for appointment and dismissal of central bank board members. - End-September SB on anti-corruption law not met; authorities request extension and staff proposes resetting to end-December 2019. - Given rejection of the urgent economic law, new program conditionality proposed: - Submission of revised COPLAFYP amendments as an SB for the fourth review (end-February 2020). - Revised COMYF amendments as an SB for the fifth review (end-April 2020). - Staff supports completion of the second and third reviews; purchase upon completion would be SDR 361.3 million (about US$498 million). - Staff supports waiver request for end-September NIR nonobservance and proposed modifications to end-December 2019 performance criteria on NOPBS, NIR, and social assistance spending. ### Recent Developments and Macroeconomic Indicators - Growth: - Real GDP growth decelerated to 0.4 percent (y-o-y) in 2019H1 from 1.1 percent (y-o-y) in 2018H2. - Estimated additional impact of protests on 2019 growth: 0.4 percentage points of GDP. - Labor market: Unemployment rose to 4.9 percent in September from 4.4 percent in June. - Country risk: EMBI widened by about 400 basis points since early October, peaking at about 1,400 basis points immediately after the November vote; spreads declined to 972 on December 11, 2019. - Inflation: Consumer price inflation was 0 percent (y-o-y) in November 2019, down from 0.5 percent in October 2019. - External sector: - Current account balance recorded a deficit of about US$0.3 billion in 2019H1. - Staff estimates a current account gap of 4.0 percent of GDP at end-2018; REER judged overvalued by about 34 percent. - Credit and banking: - Credit growth to private sector at 12.1 percent y-o-y in October 2019; deposit growth at 7.4 percent y-o-y in October 2019. - Foreign borrowing net disbursements about US$640 million in the year to October. - Share of term deposits increased by 6 percentage points to 36 percent in the last 18 months. - Reported FSIs suggest banking system stability though past-due loans trending upward. ### Outlook and Risks (projections preserved exactly) - Growth projections: - 2019: forecast at negative 0.5 percent. - 2020: 0.2 percent. - 2021: 1.6 percent. - Inflation projections: - Average inflation of 0.3 percent in 2019 and 0.9 percent in 2020. - External position: - 2019 current account expected deficit: 0.8 percent of GDP (weaker improvement than previously projected to a 0.5 percent of GDP surplus). - Financing: - Gross external financing requirements for 2019 estimated at about US$10 billion, US$1.2 billion higher than at the time of the first review. - Net public financing in 2019 expected to have a shortfall of US$2.3 billion relative to first review projections, driven by: lower-than-expected net disbursements from multilaterals (US$0.9 billion), a lower-than-expected NOPBS (about US$540 million) due to delayed asset monetization, a lower oil balance (about US$350 million), and additional financing needs (a large statistical discrepancy). - Authorities issued an international bond for US$2 billion on September 24, 2019 (dual tranche: US$600m at 7.875 percent, US$1.4 billion at 9.50 percent). - Bond issuance, together with remaining multilateral disbursements, expected to help cover budget needs and ensure consistency with revised NIR target by end-2019 (about US$300 million lower compared to the first review). ### Q2–Q3 2019 Program Performance (selected exact figures) - Non-oil primary balance including fuel subsidies (NOPBS): - End-June 2019 PC met: actual deficit US$386 million versus programmed deficit adjusted for oil prices of US$1,004 million. - End-September 2019 target met: actual NOPBS deficit US$1,625 million versus programmed deficit adjusted for oil prices of US$2,319 million. - Overall balance: - End-June indicative target overperformed: surplus of US$691 million versus programmed surplus of US$59 million. - End-September: overall balance surplus of US$118 million versus programmed deficit of US$392 million. - Net international reserves (NIR): - End-June 2019 target met by US$368 million. - End-September 2019 target missed by US$306 million. Net financing requirements rose in September 2019 by about US$1.5 billion. - TMU requires the NIR target for end-September be adjusted upwards by the full US$2 billion international bond issuance; adjusted Q3 NIR target was missed. - Authorities request a waiver of nonobservance of the end-September NIR target. - Social assistance spending: - End-June 2019 target of US$380 million met by US$47 million. - End-September 2019 target of US$695 million met by US$92 million. - Continuous performance criteria (CPC): Met, including CPC on no new gross financing of the NFPS by the central bank. - Authorities repaid US$120 million owing to CFN in mid-September and an additional US$210 million in October per commitments. - CPCs on external arrears, restrictions on payments for current international transactions, and multiple currency practices were met. ### Structural Conditionality and Reforms - Submission of three key reforms (tax reform, budget code, central bank code) under emergency procedures on October 18; National Assembly rejected emergency package on November 17, 2019; revised tax reform approved December 9, 2019. - Tax reform: - Original submission aimed at yield of 1½ to 2 percent of GDP by 2021 not met. - Modified October submission gross yields: 0.9 percent of GDP in 2020 and 0.8 percent of GDP in 2021; included about 0.2 percent of GDP savings from a 3-year contribution on companies with revenue exceeding US$50 million. - Executive economic reactivation package cost about 0.2 percent of GDP in each 2020 and 2021. - Net expected yield of emergency package: 0.7 percent of GDP in 2020 and 0.6 percent of GDP in 2021. - Revised tax reform later submitted and expected to generate net revenues together with reactivation package amounting to 0.5 percent of GDP in 2020 and 0.5 percent of GDP in 2021; approved with minor modifications on December 9. - Central Bank Code (COMYF): - Draft aimed to strengthen autonomy, governance, prohibit monetary financing and quasi-fiscal operations, and reintroduce backing rule. - Submitted draft lacked the double veto procedure for appointment/dismissal of BCE board members; SB not met and submission of revised amendments proposed as SB for the fourth/fifth reviews. - Organic Budget Code (COPLAFYP): - Submission was an end-June SB converted to a prior action and met when submitted October 18; revised submission proposed as SB for end-February 2020. - Transparency of SOEs: - Ministerial decree requires all SOEs to publish audited annual financial statements starting fiscal year 2019 — end-June SB met. - Stock of outstanding central government arrears estimated at US$1,127 million as of end-September 2019, of which US$657 million with the private sector. - Total accounts payable in the central government estimated at US$1,940 million as of end-September 2019, of which US$1,170 million are with the private sector. - Eligibility thresholds for social assistance: - Publication met; implementation of new thresholds would bring an additional 350,000 poor beneficiaries under safety net, improving coverage of poor households from about 34 percent at end-2018 to over 60 percent. ### Fiscal Framework, NOPBS, and Consolidation Path - Program consolidation objective: - Commit to reducing the NFPS non-oil primary deficit including fuel subsidies by about 3.9 percent of GDP during 2019-2021 (revised down from 5 percent previously envisaged). - New annual consolidation profile over the program: 1.5; 1.7; 0.7 percent of GDP — front-loaded with 80 percent of total (3.2 percent of GDP) expected in the first two years. - Expected effects: - Public debt projected to be slightly higher in 2021 at 48.1 percent of GDP (versus about 46 percent at time of first review) but to decline thereafter toward and below 40 percent by 2024 in the program scenario. - Reserve projections: - Projected NIR about US$3.6 billion by end-2021 (compared with US$7 billion projected at time of first review). - Gross reserves expected to increase to about US$7.6 billion by end-2021, or 39 percent of the ARA metric. - 2019 fiscal outcome updates: - Projected 2019 NOPBS deficit increased from 2.9 to 3.4 percent of GDP, largely due to delay in asset monetization. - Lower-than-expected savings from fuel subsidy reforms by 0.3 percentage points of GDP. - Social security benefit spending expected about 0.1 percentage points of GDP higher; offset by larger reductions in capital spending. - Wage bill: - Authorities committed to reduce wage bill; savings in 2020 estimated at 0.3 percentage points of GDP from compensation and employment measures. - Additional measures: - Tax reform and economic reactivation measures expected to yield net 0.5 percent of GDP in both 2020 and 2021. - Authorities plan gradual removal of gasoline subsidies; staff estimates fiscal savings of 0.2 percent of GDP in 2020 and 0.2 percent of GDP in 2021 from this removal (included in program baseline). - Authorities plan to lease frequency ranges with expected revenue of 0.4 percent in 2020 and in 2021. - Resulting NOPBS deficit expected to reach 1.7 percent of GDP in 2020; overall fiscal balance would swing into a surplus of 0.7 percent of GDP. - Additional consolidation measures of 0.7 percent of GDP planned for 2021. ### Social Protection and Safety Net - Program incorporates an increase of around US$300 million in social assistance spending in 2019. - Program aims for an increase of 0.6 percentage points of GDP in social assistance spending by end of program. - Actions taken in mid-2019: - Full funding of Bono de Desarrollo Humano (BDH) and BDH-Variable to eliminate wait lists. - Increased funding for in-home services for elderly and disabled; expanded access to child care. - Social registry modernization: - Legal bottlenecks eliminated; cooperation agreements with 14 universities to survey households in remote areas. - Fund staff and World Bank to assist preparing and publishing a time-bound action plan; SB proposed for end-February 2020. - Coverage impacts: - These actions could expand coverage of social assistance programs to about 60 percent of households in the lowest three deciles by 2021. - Further increases in social assistance spending in 2020 could result from compensation measures related to subsidy removal (up to 0.03 percent of GDP). ### Net International Reserves (NIR) Target — Rationale, Definition, and Adjustors - Program objective: increase reserve buffers in a dollarized economy; NIR used in conditionality because it targets what is within authorities’ control. - NIR definition (program measure): usable gross international reserve assets of the BCE minus gross reserve-related liabilities to nonresidents of the BCE minus reserve holdings of domestic banks and deposits of other financial institutions held at the BCE. - Key adjustors: - Upward/downward adjustment for market borrowing (issuance of international bonds), net of liability-management operations with no net NFPS debt impact. - Shortfall/excess in program loan disbursements from IMF and multilaterals. - Oil-price adjustor: 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; cap US$108.5 million (quarterly). - Perenco legal contingent adjustment: NIR adjusted downward by one-half of any Perenco payment in a quarter of 2020 when payment falls due. - Monitoring: change in NIR measured relative to stock on December 31, 2018 (US$2.9 billion). Foreign exchange asset and liability data provided weekly within 5 business days. - Annex note: weekly movements in the new NIR measure correlate with NFPS deposits at 0.98 versus 0.91 for prior measure. ### Financing, Debt, and Contingency Measures - 2019 financing: - New market financing US$2.0 billion issued in September compensates for US$0.9 billion shortfall in gross multilateral financing and other shortfalls. - 2020 financing needs and resources: - Gross financing needs at NFPS level estimated at about US$5.6 billion. - Coverage by total resources of US$7.2 billion composed of: multilateral disbursements about US$3.9 billion; bilateral financing about US$300 million; bank loans about US$650 million; domestic issuance of bonds about US$2.4 billion (including US$1.8 billion rollover of CETES). - Excess financing US$1.7 billion contributes to accumulation of NIR. - Staff obtained financing assurances from multilaterals of US$4 billion for 2020, including US$710 million re-phased from 2019. - Around US$52 million (including accrued interest) remains outstanding to international private bondholders from bonds repudiated in 2008/2009; majority were subsequently repurchased. - Contingency measures identified by authorities: - Partially compensate lost 2019 asset monetization revenue with lower net lending and other current spending. - A partial adjustor proposed to accommodate one-half of the awarded payment in an ongoing lawsuit; remainder to be compensated by contingency measures. - Options include reducing spending on goods and services, recalibrating pace of capital investment, reducing net lending, and additional cuts in other expenditure areas. ### Financial Sector and Supervision - Financial system assessed as stable and weathered recent turmoil but continued vigilance recommended. - Concerns: - Composition of credit growth skewed to microfinance and consumption; divergence between credit and deposit growth warrants monitoring. - Past-due loans in banks’ and cooperatives’ portfolios trending upward. - Recommendations: - Monitor riskiest segments and institutions closely. - Strengthen supervisory independence and governance; review legal framework for cooperatives; harmonize regulatory framework for larger cooperatives with banks. - Build macroprudential framework, consider borrower-/lender-based measures, and develop liquidity coverage and net stable funding ratios adapted domestically. - Interim measures could include raising reserve requirements and more conservative loan classification/provisioning. ### Governance, Transparency, and AML/CFT - Progress: - New public debt bulletin published; regulation requiring SOEs to publish audited financial statements issued. - Work on SOE law and PPP law with IADB and World Bank assistance. - Anti-corruption and AML/CFT: - AC legal reforms delayed; Constitutional Court decision pending on COIP reforms vetoed by Executive. - Multi-sectoral AML/CFT national risk assessment launched with World Bank support. - Need to complete legislative work on criminalization of acts of corruption, freezing/seizing/confiscation, and regulatory amendments on customer due diligence on senior officials. - AML/CFT evaluation scheduled in 2021. ### Staff Appraisal and Recommendations - Staff recommends completion of the second and third reviews and supports: - Waiver of nonobservance for end-September NIR given minor nature of breach. - Modifications of conditionality (NOPBS, NIR, social assistance) for end-December 2019 and new SBs/ITs into 2020. - Policy recommendations: - Moderate fiscal consolidation path from 5 to 4 percent of GDP in NOPBS over the program to keep public debt on a downward path. - In 2020, supplement tax reform savings with rationalization of current expenditure and strengthen tax administration (including amendments to tax procedure code). - Continue to protect the poor and upgrade social registry and safety net; accelerate Crédito de Desarrollo Humano expansion and complete social registry upgrade in 2020H1. - Strengthen PFM: revised COPLAFYP to strengthen top-down budget formulation, limit Executive discretion to amend the budget, establish arrears mechanisms, and improve expenditure controls. - Central bank reform to strengthen BCE autonomy, accountability, governance, prohibit monetary financing and quasi-fiscal activities, and enshrine a backing rule. *Source: Executive Summary and selected sections of the IMF staff report for Ecuador (document 1ecuea2019005).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Program Context - A 36-month Extended Fund Facility (EFF) arrangement with access of SDR 3.035 billion (435 percent of quota or about US$4.189 billion) was approved on March 11, 2019. The first review was concluded on June 28, 2019. - On October 1, 2019, the government announced elimination of gasoline and diesel subsidies as part of a broader economic reform package; following nearly two weeks of protests and social unrest, Decree 883 was repealed on October 13, 2019. - The government is negotiating a revised fuel subsidy decree with civil society, and considers upgrading the social safety net a priority and prerequisite for fuel subsidy reform. - On November 17, 2019, 70 out of 133 legislators voted to reject an urgent package of economic laws that included the tax code, central bank code, and organic budget code. A revised tax code was approved with minor modifications on December 9, 2019. Revised drafts of the central bank and organic budget codes will be submitted separately after internalizing legislative feedback. - The government intends to submit a labor reform in the coming months. ### Program Implementation - All end-June and end-September quantitative performance criteria (QPCs) and indicative targets (ITs) were met, except the end-September QPC on net international reserves (NIR). - The authorities request a waiver of nonobservance of the end-September QPC on NIR, arguing the breach had minor impact on program implementation. - The end-June structural benchmark (SB) on submission of amendments to the Organic Budget Code (COPLAFYP) was replaced by a prior action for the combined second and third reviews and met when amendments were submitted on October 18, 2019. - The end-October SB on submission of tax reform was replaced by a prior action requiring submission and non-rejection of a revised tax reform bill yielding at least 0.5 percent of GDP in both 2020 and 2021 on a net basis; this prior action was met following the December 9, 2019 approval vote. - The end-September SB on submission of amendments to the central bank code (Organic Monetary and Financial Code, COMYF) fell short because the submitted draft did not incorporate the double veto procedure for appointment and dismissal of central bank board members, though it contained other provisions strengthening the central bank’s institutional foundations. - Other SBs for the second and third reviews were either met or implemented with slight delays, except the end-September SB on submission of the draft anti-corruption law; the authorities request an extension and staff proposes to reset the deadline to end-December 2019. - Given rejection of the urgent economic law, new program conditionality is proposed: submission of revised COPLAFYP amendments consistent with program commitments as an SB for the fourth review, and revised COMYF amendments as an SB for the fifth review. - The authorities request modifications to end-December 2019 targets on: - non-oil primary balance including fuel subsidies (NOPBS) to partially accommodate shortfall due to delay in asset monetization; - net international reserves (NIR) due to a higher deficit and financing shortfalls; and - social assistance spending due to postponement of one program to 2020. - Staff supports completion of the second and third reviews. The purchase released upon completion would be SDR 361.3 million (about US$498 million). - Staff supports the waiver request for the end-September NIR target and the proposed modifications to end-December performance criteria on the NOPBS, NIR, and social assistance spending. ### Context and Recent Developments - Political events: Protests and policy uncertainty following subsidy removal announcement and subsequent repeal; emergency economic package submitted October 18, 2019; National Assembly rejection November 17, 2019; revised tax law approved December 9, 2019. - Growth: Real GDP growth decelerated to 0.4 percent (y-o-y) in 2019H1 from 1.1 percent (y-o-y) in 2018H2. Gross fixed capital formation fell by 2.1 percent in 2019H1 (y-o-y). Exports increased by 4.6 percent in real terms in 2019H1 (y-o-y). - Estimated additional impact of protests on 2019 growth: 0.4 percentage points of GDP due to sabotage of oil fields and agricultural operations and temporary store closures. - Labor market: Unemployment rose to 4.9 percent in September from 4.4 percent in June. - Country risk: EMBI widened by about 400 basis points since early October, peaking at about 1,400 basis points immediately after the November vote; spreads declined to 972 on December 11, 2019. - Inflation: Consumer price inflation was 0 percent (y-o-y) in November 2019, down from 0.5 percent in October 2019. - External sector: Current account balance recorded a deficit of about US$0.3 billion in 2019H1. Goods and services exports rose 3.8 percent (y-o-y) in 2019H1; imports grew 4.5 percent (y-o-y) in nominal terms. Staff estimates a current account gap of 4.0 percent of GDP at end-2018; REER judged overvalued by about 34 percent. - Credit and banking: Credit growth to private sector at 12.1 percent y-o-y in October 2019; deposit growth at 7.4 percent y-o-y in October 2019. Foreign borrowing contributed about US$640 million in net disbursements in the year to October. Share of term deposits increased by 6 percentage points to 36 percent in the last 18 months. Reported solvency, liquidity, asset quality, and profitability indicators suggest banking system stability, but past-due loans in banks’ and cooperatives’ portfolios have been trending upward. - Cash demand during unrest was short-lived and covered by the BCE; net flows normalized afterward. ### Outlook and Risks - Growth projections: - 2019: forecast at negative 0.5 percent (the lower end of the -0.5 to 0.5 percent range from the first review). - 2020: 0.2 percent. - 2021: 1.6 percent. - Inflation projections: Average inflation of 0.3 percent in 2019 and 0.9 percent in 2020; inflation expected to remain subdued in the medium term. - External position: - 2019 current account expected deficit: 0.8 percent of GDP (weaker improvement than previously projected to a 0.5 percent of GDP surplus). - Factors weighing on external position: slowdown in trading partners’ demand, refinery closures, loss of about 2.5 million barrels of oil exports in October 2019 due to protests, and higher-than-expected import growth. - Medium-term: oil exports expected to perform better than previously envisioned, but higher imports and lower non-oil export demand imply more modest current account improvement. - Financing: - Gross external financing requirements for 2019 estimated at about US$10 billion, US$1.2 billion higher than at the time of the first review. - Components include US$1.2 billion needed to close the liability management operation with bonds maturing in 2020 completed in June 2019. - Net public financing in 2019 expected to have a shortfall of US$2.3 billion relative to first review projections, driven by: lower-than-expected net disbursements from multilaterals (US$0.9 billion), a lower-than-expected NOPBS (about US$540 million) due to delayed asset monetization, a lower oil balance (about US$350 million), and additional financing needs (a large statistical discrepancy). - To offset shortfalls, the authorities issued an international bond for US$2 billion on September 24, 2019 (dual tranche: US$600m at 7.875 percent, US$1.4 billion at 9.50 percent). - The bond issuance, together with remaining multilateral disbursements, is expected to help cover budget needs and ensure consistency with the revised NIR target by end-2019 (about US$300 million lower compared to the first review). ### Specifics on 2019Q2–Q3 Program Performance - Non-oil primary balance including fuel subsidies (NOPBS): - End-June 2019 PC met: actual deficit US$386 million versus programmed deficit adjusted for oil prices of US$1,004 million. - End-September 2019 target comfortably met: actual NOPBS deficit US$1,625 million versus programmed deficit adjusted for oil prices of US$2,319 million. - Overall balance: - End-June indicative target overperformed: surplus of US$691 million versus programmed surplus of US$59 million. - End-September: overall balance surplus of US$118 million versus programmed deficit of US$392 million. - Net international reserves (NIR): - End-June 2019 target met by US$368 million. - End-September 2019 target missed by US$306 million. Net financing requirements rose in September 2019 by about US$1.5 billion due to shortfalls on multilaterals and some bilateral financing. - TMU requires the NIR target for end-September be adjusted upwards by the full US$2 billion international bond issuance; because a significant portion of proceeds was intended to cover the Q3 budget gap, the adjusted Q3 NIR target was missed. - Authorities request a waiver of nonobservance of the end-September NIR target. - Social assistance spending: - End-June 2019 target of US$380 million met by US$47 million. - End-September 2019 target of US$695 million met by US$92 million. Authorities continued to enhance critical social spending programs and reduce wait times for beneficiaries. - Continuous performance criteria (CPC): - Met, including the CPC on no new gross financing of the NFPS by the central bank. - Authorities repaid US$120 million owing to Corporación Financiera Nacional (CFN) in mid-September and an additional US$210 million in October per commitments. - CPCs on external arrears, restrictions on payments for current international transactions, and multiple currency practices were met. ### Staff Position and Actions - Staff supports completion of the second and third reviews and the SDR 361.3 million (about US$498 million) purchase upon completion. - Staff supports the waiver request for the end-September NIR nonobservance and the proposed modifications to end-December 2019 performance criteria on NOPBS, NIR, and social assistance spending. - Staff proposes resetting deadlines for certain structural benchmarks (e.g., anti-corruption law to end-December 2019) and adding new SBs for subsequent reviews to allow time to reach legislative consensus on COPLAFYP and COMYF amendments. *Source: Executive Summary of the IMF staff report for Ecuador (December 11, 2019).* ### 8. The authorities have made serious efforts to meet the structural conditionality. They ### 8. The authorities have made serious efforts to meet the structural conditionality. They ### Structural conditionality: overall progress and immediate outcome - The authorities submitted three key reforms (tax reform, budget code, and the central bank code) under emergency procedures on October 18. - A fourth reform on the labor market (not part of conditionality) has not yet been submitted. - On November 17, the National Assembly voted against the emergency package, hampering core elements of the program and leading to a sharp increase in Ecuador’s spreads. - The National Assembly approved a revised tax reform as an urgent economic law on December 9. - The authorities plan to submit the revised budget code and a central bank code individually, taking into consideration feedback from lawmakers and working to build consensus. - Other structural commitments for the second and third reviews were largely implemented. - Specific structural benchmarks (SBs) met: - Regulation to ensure publication of the audited annual financial statement of all SOEs (end-June SB) — met. - Publication of the eligibility thresholds for social spending (end-September SB) — met. - Arrears clearance plan (end-September SB) — implemented with a slight delay in early October. - The end-September SB on anti-corruption legislation was not met; staff proposes resetting the SB to end-December 2019. ### Organic Budget Code (COPLAFYP) - Submission of amendments to the Organic Code of Planning and Public Finance (COPLAFYP) was envisaged as an end-June 2019 SB and later converted into a prior action (PA) for completion of the combined second and third reviews. - The submission as part of the emergency package (with some modifications relative to the original SB) enabled compliance with the PA for completing the joint second and third reviews. - Given the rejection of the emergency package and need for more time, submission of revised amendments to this law is proposed as a new SB for end-February 2020. - The reform aims to strengthen fiscal discipline and transparency by enhancing public financial management and fiscal rules framework. ### Tax Reform - The end-August SB on publication of a tax reform plan yielding 1½ to 2 percent of GDP in additional revenues by 2021 and the end-October SB on submission of the tax reform to the National Assembly were not met. - Facing lack of political appetite for a larger reform (particularly a VAT increase), the authorities submitted a modified tax reform in October with gross expected yield: - 0.9 percent of GDP in 2020 - 0.8 percent of GDP in 2021 - Including about 0.2 percent of GDP savings from a 3-year contribution on companies with revenue exceeding US$50 million. - Executive proposed economic reactivation package with cost of about 0.2 percent of GDP in each 2020 and 2021. - Net expected yield of emergency package: - 0.7 percent of GDP in 2020 - 0.6 percent of GDP in 2021. - Authorities later submitted a revised tax reform expected to generate net revenues, together with the economic reactivation package, amounting to: - 0.5 percent of GDP in 2020 - 0.5 percent of GDP in 2021. - The revised tax reform was approved with minor modifications on December 9. - The submission and non-rejection of the revised tax reform was a prior action for completing the combined second and third review. - Key estimated fiscal impacts from Table 2 (selected totals preserved exactly): - Total (Gross) alternatives and scenarios show values including 0.93, 0.80, 0.58, 0.59, 0.57, 0.58 (as presented in the table). - Package to support growth: -0.23, -0.22, -0.11, -0.11, -0.11, -0.11. - Total (Net): 0.70, 0.58, 0.47, 0.48, 0.46, 0.47. - Specific measures listed in the table include exact estimated fiscal impacts (examples captured exactly as in source): - Introduce a tax on electronic commerce: 0.01 (2020), 0.02 (2021). - Introduce or modify excises (ICE) on beer, sugary drinks, plastic bags, telecommunications, and vehicles: 0.13 (2020), 0.14 (2021) in one column and alternate estimates 0.11/0.12 and 0.09/0.11 in other columns. - Introduce a temporary contribution 0.2% on income of the companies with revenues in excess of US$50 million: 0.16 (2020), 0.16 (2021) across columns. - Introduce a tax on small businesses of 2 percent of income: 0.08 (2020), 0.17 (2021) across columns. - Introduce a payment to facilitate the trasition to a simplified regime: 0.08 (2020) in columns shown. - (Full table values are preserved in the source; above are representative exact entries as presented.) ### Central Bank Code - Reform aimed to align the Organic Monetary and Financial Code with best practices for central banks in dollarized economies, including: - Streamlined objectives and functions. - Strengthened autonomy including in terms of its budget and recapitalization, along with enhanced accountability. - Improved governance via an independent board with fiduciary responsibilities. - Introduction of strong internal and external audit functions. - Prohibitions for all future monetary financing and quasi-fiscal operations, including direct and indirect lending to the government. - Reintroduction of a rule requiring international reserve assets to fully back deposits from other depository institutions at the BCE and coins in circulation. - The draft submitted fell short of the end-September SB standards for autonomy because appointment and dismissal of BCE’s board members depended solely on the President of the Republic. - The debate in the National Assembly was more contentious than anticipated; submission of revised amendments will become a structural benchmark for the fourth review. ### Transparency of State-Owned Enterprises (SOEs) - MEF issued a ministerial decree requiring all SOEs to publish audited annual financial statements starting in fiscal year 2019 — meeting the end-June SB. - Ministerial decree provides specific accounting guidelines to standardize SOE accounting practices and help consolidate financial information with the rest of the public sector. - Significant work remains to achieve unqualified auditor’s opinions due to valuation difficulties, prohibition of writing down assets by the controller’s office, and heritage of past non-transparent mergers. - A reform of the SOE law is under consideration; timing of submission is uncertain. ### Expenditure arrears - Authorities progressed in identifying the stock of expenditure arrears and submitted a plan to clear the stock; SB for end-September implemented with slight delay. - Plan includes standardized definition of arrears and a 90-day payment deadline for current and capital expenses (when not established by law, contract, regulation or any other valid public act). - This definition will be included in the amendments to the COPLAFYP. - Stock of outstanding central government arrears is estimated at US$1,127 million as of end-September 2019, of which US$657 million with the private sector. - Total accounts payable in the central government are estimated at US$1,940 million as of end-September 2019, of which US$1,170 million are with the private sector. ### Eligibility thresholds for social assistance - SB on definition and publication of eligibility thresholds for social assistance programs by end-September was met. - MIES developed a new poverty index based on the Social Registry 2018 database and modeled new eligibility thresholds. - Under the published baseline scenario, implementation of the new eligibility thresholds would bring an additional 350,000 poor beneficiaries under the social safety net, improving coverage of poor households from about 34 percent at end-2018 to over 60 percent. ### Policy discussions — Strengthening the institutional foundations of dollarization: Restoring fiscal prudence - Authorities proposed moderating the fiscal consolidation path while maintaining broad program objectives unchanged. - NOPBS consolidation narrowed by 3.9 percent of GDP in 2019-2021 compared to 5 percent of GDP previously envisaged. - A fiscal consolidation of about 4 percent of GDP in the NOPBS would: - Put public debt on a sustainable path (Annex 3) and bring it below the 40 percent benchmark by 2024. - Resulting primary balance of 4.6 percent of GDP at end-2021 would exceed the debt-stabilizing primary balance of 2.5 percent of GDP. - Public debt would be slightly higher in 2021 at 48.1 percent of GDP (versus about 46 percent at time of first review). - New annual consolidation profile over the program: 1.5; 1.7; 0.7 percent of GDP — front-loaded with 80 percent of total (3.2 percent of GDP) expected in the first two years. - Reduced build-up of international reserves over the program: - Projected NIR about US$3.6 billion by end-2021 (compared with US$7 billion projected at time of first review). - Gross reserves expected to increase to about US$7.6 billion by end-2021, or 39 percent of the ARA metric. - This cushion would cover financial sector deposits with the BCE, outstanding credit of the BCE to the IMF, a quarter of public external amortizations, and one month of government expenditure at the NFPS level. - Expected 2019 fiscal outcome and composition shifts: - Projected 2019 NOPBS deficit increased from 2.9 to 3.4 percent of GDP, largely due to delay in asset monetization. - Lower-than-expected savings from fuel subsidy reforms by 0.3 percentage points of GDP due to higher global oil prices and substitution effects. - Social security benefit spending expected about 0.1 percentage points of GDP higher due to higher-than-anticipated unemployment benefit payments from wage-bill optimization. - Offsetting larger reductions in capital spending. - Wage bill and public administration: - Authorities committed to reduce public wage bill, albeit at a slower pace. - Savings in 2019 were small; optimization included termination of occasional contracts and an interinstitutional agreement to restructure public administration to allow more terminations by end-2019. - Authorities committed to achieve savings in the wage bill in 2020 estimated at 0.3 percentage points of GDP with specific compensation and employment measures. - Fiscal consolidation expected to continue in 2020-21: - Reduction in consolidation objective for 2020 from 2 percent to 1.7 percent of GDP agreed as appropriate. - Tax reform and economic reactivation measures expected to yield net 0.5 percent of GDP in both 2020 and 2021. - Authorities plan gradual removal of gasoline subsidies; staff estimates fiscal savings of 0.2 percent of GDP in 2020 and 0.2 percent of GDP in 2021 from this removal (included in program baseline). - Authorities plan to lease frequency ranges to telecom companies with expected revenue of 0.4 percent in 2020 and in 2021. - Resulting NOPBS deficit expected to reach 1.7 percent of GDP in 2020 (one half of expected deficit in 2019); overall fiscal balance would swing into a surplus of 0.7 percent of GDP. - Additional consolidation measures of 0.7 percent of GDP planned for 2021, including further rationalization of the wage bill, goods and services, fuel subsidies, and capital spending. - Fiscal measures intended to allow somewhat higher capital investment in 2020 and an additional increase in social assistance spending to expand social safety net coverage by mid-2020. *Source: IMF staff report content (section 8).* ### 14. The authorities continue to work to strengthen public spending controls. They have ### 14. The authorities continue to work to strengthen public spending controls. They have ### Public spending controls and arrears - Progress made in identifying the stock of central government arrears, but additional work is needed to identify extrabudgetary non-verified arrears in the central government. - Further efforts needed to compile the stock of arrears at the NFPS level and to address underlying causes of arrears accumulation, including: - enhancing budget formulation; - strengthening internal control and oversight mechanisms; - improving liquidity management and fiscal reporting. - The authorities have requested technical assistance on cash management, which is scheduled to take place in early 2020. - Reform of the COPLAFYP could significantly strengthen monitoring and reporting of arrears by: - introducing a legal definition of arrears that will require the update of the information system; - requiring that arrears are reported in accordance with technical norms to be issued by the MEF; - requiring that the MEF issues the methodology for estimating the stock of arrears, and technical standards for the public entities to validate accounts payable from previous years. - New structural benchmarks will support implementation of these reforms, as will a new indicative target on central government arrears, to be introduced starting in June 2020 (¶32). ### Tax administration and tax reform - Powers of tax administration require strengthening—including in combatting unacceptable tax avoidance schemes—while protecting taxpayers’ rights. - Modifications to the Tax Procedure code are needed to secure gains from the tax reform; proposed modifications could include: - introducing a joint liability/responsibility for tax obligations and offences; - granting powers to tax administration to take precautionary measures to safeguard the recovery of tax debts, even when an assessment has not yet been made; - providing incentives to taxpayers to substantiate their claims within the course of the audit to avoid delay tactics through the use of the appeals process; - overhauling the administrative penalties regime. - Priorities for tax administration include: - implementing a fully-fledged Large Taxpayer Office; - strengthening enforcement efforts against VAT non-compliance, abuse of PIT’s deduction of personal allowances, misuses of tax incentives; - addressing erosion of the CIT base through cross-border transactions; - tackling High Net Wealth Individuals (HNWI) avoidance practices. - Staff will continue dialogue with the authorities on implementing these amendments. ### Fiscal and revenue/expenditure figures and consolidation measures (selected numerical items as reported) - Staff proposes to raise the floor on social assistance spending by 0.3 percentage points of GDP in 2020–21. - Compensation measures to households for the removal of gasoline subsidies could amount to up to 0.03 percent of GDP. - Credit exposure of the financial system with the government is about US$1.5 billion. - Table excerpts (2019–2021 figures preserved as in source): - Revenue: -1.0 (2019); 1.5 (2020); -0.8 (2021); -0.3 (2019-2021) - Planned tax reform: 0.0 (2019); 0.5 (2020); 0.0 (2021); 0.5 (2019-2021) - Expenditure: 2.5 (2019); 0.2 (2020); 1.5 (2021); 4.2 (2019-2021) - Total: 1.5 (2019); 1.7 (2020); 0.7 (2021); 3.9 (2019-2021) - (Sources: Ministry of Finance and IMF staff calculations. Footnotes retained in source.) ### Promoting shared prosperity and protecting the poor and most vulnerable - The social safety net is undergoing major reform; prior system excluded most poor households while many non-poor households received assistance. - Coverage: just 1 in 3 households in the three poorest income deciles received social assistance transfers. - Leakage: 4 in 10 beneficiaries of social assistance belonged to non-poor households. - The social registry (based on a 2014 database) is incomplete and outdated. - Authorities launched active policy measures in mid-2019, including: - full funding of the Bono de Desarrollo Humano (BDH) and the related BDH-Variable to eliminate wait lists; - increasing funding for in-home services for the elderly and disabled; - expanding access to child care to support female labor force participation. - Legal bottlenecks to establishing a new social registry have been eliminated; administrative hurdles for hiring personnel removed via an inter-ministerial agreement. - Cooperation agreements finalized with 14 public and private universities in late September to survey households in the bottom three deciles in remote areas. - Fund staff, in consultation with the World Bank, will offer assistance to prepare and publish a time-bound action plan to implement updated eligibility thresholds and accelerate completion of the upgraded social registry (newly proposed SB for end-February 2020). - The updated eligibility thresholds for social assistance programs were published at end-September (SB) and should be implemented as soon as feasible and no later than mid-2020 when the social registry upgrade is complete. - Potential impact: - These actions could lead to a further expansion of coverage of social assistance programs to about 60 percent of the households in the lowest three deciles of the income distribution by 2021. - Further increases in social assistance spending in 2020 could result from compensation measures related to subsidy removal (up to 0.03 percent of GDP). ### Boosting resilience of the financial system - Financial system appears stable; reported FSIs suggest solvency, profitability, and liquidity. - Divergence between credit and deposit growth warrants continued vigilance. - Staff encouraged supervisory authorities to: - monitor credit growth closely, particularly in riskier segments and institutions; - develop a contingency plan for liquidity pressures or signs of asset quality deterioration. - Program envisions establishment of a macroprudential framework; interim short-term measures could include: - raising reserve requirements; - more conservative loan classification and provisioning policies for particular asset classes (e.g. housing or consumer loans). - Supervisory authorities and staff completed a stocktaking of key issues (banking supervision, cooperatives’ supervision, macroprudential framework, liquidity requirements) with IMF technical assistance; further technical assistance and detailed workplans are being prepared. - Recommendations include: (i) Banking supervision: review legal framework to provide operational independence and improve governance of the superintendency; review supervisory practices to better evaluate credit risk management and loan portfolio quality. (ii) Cooperatives regulation and supervision: review legal framework to clarify perimeter of supervision; develop better practices to supervise credit and liquidity risk and improve data collection; establish minimum governance standards; use graduated regulation by complexity; harmonize regulatory framework for larger cooperatives with that of banks. (iii) Macroprudential framework: build institutional understanding and analytical capacity; establish legal basis; member agencies should start producing a joint biannual internal financial stability report; strengthen monitoring capabilities; consider borrower-based and lender-based macroprudential measures; further technical assistance expected including a high-level seminar. (iv) Liquidity requirements: simplify current liquidity requirements gradually, replacing them with a single requirement applied uniformly across the system; review eligible instruments to ensure true liquidity; develop a Basel-like liquidity coverage ratio and net stable funding ratio adapted to domestic needs to be implemented over time. - A thorough reform of the financial supervisory framework in the organic law (COMYF) will have to be decided once current reforms under discussion are passed; political feasibility has declined. ### Boosting competitiveness and job creation - A labor market reform is planned to be submitted to the National Assembly in the coming months (not a structural benchmark under the Fund program but critical for restoring competitiveness and reducing informality). - Draft reform proposals include provisions for more flexible work days and working hours, and measures to promote female labor force participation such as allowing the mandated 12 weeks of maternity leave to be shared between both parents. - Prospects for submitting and passing the law depend on progress in negotiations with social groups, which are ongoing. ### Improving transparency and governance - Authorities published a new public debt bulletin on public debt statistics, including a new table on contingent liabilities and a technical note explaining methodology. - Staff urged full adoption of the methodology in the IMF’s Public Sector Debt Statistics: Guide for Compilers and Users. - Staff encouraged authorities to: - develop and publish a debt management strategy; - begin tracking cost-risk indicators of the entire debt portfolio; - introduce investor relations practices. - The authorities are working on a new law for state-owned enterprises (SOEs) with IADB assistance to improve efficiency, increase transparency, and strengthen governance; the law aims to align SOEs with private company standards (taxes, labor regulations, accounting standards) and eliminate obstacles to audited financial statements by allowing SOEs to hire their own external auditors. - A new law on private-public partnerships (PPPs) is being prepared with World Bank and IADB assistance; the law intends to: - create a proper structuring agency; - establish a process for reviewing and approving PPPs; - establish limits on PPP commitments; - put in place procedures to hedge fiscal risks from PPPs; and - organize unsolicited proposal processes. - Enhancing anticorruption legal framework and its implementation is fundamental; recent events caused changes in Anticorruption (AC) Secretary leadership and staff rotation that slowed progress. - Legal reform efforts have focused on non-conviction-based asset forfeiture and access to public information legislation. - The Assembly approved reforms to the Criminal Code (COIP) impacting provisional measures and confiscation of corruption proceeds but the Executive vetoed the reforms for unconstitutionality; the Constitutional Court is expected to issue a final decision soon. - AC Secretary is working on a new package of reforms to the COIP to address remaining issues in criminalization of acts of corruption in line with international standards. - Reforms aimed at enhancing PFM (¶8), central bank governance (¶8), and financial sector oversight (¶21) are expected to further strengthen governance and reduce vulnerabilities to corruption. - AML/CFT reforms: - Multi-sectoral working groups and data collection for the national risk assessment exercise launched with World Bank support. - A review of the AML/CFT legal framework is underway, with focus on enhancing preventive measures for politically exposed persons and strengthening risk-based AML/CFT bank supervision. - These reforms are fundamental for the AML/CFT evaluation the country will undergo in 2021. ### Program modalities and risks - Proposed modifications to conditionality include: - Modifications to the NOPBS, NIR, and social assistance QPCs for end-December 2019. - New PCs proposed for end-March and end-June 2020. - New ITs proposed for end-September 2020 and end-December 2020. - The authorities are requesting, and staff supports, introduction of an adjustor for half of the potential payment related to a pending lawsuit in 2020 and technical modifications to the NIR adjustor on market borrowing to reflect its cumulative nature. *Source: IMF staff report content provided.* ### 29. In light of their macro-criticality, two prior actions were set for the combined second ### Combined Second and Third Reviews: Prior Actions, Benchmarks, Financing, Risks, and Staff Appraisal ### Prior actions, missed SBs, and timetable changes - Two prior actions were set for the combined second and third reviews due to macro-criticality. - End-August SB on the publication of a broad-based tax reform plan and end-October SB on the submission of the tax reform to the National Assembly were not met. - The end-October SB was converted into a prior action for the combined second and third reviews, requiring: - submission and non-rejection of the revised tax reform with a net yield of at least 0.5 percent of GDP in 2020 and 2021. - The end-June SB on the submission of amendments to COPLAFYP to the National Assembly was delayed and became a prior action for completion of the combined reviews. ### Q4 2019 targets: NOPBS, NIR, and social assistance - Authorities request modifications to the NOPBS, NIR and social assistance spending targets for Q4 2019. - Revised NOPBS target would reflect revenue lost in 2019 due to postponement of an asset monetization operation to 2020 (partly caused by time lost during the October protests). - Revenue shortfall drivers cited: - postponement of the asset monetization project, - lower-than-expected oil balance due to the refinery closure, - higher-than-expected repayments of past obligations by the social security and public enterprises (¶6). - Staff supports modification to the Q4 NIR target in light of these shortfalls. - Postponement of the expansion of the Crédito de Desarrollo Humano to 2020 (earlier planned for 2019) of US$0.1 billion led to reprofiling of social assistance spending in 2019: - proposed end-December 2019 target of US$1.1 billion (compared to US$1.2 billion). ### New and shifted structural benchmarks (SBs) and indicative timelines - Two new SBs proposed for end-February and end-April 2020 after rejection of the economic reform package: - submission of revised amendments to COPLAFYP and COMYF laws as separate reforms (SBs end-February 2020 and end-April 2020). - SBs on establishment by the central bank of an audit committee and approval of an internal audit charter for the BCE proposed to shift from end-March to end-August 2020. ### Five new structural benchmarks to strengthen PFM - Aim: enhance budget credibility, improve cash management, and strengthen monitoring of arrears. - Proposed SBs: - end-June 2020: adoption of a single budget circular that establishes binding expenditure ceilings for both current and capital expenditure. - end-January 2020: formalize the operation of the Financial Committee to strengthen cash management. - end-February 2020: MEF to publish a Financial Plan to align budget execution with cash availability to accompany the 2021 budget submission to the Assembly by end-February 2020. - end-June 2020: strengthen monitoring of arrears for the entire NFPS. - end-December 2020: arrears clearance and prevention in the NFPS. - Additional measure: a new IT proposed to be introduced on central government arrears starting from June 2020. ### Anti-corruption and governance SBs - Structural benchmark on submission of anti-corruption legislation reset from end-September to end-December 2019 and slightly modified due to Constitutional Court resolution clarifying procedural limitations. - New SB for end-June 2020 to expand public access to information in asset declarations to strengthen public officials’ asset declarations as a prevention and enforcement tool. ### Education and health SB - Structural benchmark on publication of an action plan to strengthen efficiency and quality of primary education and health spending (in coordination with World Bank technical assistance) proposed to be reset to end-June 2020. - Authorities awaiting technical experts’ conclusions; more time required to design the action plan. ### Social assistance SB - New SB for end-February 2020 related to social assistance: - prepare and publish an action plan to (i) implement updated eligibility thresholds for social assistance and (ii) accelerate completion of the upgraded social registry. ### Financing status, projections, and composition - Ecuador’s capacity to repay remains adequate, although risks have risen substantially; program remains fully financed for the next 12 months. - Revisions to projected reserve path imply worsening of indicators of fund credit relative to gross reserves (Table 8 referenced). - 2019 financing: - new market financing of US$2.0 billion issued in September, - will compensate for US$0.9 billion shortfall in gross multilateral financing in 2019 and previously planned commercial financing shortfalls, as well as shortfall due to delay in asset monetization and repayment of past obligations by public entities outside the central government. - 2020 financing needs and resources: - gross financing needs at the NFPS level estimated at about US$5.6 billion. - coverage by total resources of US$7.2 billion composed of: - multilateral disbursements of about US$3.9 billion, - bilateral financing of about US$300 million, - bank loans of about US$650 million, - domestic issuance of bonds of about US$2.4 billion, including US$1.8 billion rollover of short-term government securities (CETES). - excess financing of US$1.7 billion contributes to accumulation of net international reserves. - Staff obtained financing assurances from multilaterals of US$4 billion for 2020, including US$710 million re-phased from 2019. - World Bank has offered additional budget financing in 2020 of US$250 million (included in revised program scenario) and indicated possibility of additional project financing (not yet included). - Staff will monitor financing and advise on debt management, including design of a comprehensive debt management strategy and investor communication. ### Exchange restrictions and safeguards - Tax on transfers abroad is both: - an exchange restriction subject to Fund approval under Article VIII, and - a capital flow management measure (CFM) under the IMF’s Institutional View on Liberalization and Management of Capital Flows (IV). - Authorities committed to phasing out the tax on transfers abroad as macroeconomic stability is restored and reserves strengthened. - Monetary and Financial Board passed a resolution in August 2019 implementing changes to the legal framework for the exchange system based on Article VIII assessment recommendations. - Safeguards update (finalized June 2019) recommended restoring BCE autonomy and strengthening credibility of the dollarization regime. - Enactment of new central bank law would allow implementation of safeguards, including: - approval of an internal audit charter, - establishment of an Audit Committee. - BCE is taking steps to adopt IFRS as its financial reporting framework. ### Arrears, financing assurances, and Lending into Arrears - Around US$52 million (including accrued interest) remains outstanding to international private bondholders from bonds repudiated in 2008/2009; majority were subsequently repurchased by the government. - Staff considers authorities to be making good faith efforts as required under the Fund’s Lending into Arrears policy. ### Downside risks (external and domestic) - External risks: - A sharp fall in oil prices could necessitate a larger and more accelerated adjustment; an increase in oil prices is an upside risk. - A sharp rise in risk premia globally could increase debt service and refinancing risks; regional political instability may contribute to volatility. - Rising global protectionism could reduce global growth and demand for Ecuador’s exports. - Continued spillovers from the Venezuela crisis could have fiscal costs: - as of November 2019, estimated 385,042 Venezuelan refugees and migrants living in Ecuador. - preliminary estimates suggest government expenditure on Venezuelan arrivals is in the range of 0.1–0.2 percent of GDP and could reach 0.4 percent of GDP over the medium term if migrant flows continue unabated. - increased labor supply from migration could weaken labor market conditions in the short term but likely increase Ecuador’s potential growth in the medium term. - Ongoing legal disputes may generate additional fiscal costs in 2020. - Lower-than-expected disbursements from multilaterals could lower reserve accumulation: - team analyzed a scenario with delay of one-half of expected disbursements from multilaterals in 2020 and only one-half of the non-disbursed funds in 2020 being disbursed in 2021; this scenario implies reserve coverage by the ARA metric falling from 39 percent to 36 percent, still covering bank deposits in the central bank and only slightly short of the staff-designed Ecuador-specific reserve metric. - A recent sharp increase in country risk may result in additional payments due to margin calls embedded in some debt contracts (mitigated by higher bond prices). - Domestic risks: - Political landscape significantly more complex after October social unrest and rejection of the urgent law in November. - Risks that remaining legislative proposals (budget code and central bank law) are weakened or do not pass, undermining needed reforms. - Heightened uncertainty may deter asset monetization investors. - Specific downside risks to consolidation plan include: - (i) delays and lower-than-expected revenues from asset monetization; - (ii) delays and lower-than-expected revenues from leasing of frequency ranges; - (iii) lower-than-expected yield from fiscal reform; - (iv) lower social spending jeopardizing fuel subsidy reform implementation. - Weak expenditure controls, including in the wage bill, could undermine fiscal objectives. - Politically-related spending in a pre-election year by government sectors outside central control (e.g., local governments) could exacerbate pressures. - Insufficient coordination between government entities complicates macroeconomic management and risks meeting program targets. ### Contingency measures identified by authorities - Authorities identified contingency measures to safeguard program objectives in 2019 and 2020: - partially compensate lost 2019 asset monetization revenue with lower net lending and other current spending. - a partial adjustor proposed to accommodate one-half of the awarded payment in an ongoing lawsuit; the remainder to be compensated by contingency measures. - specific options to draw on contingency measures include: - reduce spending on goods and services, - recalibrate pace of rescaling capital investment, - reduce net lending, - implement additional cuts in other areas of expenditure. ### Staff appraisal and policy recommendations - Program implementation challenged by political, economic, and social environment; economic growth slowed in 2019. - Authorities made serious efforts to meet conditionality but October social unrest and Assembly rejection of reform package weakened implementation, necessitating program recalibration to gather political and social consensus and recognize changed outlook. - Progress noted on fiscal consolidation and reserve buffers in 2019: - efforts to reduce the wage bill commendable, though partially diluted by hiring in health and security sectors. - savings from 2018 fuel subsidy reform were lower than expected; expected asset monetization revenues did not materialize. - shortfalls largely offset through cuts in capital spending. - reserve buffers increased over 2019, improving reserve adequacy relative to end-2018. - Recommendation to moderate envisaged fiscal consolidation path: - lower fiscal consolidation target from 5 to 4 percent of GDP in the non-oil primary balance including fuel subsidies over the course of the program to keep public debt on a downward path. - In 2020, tax reform savings should be supplemented with savings from rationalizing current expenditure. - Strengthen tax administration, including amendments to the tax procedure code, to help secure gains from tax reform. - In 2021, composition of adjustment expected to shift towards expenditure measures. - Reserve accumulation revised downward: - projected build-up of international reserves about US$3.4 billion lower than at time of first review. - despite reduction, reserves by end of program still projected to meet basic liquidity requirements and standards of the backing rule in submitted central bank code amendments. - Social protection and safety net recommendations: - continue demonstrating commitment to protect the most vulnerable and strengthen social safety net. - progress included reduction of wait times, removal of administrative hurdles in critical social programs, and publication of new eligibility thresholds. - staff urges acceleration of Crédito de Desarrollo Humano expansion in 2020. - completion of upgrade of social registry in 2020H1 is a priority; additional increase in social assistance spending programmed for 2020H2 and 2021 to expand coverage. - Public financial management priorities: - revised Organic Budget Code reform to be submitted early next year should: - strengthen top-down budget formulation, - limit Executive discretion to amend the budget, - establish clearer mechanism for dealing with arrears, - strengthen expenditure controls and fiscal rules framework. - additional measures needed to address root causes of arrears: enhance budget formulation, strengthen internal control and oversight, improve liquidity management and fiscal reporting. - Central bank reform priorities: - strengthen BCE autonomy, accountability, and governance to ensure sound reserve management and protect dollarized framework. - reform of the Organic Monetary and Financial Code should: - improve BCE autonomy and governance through creation of a board with fiduciary responsibility, - solidify prohibition on monetary financing and quasi-fiscal activities, - enshrine a backing rule to guide BCE reserve management. *Source: IMF staff report text (paragraphs 29–48).* ### 49. The financial system is stable and weathered the recent turmoil well, but continued ### The financial system is stable and weathered the recent turmoil well, but continued vigilance is warranted while regulatory and supervisory frameworks are being upgraded. ### Financial system stability and credit dynamics - Finding: "The financial system is stable and weathered the recent turmoil well, but continued vigilance is warranted while regulatory and supervisory frameworks are being upgraded." - Finding: "Although the gap between credit and deposit growth is narrowing, the slowdown in economic activity poses some risks to the financial system." - Finding: "Recent composition of credit growth ... has been heavily skewed to microfinance and consumption." - Recommendation: "It will be important to monitor closely the riskiest segments and institutions." - Recommendation: "Aligning credit risk regulation with good practice and closing the regulatory gaps between banks and cooperatives is also recommended." ### Anti-corruption and AML/CFT frameworks - Finding: "Enhancements to the anticorruption and AML/CFT frameworks are needed to strengthen governance and reduce vulnerabilities to corruption." - Finding: "The efforts made in the area of asset recovery are welcome." - Recommendation: "Complete the legislative work on criminalization of acts of corruption and the freezing, seizing and confiscation of corruption proceeds." - Recommendation: "Complete the regulatory amendments on customer due diligence on senior officials." - Recommendation: "Continue to engage in coordination initiatives to avoid conflicting efforts, defining agreed strategic priorities, and advancing preventive measures focused on public officials." - Recommendation: "Specific legal reforms to support the implementation of an effective AML/CFT risk-based supervision should be developed." ### Structural reform agenda - Finding: "The authorities should continue pushing forward with other elements of their structural reform agenda." - Finding: "Substantial progress has been made, with the collaboration of other international financial institutions, in preparing draft reforms on the labor market, state-owned enterprises, and public-private partnerships." - Rationale: "These much-needed reforms would help raise economic efficiency and productivity, and, in the case of the SOE and PPP laws, enhance governance and reduce fiscal risks." ### Program implementation risks and contingency measures - Finding: "Program implementation going forward will be challenging." - Risks identified: "An unfavorable external environment (lower oil prices, slower global growth, heightened risk aversion in the financial markets) could create headwinds to the program." - Additional downside risks: "a complex domestic political environment, weak expenditure controls, potentially lower-than-expected disbursements from multilaterals, and continued spillovers from the Venezuela crisis." - Action: "The identification of contingency measures to safeguard program objectives in the near term is welcome;" - Recommended contingency measures: "consider further cuts in goods and services spending, limiting the scaling-up of public investment, reducing net lending, and implementing additional cuts in other areas of expenditure, as part of these contingency measures." *Source: 1ecuea2019005 - 49. The financial system is stable and weathered the recent turmoil well, but continued vigilance is warranted while regulatory and supervisory frameworks are being upgraded. (https://www.imf.org/-/media/files/publications/cr/2019/1ecuea2019005.pdf)* ### 53. In view of the authorities’ performance under the program, staff recommends ### 1ecuea2019005 - 53. In view of the authorities’ performance under the program, staff recommends ### Program decision and conditionality - Staff recommends completion of the second and third reviews. - Staff supports the authorities’ request for a waiver of nonobservance for the end-September performance criterion on net international reserves given the minor nature of the breach. - Staff supports proposed modifications of conditionality. ### Recent economic developments and activity - Real GDP growth fell to 0.3% in 2019Q2. - Contributions to real GDP growth (2019Q2) highlighted: - Tradables inflation shifted to positive territory while nontradables inflation slowed in line with wage growth. - A fall in public consumption and investment outweighed export growth. - Job quality has deteriorated; adequate and inadequate employment shares (Sep-19): Adequate Employed 44.3, 42.2, 39.7, 39.7, 40.5, 55.5, 57.4, 59.6, 59.7, 58.8 (figure series presented). - Economic activity and industrial production indices: industrial production index has risen in 2019 while overall economic activity has been sluggish. ### Inflation and prices - Consumer price index period average and end-of-period projections: - CPI period average: 3.6, 4.0, 1.7, 0.4, -0.2, 0.4, 0.3, 1.2, 0.9, 1.2, 1.2, 1.2, 1.2 (2014–2024 series). - CPI end-of-period: 3.7, 3.4, 1.1, -0.2, 0.3, 0.6, 0.4, 1.4, 0.9, 1.2, 1.2, 1.2, 1.2 (2014–2024 series). - Transportation costs were the main driver of inflation. ### External position and reserves - Current account developments: - Current account (percent of GDP): -0.7, -2.2, 1.3, -0.5, -1.4, 0.5, -0.8, 1.4, 0.3, 0.6, 0.7, 1.0, 1.2 (2014–2024 series). - Gross international reserves (GIR) and Net international reserves (NIR): - Gross international reserves (US$ millions): 3,762; 2,351; 4,216; 2,006; 2,158; 4,679; 4,215; 8,446; 6,022; 7,576; 8,016; 9,123; 10,105 (2014–2024 series). - Net international reserves (US$ millions): 425; -498; -1,917; -3,293; -2,895; 237; 743; 3,668; 2,087; 3,629; 3,851; 4,701; 5,388 (2014–2024 series). - Program definition NIR (US$ millions, at program exchange rates): -2,498; -2,889; 248; -563; 679; 1,957; 3,499; 3,721; 4,571; 5,258 (series provided). - Underlying reserves (US$ millions): -3,293; -2,895; -1,159; -1,319; 879; -699; -551; -329; 596; 1,573 (series provided). - GIR and NIR declined recently after increasing through September 2019. - External debt (percent of GDP) rose in the first half of 2019: - Public and private external debt (percent of GDP, 2014–2024 series): Public 27.1, 33.8, 43.2, 44.6, 46.1, 48.4, 49.6, 47.4, 50.1, 48.1, 44.8, 41.5, 38.2; External (memorandum) 25.2, 29.4, 36.6, 39.7, 41.7, 42.8, 45.6, 44.3, 48.5, 48.9, 46.2, 43.7, 40.9. ### Fiscal developments and public finances - Revenue and expenditure (percent of GDP, 2014–2024 series): - Revenue: 38.4, 33.6, 30.3, 32.0, 36.1, 34.7, 34.2, 37.3, 36.2, 35.5, 34.9, 34.9, 34.9. - Expenditure: 43.6, 39.7, 38.6, 36.5, 37.3, 35.0, 35.3, 34.1, 35.5, 33.8, 33.3, 33.2, 33.2. - Overall balance (deficit -) (percent of GDP): -5.2, -6.1, -8.2, -4.5, -1.2, -0.3, -1.1, 3.2, 0.7, 1.7, 1.6, 1.7, 1.7 (2014–2024 series). - Primary balance (percent of GDP): -4.2, -4.7, -6.7, -2.3, 1.3, 2.3, 1.6, 6.0, 3.7, 4.6, 4.2, 4.2, 4.3 (2014–2024 series). - Non-oil primary balance (percent of GDP): -7.4, -4.0, -6.7, -4.1, -1.9, -1.0, -1.1, 0.9, 0.3, 0.5, 0.4, 0.3, 0.3. - Public debt (percent of GDP): 27.1, 33.8, 43.2, 44.6, 46.1, 48.4, 49.6, 47.4, 50.1, 48.1, 44.8, 41.5, 38.2 (2014–2024 series). - Key fiscal levels in dollar terms (Table 4a, selected): - Revenue (US$ millions): 39,032 (2014); 33,322 (2015); 30,314 (2016); 33,426 (2017); 38,866 (2018); 37,449 (2019 Prel.); 36,646 (2019 Prog.); 40,670 (2020 Prog.). - Expenditure (US$ millions): 44,346 (2014); 39,398 (2015); 38,540 (2016); 38,079 (2017); 40,166 (2018); 37,741 (2019 Prel.); 37,833 (2019 Prog.); 37,169 (2020 Prog.). - Overall balance (US$ millions): -5,314 (2014); -6,076 (2015); -8,226 (2016); -4,653 (2017); -1,300 (2018); -292 (2019 Prel.); -1,187 (2019 Prog.); 3,502 (2020 Prog.). ### Public sector financing and financing needs - Gross financing needs (US$ millions): 11,035 (2014); 14,181 (2015); 19,086 (2016); 17,400 (2017); 9,169 (2018); 8,109 (2019 Prel.); 8,669 (2019 Prog.); 2,091 (2020 Prog.). - Identified external financing (US$ millions): 6,411 (2014); 7,311 (2015); 6,301 (2016); 6,344 (2017); 10,142 (2018); 9,928 (2019); 10,779 (2019 Prog.); 8,594 (2020 Prog.). - IMF financing and program access (Table 11 — Access and phasing under the Extended Fund Arrangement): - Board approval of EFF, March 11, 2019: SDR 469.70; US$ 651.47; Disbursement 67.32; Cumulative 67.32. - First Review, June 15, 2019: SDR 180.65; US$ 250.14; Disbursement 25.89; Cumulative 93.21. - Second Review, September 15, 2019: SDR 180.65; US$ 249.06; Disbursement 25.89; Cumulative 119.11. - Third Review, December 15, 2019: SDR 180.65; US$ 249.06; Disbursement 25.89; Cumulative 145.00. - Fourth through Eleventh Reviews list subsequent SDR and US$ tranches leading to a Total SDR 3,035.0; US$ 4,189.3; Cumulative Percent of quota 435.0. - Ecuador's quota is SDR 697.7 million. ### Balance of payments and external sector projections - Current account (US$ millions): -669 (2014); -2,221 (2015); 1,321 (2016); -490 (2017); -1,487 (2018); 515 (2019 Prel.); -876 (2019 Prog.); 1,491 (2020 Prog.). - Trade balance and exports/imports (2019 Prel. and projections): - Exports, f.o.b. (US$ millions): 22,464 (2019 Prel.); 22,189 (2019 Prog.); 22,920 (2020 Prog.). - Imports, f.o.b. (US$ millions): 21,147 (2019 Prel.); 21,794 (2019 Prog.); 20,943 (2020 Prog.). - Financial account (US$ millions) and components (2014–2019 series presented): - Financial account (US$ millions): -402 (2014); -766 (2015); -800 (2016); 1,424 (2017); -1,745 (2018); -615 (2019 Prel.); -1,591 (2019 Prog.). - Direct investment (US$ millions): -772 (2014); -1,323 (2015); -769 (2016); -619 (2017); -1,408 (2018); -1,221 (2019 Prel.); -973 (2019 Prog.). - Overall balance (US$ millions): -424 (2014); -1,489 (2015); 1,207 (2016); -1,858 (2017); -92 (2018); 1,202 (2019 Prel.); 786 (2019 Prog.); 2,167 (2020 Prog.). ### Monetary and financial sector indicators - Banking system indicators (selected, end-of-period values): - Regulatory capital to risk-weighted assets (CAR): 13.8, 12.4, 13.0, 12.8, 11.9, 12.7, 14.4, 13.9, 13.7, 13.4, 13.8, 13.3, 13.4 (series). - Nonperforming loans to gross loans: 2.9, 2.2, 2.2, 2.8, 2.6, 2.9, 3.7, 3.5, 3.0, 2.6, 3.1, 3.0, 3.0. - Return on average assets (ROA): 1.2, 1.3, 1.7, 1.1, 0.9, 1.0, 0.9, 0.6, 1.0, 1.4, 1.3, 1.4, 1.5. - Liquid assets to short-term liabilities: 35.2, 32.4, 28.7, 30.5, 30.7, 26.0, 29.6, 33.9, 29.4, 27.9, 23.2, 25.2, 24.1. - Monetary aggregates (selected): - Gross international reserves (US$ millions) repeated in monetary survey: 4,679; 4,215; 8,446; 6,022; 7,576; 8,016; 9,123; 10,105 (series). - Net foreign assets and net domestic assets tables provide detailed levels and projections through 2024. ### Key projections and medium-term outlook (selected numbers) - Real GDP projections (percent change): -0.5 (2019 Prel.); -0.5 (2019 Prog.); 0.2 (2020 Prog.); 0.2 (2021 Prog.); 1.6 (2022); 2.7 (2023); 2.5 (2024). - Unemployment rate projections: 3.7 (2019 Prel.); 4.3 (2019 Prog.); 4.3 (2020 Prog.); 4.7 (2021 Prog.); 4.8 (2022); 4.8 (2023); 4.6 (2024); 4.4 (2025); 4.2 (2026). - Oil price Ecuador mix (US$ per barrel): 84, 42, 35, 46, 61, 52, 56, 52, 54, 51, 50, 50, 51 (2014–2024 series). ### Policy implications highlighted by staff - Recommendation to complete the second and third reviews, reflecting satisfactory program performance against conditionality overall. - Support for waiver of nonobservance related to the end-September performance criterion on net international reserves because the breach was minor. - Support for modifications of conditionality to reflect evolving program implementation needs. *Sources: Central Bank of Ecuador; Ministry of Finance; National Statistical Institute of Ecuador (INEC); World Bank Development Indicators; IMF staff calculations and estimates (from the document "First Review under the Extended Fund Facility Arrangement, Requests for Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, and Financing Assurances Review (July 3, 2019, CR 19/210)").* ### Annex I. Explaining the Program Target on Net International ### Annex I. Explaining the Program Target on Net International Reserves ### Program objective and rationale - One of the main objectives of the authorities’ Fund-supported program is to increase reserve buffers, which have been depleted significantly in recent years. - Given Ecuador’s status as a dollarized economy with no monetary policy, the program condition on net international reserves (NIR) is designed to target only what is within the authorities’ control; this implies a target which is essentially a fiscal one and which is strongly correlated with the build-up of deposits of the non-financial public sector at the central bank. - In a dollarized economy, the central bank cannot print money to exchange for foreign currency; reserve accumulation is therefore more constrained than in countries with their own currencies. - Liquidity buffers in foreign currency are still needed to fund the domestic financial sector or the public sector in cases of unexpected fluctuations in government revenue or spending (e.g., due to natural disasters), or if external financial support is not available. - As an oil exporter, Ecuador may need larger liquidity buffers because of the greater volatility of foreign currency flows. ### Choice of reserve target: NIR versus GIR - The ultimate objective is an accumulation of gross international reserves (GIR). - The program uses net international reserves (NIR) in conditionality because NIR targets only what is reasonably within the authorities’ control. - NIR is defined as reserve assets minus reserve liabilities; reserve liabilities are foreign exchange liabilities to both residents and non-residents which could potentially drain reserves. - Because Ecuador is dollarized, 100 percent of central bank liabilities are in foreign exchange, making Ecuador somewhat of a special case. - During the first review, the definition of NIR was modified to exclude additional liabilities that, although mostly managed by the public sector, belong to the private sector; these include: - deposits of the public entity that manages the resources of the deposit insurance fund and the bank liquidity fund (COSEDE), and - deposits in transitory payments systems accounts. - Exclusions also include all liabilities to the domestic banking system, short-term foreign liabilities, and central bank liabilities to the IMF. - These modifications have brought NIR closer to a target on accumulation of government deposits. ### Intended mechanism for achieving the NIR target - The NIR target is designed to build reserves through: - an accumulation of government deposits at the central bank, and - gradual winding down of credit to the public sector. - As an accounting relationship, NIR is closely aligned with government deposits at the central bank. - Past expansion of the central bank’s domestic assets through direct and indirect financing of the government caused the relationship to break down starting around the end of 2008; abstracting from credit to government, movements in NIR have been very closely correlated with movements in government deposits. - NIR has persistently fallen into negative territory since 2015, indicating that foreign exchange liabilities are not fully backed by reserves. ### Expected evolution of GIR alongside NIR-targeting - While the NIR target is to be achieved through government saving, GIR accumulation is envisaged to occur because of: - an improvement in the current account balance over the course of the program, and - higher net capital inflows from the private sector. ### Empirical correlation notes - Weekly movements in the new measure of NIR are more closely correlated with movements in NFPS deposits compared with the current definition: 0.98 versus 0.91. *Source: Annex I. Explaining the Program Target on Net International Reserves* ### 62.5 percent of GDP at the end of 2022. However, as in the previous cases, it would gradually decline ### 1ecuea2019005 - 62.5 percent of GDP at the end of 2022. However, as in the previous cases, it would gradually decline ### Debt trajectory and baseline projections - Nominal gross public debt: 24.3 (2017), 44.6 (2018), 46.1 (2019), 49.6 (2020), 50.1 (2021), 48.1 (2022), 44.8 (2023), 41.5 (2024), 38.2 (projection series shown). - Net public debt: 19.0 (2017), 39.6 (2018), 40.3 (2019), 42.2 (2020), 41.5 (2021), 38.8 (2022), 35.9 (2023), 32.9 (2024), 30.0 (projection series shown). - Public gross financing needs (in percent of GDP): 7.5 (2017), 16.7 (2018), 8.5 (2019), 8.1 (2020), 5.2 (2021), 3.4 (2022), 4.1 (2023), 3.8 (2024), 3.3 (projection series shown). - Change in gross public sector debt (cumulative): 1.6 (2008-2016 actual), then 1.5 (2017), 1.5 (2018), 3.5 (2019), 0.5 (2020), -2.1 (2021), -3.3 (2022), -3.3 (2023), -3.2 (2024), cumulative -7.9 (projection statement). - Identified debt-creating flows (cumulative): 1.7 (2008-2016 actual), 1.1 (2017), 0.7 (2018), 2.9 (2019), 0.3 (2020), -2.1 (2021), -3.3 (2022), -3.3 (2023), -3.2 (2024), cumulative -8.8. - Primary (noninterest) revenue and grants (percent of GDP): 35.4 (2008-2016 actual), 32.0 (2017), 36.1 (2018), 34.2 (2019), 36.2 (2020), 35.5 (2021), 34.9 (2022), 34.9 (2023), 34.9 (2024), cumulative 10.6 (noted). - Primary (noninterest) expenditure (percent of GDP): 37.7 (2008-2016 actual), 34.4 (2017), 34.9 (2018), 32.7 (2019), 32.5 (2020), 30.9 (2021), 30.7 (2022), 30.7 (2023), 30.7 (2024), cumulative 88.2. ### Macroeconomic assumptions and indicators (selected) - Real GDP growth (percent): 3.5 (2008-2016 actual), 2.4 (2017), 1.3 (2018), -0.5 (2019), 0.2 (2020), 1.6 (2021), 2.7 (2022), 2.5 (2023), 2.5 (2024). - Inflation (GDP deflator, percent): 4.2 (2008-2016 actual), 1.9 (2017), 1.8 (2018), 0.2 (2019), 0.5 (2020), 0.7 (2021), 1.0 (2022), 1.1 (2023), 1.2 (2024). - Nominal GDP growth (percent): 8.0 (2008-2016 actual), 4.4 (2017), 3.1 (2018), -0.3 (2019), 0.7 (2020), 2.4 (2021), 3.7 (2022), 3.6 (2023), 3.7 (2024). - Effective interest rate (percent): 4.6 (2008-2016 actual), 5.1 (2017), 5.8 (2018), 5.6 (2019), 6.0 (2020), 5.9 (2021), 5.7 (2022), 5.7 (2023), 6.3 (2024). - Sovereign spreads: EMBIG (bp) reported as 972 (data point). ### Risks, vulnerabilities, and debt structure - Public debt held by non-residents: about 73 percent of total public debt (highlighted as a high risk). - External debt composition: about half of external debt is owed to official creditors, which mitigates the vulnerability from non-resident holdings. - Near-term external debt rollover risks: limited, "thanks to the recent liability management operation." - The public DSA risk assessment identifies the ratio of public debt held by non-residents as a high risk; recent widening of the spread increased market perception of risk to high. - Debt profile indicators cited as relevant in heat-map framework: bond spread thresholds at 200 and 600 basis points; external financing requirement benchmarks at 5 and 15 percent of GDP; change in share of short-term debt benchmarks at 0.5 and 1 percent; public debt held by non-residents benchmarks at 15 and 45 percent; share of foreign-currency denominated debt benchmarks at 20 and 60 percent. ### Stress tests and alternative scenarios - Baseline and alternative scenario assumptions (selected): - Baseline Primary Balance path: 1.5 (2019), 3.7 (2020), 4.6 (2021), 4.2 (2022), 4.2 (2023), 4.3 (2024). - Historical scenario Primary Balance: 1.5 (2019), -2.4 (2020), -2.4 (2021), -2.4 (2022), -2.4 (2023), -2.4 (2024). - Constant Primary Balance scenario Primary Balance: 1.5 (2019-2024 constant). - Selected stress test shocks (illustrative impacts and underlying assumptions preserved): - Primary Balance Shock baseline versus shock: Primary balance trajectories shown (e.g., baseline 1.5, 2.4, 3.3, 4.2, 4.2, 4.3; shock 1.5, 2.5, 2.3, 4.2, 4.2, 4.3). - Real GDP Growth Shock: baseline real GDP growth -0.5, 0.2, 1.6, 2.7, 2.5, 2.5; shock -0.5, -2.6, -1.2, 2.7, 2.5, 2.5. - Real Interest Rate Shock: effective interest rate under shock 5.6, 6.0, 6.3, 6.2, 6.4, 7.2 (versus baseline). - Real Exchange Rate Shock and Oil Shock scenarios and a Combined Shock are presented with corresponding macro-fiscal paths. - Graphical and percentile analyses shown for: - Gross nominal public debt (percent of GDP and percent of revenue) under baseline and stress tests. - Public gross financing needs (percent of GDP) under scenarios. - Evolution of predictive densities and percentile bands for gross nominal public debt (10th-25th, 25th-75th, 75th-90th). ### Realism of baseline and forecast performance - Forecast track record metrics: - Real GDP growth forecast error median: 1.31 (Ecuador median forecast error, 2010-2018) with percentile rank 92%. - Primary Balance forecast error median: -1.33 with percentile rank 17%. - Inflation (Deflator) forecast error median: 0.64 with percentile rank 71%. - Assessment tools include boom-bust analysis, distribution of forecast errors, and metrics on cyclically-adjusted primary balance (CAPB) adjustments and levels: - 3-year CAPB adjustment greater than 3 percent of GDP placed Ecuador in a distribution with a percentile rank of 3%. - 3-year average CAPB level percentile rank of 13%. ### Policy commitments and programmatic actions (Letter of Intent and Memorandum highlights) - IMF program financing request: disbursement of SDR 361.3 million (equivalent of about US$498.0 million) for second and third reviews under the Extended Fund Facility; the full amount requested for budget support. - Additional international partner financing: about US$6 billion over three years secured in support of the program. - Program goals and pillars (Plan de Prosperidad / Memorandum of Economic and Financial Policies): - Restore and strengthen institutional foundations of dollarization. - Generate employment and growth through competitiveness. - Promote equality of opportunity and protect the poor and vulnerable. - Ensure full transparency and good governance. - Fiscal objectives: - Reverse upward trajectory of public debt-GDP ratio and, over time, bring debt below benchmark target of 40 percent of GDP; reinstate that target as a legally binding limit. - Restore prudence in fiscal policy, strengthen institutional framework of the Central Bank, boost financial system resilience, and support job creation. - Recent policy actions noted: - 2018 Ley de Fomento Productivo ended Central Bank financing of the budget and introduced a new fiscal framework. - Measures to reduce fuel subsidy costs and distortions, redirecting resources to support lower income households. - Governance and transparency commitments: - Consent to publication of the Letter of Intent, Memorandum of Economic Policies, and Staff Report. - Commitment to provide timely and accurate data and to consult with the IMF on policy changes. *Source: IMF staff calculations and Ecuador authorities documents as presented in the Public Sector Debt Sustainability Analysis and Letter of Intent (as of December 11, 2019).* ### 6. We commit to reducing the Non-Financial Public Sector non-oil primary deficit including ### 6. We commit to reducing the Non-Financial Public Sector non-oil primary deficit including ### Fiscal consolidation objective and principles - Commit to reducing the Non-Financial Public Sector non-oil primary deficit including fuel subsidies by about 3.9 percent of GDP during 2019-2021, with efforts for 2019 well underway. - Burden of the realignment will mostly be borne by streamlining government operations and a broad-based effort by the people of Ecuador. - Effort remains focused on promoting high quality employment and continued wide access to services, including health and education. - Main pillars: - (i) a realignment of the public sector wage bill respecting labor rights and protecting the provision of services; - (ii) an optimization of the system of fuel subsidies to benefit the poor and vulnerable and reduce distortions; - (iii) a reform of the tax system to make it more equitable, growth-friendly and simpler; - (iv) a reduction in public spending on capital and goods and services. - Savings and revenues generated will allow increased spending on social assistance and phasing out the distortionary tax on transfers abroad once macroeconomic stability is restored and the reserve position is strengthened. ### 2019 measures and expected outcomes - Significant down-payment on deficit reduction is being made in 2019 through rationalization of primary spending and prioritizing capital projects. - 2019 envisaged measures: - Careful realignment of the wage bill via wage restraint and prudent renewal of occasional contracts and new hiring; renewing only one of every two expiring contracts in the non-social sectors; harmonizing wages of newly hired public employees with private sector wages. - Continued savings from reduction in subsidies for gasoline and diesel used for industrial purposes implemented in 2018 and earlier in 2019; normalization of diesel prices for industrial purposes to reduce distortions and target intended beneficiaries. - Improving procurement terms and conditions by using competitive bidding, framework and wholesale agreements, making processes more transparent and timelier, and improving inventory management to reduce spending on goods and services. - Updating schedule of fees charged for government services to more accurately reflect their costs and the markets they serve. ### 2020 measures and targets - 2020 fiscal goal: achieve a reduction of the Non-Financial Public Sector non-oil primary deficit including fuel subsidies by 1.7 percent of GDP through further rationalizing primary spending and measures to boost revenue collection. - 2020 envisaged measures: - Savings from the tax reform and economic reactivation tax package. - Updating the schedule of fees charged for government services to more accurately reflect their costs and the markets they serve. - Further careful realignment of the wage bill via wage restraint and prudent renewal of occasional contracts and new hiring. - Continuing rationalization of spending on goods and services, as well as subsidies. - Leasing concession rights of public assets to private partners while ensuring public ownership, using transparent processes that maximize benefit to the state, ensure coverage of services, and protect the budget from contingent liabilities. ### Contingency measures and social protection emphasis - If fiscal outcomes fall short of program targets, committed to deploying contingency measures to fully comply with program targets, which could include further rationalization of spending (on a commitment basis) on goods and services, capital, and fuel subsidies. - Part of the savings and revenue will be used to increase social assistance and support the most vulnerable. - Strengthening of Plan Toda Una Vida to ensure access to health, education, safe and healthy habitat, housing and water, with greater emphasis on the most vulnerable, women, the elderly and disabled. ### Strengthening the fiscal framework and public financial management - Revisions in Ley de Fomento Productivo (2018) and an action plan published end-April 2019 to strengthen public financial management (structural benchmark). - Amendments to Código Orgánico de Planificación y Finanzas Públicas (COPLAFYP) submitted as part of reform package; after rejection by National Assembly, revised amendments to be submitted by end-February 2020. - Amendments aim to: - Strengthen role of Minister of Economy and Finance as fiscal oversight authority. - Ensure annual budgets are prepared in line with best international practices. - Further strengthen fiscal rules framework, including escape clauses, automatic correction mechanisms, and in-year fiscal reporting. - Limit government discretion to amend approved budgets and introduce robust contingency allocation framework. - Improve government accounting and reporting, including comprehensive definition of public debt, better cash management practices, and commitment controls. - Introduce standardized definition of arrears and a 90-day payment deadline for current and capital expenses associated with acquisition of goods and services from date of accrual. - Planned arrears management actions: - Create system of information collection on domestic expenditure arrears. - Assess current stock of expenditure arrears and develop a plan of arrears clearance (end-September 2019 structural benchmark). - Implement institutional arrangements to better report on and control expenditure commitments. - Introduce an indicative target on central government arrears starting from June 2020. - Modernization of the computer system underway to facilitate compliance. - Working with technical assistance experts to modernize budget and cash management processes and controls. ### Transparency, borrowing constraints, and IMF program compliance - Commit to strengthen data disclosure, provision and monitoring at all stages of the budget cycle and to institute clear automatic enforcement mechanisms and effective sanctions for non-adherence to the law. - Commit to refrain from new government international borrowing arrangements based on repurchase agreements or the pledging of Central Bank assets to safeguard creditworthiness. *Source: Excerpt from document 1ecuea2019005.* ### 30. Our nation is proud of the gains we have made in supporting those who struggle to ### 30. Our nation is proud of the gains we have made in supporting those who struggle to ### Program objectives and commitments - The economic program incorporates a significant increase (of around US$300 million) on social assistance spending in 2019. - The program aims for an increase of 0.6 percentage points of GDP in social assistance spending by the end of the program. - Commitment to expand coverage of “Plan Toda Una Vida” and other social programs, with particular attention to rural and indigenous populations. ### Strengthening social assistance programs - Actions and reforms: - Work with international partners to extend coverage and raise benefits for the “Bono de Desarrollo Humano” conditional cash transfer program. - Increase spending to support disabled population via “Misión Las Manuelas” and the elderly via “Mis Mejores Años”. - Expand coverage of non-contributory pensions and design a comprehensive plan to concentrate resources on those most in need. - Eligibility and registry updates: - Define and publish new eligibility thresholds for social assistance programs (end-September 2019 structural benchmark). - Ongoing update and modernization of the social registry to ensure proper targeting, comprehensive coverage, and better administrative data management. - Publish an action plan to implement updated eligibility thresholds and accelerate completion of upgraded social registry by end-February 2020. - Expected coverage impact: - Over 200,000 additional poor and vulnerable households will be covered by Ecuador’s social safety net by 2021. ### Improving education and health outcomes - Priorities: - Strengthen efficiency and quality of primary education and health spending to improve learning, preventive health, and stunting outcomes. - Identify efficiency gains in sectoral budgets without sacrificing coverage and quality of service provision. - Prioritize investments with high human capital returns (end-June 2020 structural benchmark). ### Transparency and good governance — background and objectives - Rationale: - Multi-pronged strategy to promote transparency and fight corruption, improve business climate, lower cost of public financing, and support private investment and job creation. - Legislative and institutional measures: - Strengthen anti-corruption legal framework in line with international standards; submit legislative initiatives to the National Assembly later in the year (end-December 2019 structural benchmark). - Enhancements to include prevention and criminalization of corruption, freezing/seizing/confiscation of proceeds in line with the Constitution and FATF standards, increased independence of law enforcement and judiciary, strengthened anti-corruption institutions, improved inter-agency coordination, and better access to information for civil society oversight. - Prior institutional steps: appointment of a transitional Citizens Participation and Social Control Council; creation of the Anticorruption Secretary and the International Experts Commission to Fight Corruption in 2019. - Commitment to deepen adherence to the United Nations Convention against Corruption. ### Improving fiscal and public-sector transparency - Public debt and enterprise reporting: - Publication of public debt data conforming with international standards. - Adoption of a regulation requiring publication of audited financial statements by all public enterprises (end-June 2019 structural benchmark). - Commitment to publish greater information on draft budget to better quantify fiscal measures and risks and to assess compliance with fiscal rules. - Procurement and budget management: - Work with international partners to strengthen public procurement processes and require procurement contracts to be published in compliance with personal data regulations. - Improve budget management practices to ensure transparency, timeliness, quality and efficiency; encourage observatories to hold government accountable. - External public-sector debt transparency: - Provide detailed information on external non-financial public-sector debt, including all collateralized debt and arrangements similar to IMF arrangements on a regular basis (quarterly structural benchmarks for end-March, end-June, end-September, and end-December 2019). ### Improving transparency of the Central Bank - Publication: - Published the Central Bank’s financial statements for 2017. - Intend to produce financial statements in conformance with International Financial Reporting Standards in 2019 and begin publishing under this new standard starting in 2021. ### Improving transparency in the oil sector - State enterprises and governance: - Begin publishing externally-audited financial statements of state-owned enterprises, including oil companies (end-June 2019 structural benchmark). - Increase transparency of employment policies in oil companies. - Intend to merge the operations of the two state-owned oil companies with technical assistance from the Inter-American Development Bank. - Seek technical assistance to pursue membership of the Extractive Industries Transparency Initiative over the course of the extended arrangement. ### Strengthening AML/CFT (Anti-Money Laundering and Countering Financing of Terrorism) - Risk assessment and supervision: - Develop an AML/CFT national risk assessment that properly prioritizes corruption-related threats by 2020. - Upgrade regulatory and risk-based supervisory tools to ensure banks and relevant entities adequately monitor business relationships with senior officials (item in end-September structural benchmark revised to end-December 2019). - Strengthen the asset declaration regime for senior government officials by expanding public access to information in declarations (June 2020 structural benchmark). - Review the existing AML/CFT legal framework to ensure compliance with FATF standards by mid-2020. - Strengthen implementation of a risk-based approach to AML/CFT bank supervision by end-2020, with technical support from Fund staff. ### Program monitoring and issues - Waiver request: - Request a waiver of non-observance for the end-September 2019 quantitative performance criterion on NIR given the minor macro-economic impact of the breach. - Monitoring framework: - Program will be monitored based on performance criteria, indicative targets, and structural benchmarks as set out in Tables 1 and 2 based on definitions in the TMU attached to the source. - Expected review schedule: the fourth review by the executive board will take place on or after March 15, and the fifth on or after June 15. - Reporting and benchmark schedule: - Quarterly structural benchmarks and reporting on external non-financial public-sector debt at end-March, end-June, end-September, and end-December 2019. - Specific structural benchmarks and prior actions include publication, submission, and legislative measures with multiple named dates (for example: end-March, end-April, end-May, end-June, end-August, end-September, end-December 2019, and dates in 2020 such as end-February 2020, end-June 2020, mid-2020, and end-2020) as detailed in the program’s structural benchmark schedule. *Source: 1ecuea2019005 - 30. Our nation is proud of the gains we have made in supporting those who struggle to (PDF).* ### 9. Submission to the National Assembly, in ### 9. Submission to the National Assembly, in consultation with Fund staff, of amendments to the Central Bank’s legal framework ### Central Bank legal framework amendments (objective: To strengthen the institutional underpinnings of dollarization) - Submit to the National Assembly, in consultation with Fund staff, of amendments to the Central Bank’s legal framework to: - (i) introduce autonomous governance arrangements, - (ii) improve its objectives and functions in line with best practice, - (iii) provide for the phased-in recapitalization of the Central Bank, - (iv) introduce a backing rule that requires a timetable to cover specific Central Bank liabilities with international reserve assets, and - (v) introduce a prohibition on quasi-fiscal activities of the Central Bank and on monetary financing of the government that prohibits quasi-fiscal spending by the Central Bank, as well as any direct or indirect lending to the non-financial public sector, including that via public banks (this covers the purchase of securities, advances, or guarantees, or financial transactions that are a condition precedent for lending operations entered into by the government but not trade credits), and - (vi) introduce modifications to allow for the publication of external auditor's opinion and detailed notes. - Timeline and implementation status: - End-September 2019 — Not met, converted into a structural benchmark (#19) for the Fifth Reviews. - End-April 2020 — Newly proposed benchmark (listed again as item #19 under later benchmarks). - End-March 2020 — Establishment by the BCE of an audit committee, consisting of non-executive directors of the BCE Board, including at least one member with accounting expertise. Date proposed to be reset to end-August 2020. ### Arrears clearance and expenditure controls (objective: To strengthen expenditure controls) - Submit to IMF staff a plan of arrears clearance based on the survey of arrears at the central government level. - Timeline and implementation status: - End-September 2019 — Not met, implemented with delay mid-October 2019. - Modernize computer systems at the level of the central government to introduce necessary changes to collect information on domestic payment arrears of the central government. - End-January 2020 — Date proposed to be reset to end-June 2020. - The Ministry of Finance issues guidelines to the NFPS entities establishing strict information requirements for all the entities of the NFPS on the quarterly and annual data on the stocks of accounts payable and arrears, and on the stocks of financial assets and liabilities (in accordance with the provisions of the COPLAFYP Law (Art. 152) and Regulation (Art 160 and Art 162) requiring that public sector entities (GADs, PEs, and social security institutions) submit financial and accounting information and financial statements and accounting reports to the MEF on a monthly basis). The guidelines should include a requirement on the provision of information on the future repayment schedule of arrears and other accounts payable. The guidelines should also establish information requirements on the steps taken by NFPS entities to prevent accumulation of arrears. - End-June 2020 — Newly proposed benchmark. - Submit to IMF staff a strategy of arrears clearance and prevention based on quarterly and annual data on the stocks of accounts payable and arrears and on the stocks of financial assets and liabilities, by sub-sector of the entire NFPS. - End-December 2020 — Newly proposed benchmark. ### Tax reform (objective: To improve the tax system) - Submission to the National Assembly, in consultation with Fund staff, of a broad-based growth-friendly tax reform aimed at: - improving revenue mobilization, - increasing efficiency, simplicity, and equity, - shifting from direct to indirect taxes, and - reducing exemptions and preferential treatment. - Revenue target: - This reform will target an increase in revenues of 1½ to 2 percent of GDP by 2021. - Timeline and implementation status: - End-October 2019 — Not met, converted into a prior action (#4) for the Second and Third Reviews with modification. ### Education, health, and social protection reforms (objective: To improve education and health outcomes; To strengthen the social safety net) - Publication of an action plan, in coordination with World Bank technical assistance, to strengthen the efficiency and quality of primary education and health spending. - End-December 2019 — Date proposed to be reset to end-June 2020. - Preparation and publication of an action plan to implement the updated eligibility thresholds for social assistance and to accelerate the completion of the upgraded social registry with assistance from Fund staff and in collaboration with the World Bank. - End-February 2020 — Newly proposed benchmark. ### Cash management, budgeting, and fiscal rules (objectives: To strengthen policy formulation for cash management; To strengthen fiscal management and clarify the fiscal rules framework; To strengthen the top-down budgeting approach) - Amend Ministerial Agreement (Acuerdo Ministerial) 447 to formalize the operation of the Financial Committee by establishing at a minimum: - a) specifying the members of the Committee that include [the Minister, the Vice ministers and the Undersecretaries of SP, STN, SFP, and SPF], - b) specifying the roles and responsibilities including in cash management, - c) requiring the creation of a Technical Committee composed of [technical staff of Undersecretariats offices] to support the implementation of the Financial Committee decisions and make proposals to the Financial Committee as needed. - End-January 2020 — Newly proposed benchmark. - Publication of a Financial Plan, that will accompany the budget proforma to be submitted to the National Assembly, as a mechanism to align the execution of the budget to cash availability. - End-February 2020 — Newly proposed benchmark. - Submission to the National Assembly of the revised amendments to the Organic Code of Planning and Public Finances and any other relevant laws, in consultation with Fund staff, to: - (i) limit the discretion of the Executive to amend the annual budget that is approved by the National Assembly and introduce a robust framework for a contingency allocation in the budget, - (ii) restrict the use of CETES (treasury certificates) for short-term financing and develop a plan of reducing the current stock of CETES, - (iii) explicitly define the institutional coverage of the public debt to be the consolidated nonfinancial public sector and the institutional coverage of the expenditure rule apply to the General Government, - (iv) adopt binding annual targets for the NFPS non-oil primary balance, excluding subnational governments, while reinforcing the system of controls over the fiscal balance and borrowing of public entities of the NFPS, - (v) introduce the necessary mechanisms to support the effective operation of expenditure rule and its interaction with the Constitutional “golden rule,” - (vi) adopt a standardized definition of arrears and strengthen their monitoring and reporting, and - (vii) introduce a 90-day payment deadline, unless otherwise established by law, contract, regulation or any other valid public act, for the current and capital expenses associated with the acquisition of goods and services from the date of their accrual (“devengo” according to Ecuadorian statutes). - End-February 2020 — Newly proposed benchmark. - Adopt and implement regulation to enhance the existing online publication of asset declarations of high-level public officials, expanding the quantity of information provided, by including itemized information on assets and liabilities, and ensuring the easy, searchable, and timely access to declarations. - End-June 2020 — Newly proposed benchmark. - Adopt a single budget circular for both current (permanent) and capital (non-permanent) expenditure that includes expenditure ceilings (overall and by category) in consultation with Fund staff. - End-June 2020 — Newly proposed benchmark. - The Ministry of Finance issues guidelines to the NFPS entities establishing strict information requirements for all the entities of the NFPS on the quarterly and annual data on the stocks of accounts payable and arrears, and on the stocks of financial assets and liabilities (see detailed description under Expenditure controls). - End-June 2020 — Newly proposed benchmark. *Source: 9. Submission to the National Assembly, in consultation with Fund staff, of amendments to the Central Bank’s legal framework (from the provided IMF content unit).* ### 25. Approval of an internal audit charter by the new ### 25. Approval of an internal audit charter by the new ### Audit charter and institutional strengthening - Approval of an internal audit charter by the new BCE audit committee that: - (i) states the function’s mandate, independence, authority, and objectivity; - (ii) requires adherence to the Institute of Internal Auditors (IIA) standards; - (iii) ensures full coverage of all BCE’s activities; and - (iv) defines the reporting lines and modalities. - Purpose: To strengthen the institutional underpinnings of dollarization. - Original timeline: End-March 2020. - Revised timeline: Date proposed to be reset to end-August 2020. ### Definitions and coverage of fiscal performance criteria (TMU) - Non-Financial Public Sector (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); - Development Bank of Ecuador (BDE). - Non-oil primary balance of NFPS, including petroleum subsidies: - defined as total non-oil revenues minus primary non-oil spending, minus spending on subsidies on petroleum products. - Primary non-oil revenues are recorded on cash basis. - Revenues explicitly included: - Tax revenues (ingresos tributarios), excluding corporate income tax paid by state-owned oil companies; - Social security contributions (contribuciones sociales); - Other revenues (otros ingresos); - Proceeds from asset monetization (leasing of NFPS assets). - Revenues explicitly excluded: - Interest income (recorded on cash basis); - Proceeds from the sale of financial assets; - Revenues from privatization of government-owned entities; - Revenues from oil exports; - Revenues from the domestic sales of oil derivatives; - Operating surplus of state-owned oil companies (PetroAmazonas and PetroEcuador). - Primary non-oil spending (accrual basis) 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. - Petroleum subsidies: - Include subsidies on gasoline, kerosene, diesel, natural gas and liquified petroleum gas. - Subsidy = retail sales price − cost of product. - Cost estimation: imported products = import price + transportation, storage and commercialization costs; domestic products = refinery gate price + transport, storage and commercialization costs. ### Non-Financial Public Corporations covered under NFPS - 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 ### Adjustor to the floor of non-oil primary balance (including petroleum subsidies) - Adjustor formula: - The floor will be adjusted 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. - Cap on adjustor: US$119.33 million (quarterly). - Legal contingent adjustment: - If the government is required to pay damages in, or settles, the Perenco lawsuit, the floor will be adjusted downward by one-half of the amount the government has to pay to Perenco in a given quarter of 2020. ### Social assistance spending (floor) — definitions and monitoring - Social assistance spending includes central government spending on programs for poor, elderly, disabled, and very young, comprised of: - (i) benefits payments; - (ii) financial transaction costs; - (iii) costs related to monitoring, accompaniment, and implementation (gastos conexos); - (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. - Included programs (selected lists): - 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). - Stronger Social Protection: Programs aimed at protecting poor and vulnerable households from the impact of economic adjustment. - Monitoring: - Monthly data provided with a lag of no more than 30 calendar days after the end of each month. - Data to include expenditure execution broken down by program and expenditure type, number of beneficiaries and benefit amount. - Authorities must report any changes to eligibility requirements. ### Net International Reserves (NIR) — definition, adjustors, and monitoring - 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. - Conversion: Non-U.S. dollar assets and liabilities converted to US$ at program exchange rates. - Usable gross international reserve assets include: - (i) currency and deposits; - (ii) monetary gold; - (iii) holdings of SDRs; - (iv) reserve position in the IMF; - (v) securities (debt and equity); - (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; - 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 tied up in repurchase agreement transactions; - Net positions with ALADI and SUCRE. - Gross reserve-related liabilities comprise: - All short-term liabilities of the BCE vis-à-vis non-residents denominated in convertible foreign currencies with remaining maturity of one year or less; - Short-term liabilities of the central government with maturity of less than 30 days; - Stock of IMF credit outstanding but excluding credit transferred by the Fund into a Treasury account to meet the government’s financing needs directly; - Nominal value of all derivative positions 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), except deposits of the BIESS, including those held in trust funds (“fideicomisos BIESS y fideicomisos IESS”). - Adjustors to the NIR floor: - Adjusted upward/downward by the amount of borrowing from non-residents above/below program envisaged (issuance of international bonds), net of issuances related to liability-management operations with no net impact on NFPS debt stock. - Adjusted downward/upward by the shortfall/excess in program loan disbursements from the IMF and multilateral institutions (IADB, World Bank, CAF, and FLAR) and grants relative to baseline projection. - Oil-price adjustor: 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; cap: US$108.5 million (quarterly). - Perenco legal contingent adjustment: stock of NIR adjusted downward by one-half of the amount the government is required to pay to Perenco in a quarter of 2020 when payment falls due. - Monitoring: - Change in NIR measured relative to the stock on December 31, 2018 which stood at US$2.9 billion. - Foreign exchange asset and liability data provided weekly within 5 business days. ### Program exchange rates and market/commodity reference values (as of January 31, 2019) - US Dollar to Euro 0.87 - US Dollar to Renminbi 6.70 - US Dollar to Yen 108.89 - US Dollar to SDR 0.71 - US Dollar to British Pound 0.76 - US Dollar to South Korean Won 1,112.72 - US Dollar to Swiss Franc 0.99 - US Dollar to Canadian Dollar 1.31 - US Dollar to Danish Krone 6.52 - US Dollar to Swedish Krone 9.05 - US Dollar to Norwegian Krone 8.43 - US Dollar to Australian Dollar 1.37 - US Dollar to Mexican Peso 19.11 - US Dollar to Colombian Peso 3,106.50 - Gold prices (US$/ounce) 1,321.25 - Source: Bloomberg, as of January 31, 2019. ### Oil price program assumptions and related tables - Program petroleum spot crude price (APSP) forecast (US$ per barrel): - 2019 Q4 61.8 - 2020 Q1 59.9 - 2020 Q2 58.3 - 2020 Q3 57.2 - Note: APSP is a simple average of UK Brent, Dubai, and West Texas Intermediate spot prices. - Adjustors and caps: - Non-oil primary balance adjustor per US$1/barrel: US$23.85 million (quarterly); cap US$119.33 million (quarterly). - NIR oil-price adjustor per US$1/barrel: US$21.7 million (quarterly); cap US$108.5 million (quarterly). ### Ceilings and arrears monitoring - Continuous monitoring applies to: - The four standard performance criteria: (i) no imposition or intensification of restrictions on payments and transfers for current international transactions; (ii) no introduction/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. - Floor on social assistance spending of the central government. - Floor on the change in the stock of Net International Reserves. - Ceiling on external payment arrears by the NFPS. - Ceiling on new gross central bank direct financing to the NFPS and indirect financing to the NFPS through public banks. - External payment arrears (program definition): - External debt obligations (principal and interest) falling due after March 11, 2019 that have not been paid within 90 days of due date, considering contractual grace periods. - Coverage: NFPS. Exclusions: (i) arrears on short-term trade credit or letters of credit; (ii) arrears on debt subject to renegotiation or restructuring; (iii) arrears from nonpayment of commercial claims subject to litigation initiated prior to March 11, 2019. - Central bank financing to NFPS (definition): - Includes overdraft transfers from the BCE to NFPS entities; advance distribution of unrealized BCE profits; BCE acquisition of government debt on primary market or from public institutions; BCE lending to public banks to acquire government debt on primary market or from public institutions. - Monitoring for BCE financing: - Continuous monitoring with monthly data on amortizations and disbursements of credit to NFPS and publicly-owned banks for financing the NFPS provided within 5 business days to the Fund. ### Indicative targets and overall NFPS balance - Overall balance of NFPS: - Defined as non-oil primary balance of NFPS + oil balance of NFPS + interest revenues of NFPS − interest expenditures of NFPS. - Oil balance of NFPS: - Sum of (i) revenues from oil exports; (ii) revenues from domestic sales of oil derivatives; (iii) operating surplus of PetroAmazonas and PetroEcuador − (i) expenditures on investment in oil sector; (ii) expenditures on imports of petroleum derivatives (de Financiamento de Derivados Deficitarios); (iii) payments to private oil companies (Ministerio de Energía y Recursos Naturales no Renovables). - NFPS interest expenditures measured on cash basis; all other expenditures on accrual basis. - Monitoring: Fiscal data to be provided with lag no more than 60 calendar days after each quarter; preliminary monthly data within 45 days after month end. ### NFPS debt definition and data requirements - NFPS debt defined per IMF GFSM 2014 and Public Sector Debt Statistics guide. - Debt instruments include: - Special drawing rights (SDRs); - Currency and deposits; - Debt securities; - Loans; - Insurance, pension, and standardized guarantee schemes; - Other accounts payable. - Instruments specifically listed for Ecuador: - 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. - Netting rule: - Liabilities issued by NFPS entities and held as assets by other NFPS entities should be netted out in consolidation. - Central bank lending to government included in NFPS debt stock. - Monitoring and reporting timetables and requirements: - NFPS debt stock data in US$ provided monthly with lag no more than 30 calendar days. - Weekly: consolidated banking system balance sheets, BCE balance sheet, financial indicators, monetary data template — no later than 5 business days. - Monthly: NFPS financing data, NFPS cash flow data (lag no more than 60 days after month close), detailed info on collateralized debt within 2 weeks of signing new contracts. - Quarterly: detailed balance of payments data no later than 90 days. *Statement by Afonso S. Bevilaqua, Pedro Fachada, Francisco Rivadeneira — December 19, 2019.* ### 1. On behalf of our Ecuadorian authorities, we thank the mission team for its ### On behalf of our Ecuadorian authorities, we thank the mission team for its ### Acknowledgements - Authorities express gratitude to the mission team, management, staff and Executive Board members for support to Ecuador’s economic transformation and technical assistance. - Support is especially appreciated given the exceptional circumstances experienced in recent months. ### Program implementation and targets - Authorities report satisfactory progress in implementation of the Extended Fund Facility (EFF) arrangement. - "All performance criteria and indicative targets for end-June were comfortably met, particularly for the non-oil primary balance including fuel subsidies (NOPBS), the main fiscal anchor under the program." - For end-September 2019, "performance criteria and indicative targets were met, except for the criterion on the net international reserves." - "The main structural benchmarks and all prior actions have also been met for the combined second and third reviews." ### Social unrest, dialogue, and subsidy policy - Authorities acknowledge recent social unrest that complicated policy implementation and note similar episodes in the region. - President Moreno engaged directly with all main segments of Ecuadorian civil society; "the political and social situation in Ecuador has since returned to a relative state of normalcy." - Authorities state the need to move away from "the unaffordable level of fiscal spending seen in the period of high oil prices" and recognize associated social resistance. - Considered options included an increase in VAT rate, but "the political forces represented in the National Assembly did not ensure enough support to approve a VAT increase." - In early October the administration decided to eliminate the subsidy on low-octane gasolines and diesel fuels after consulting the transport sector; subsidy on high-octane gasoline had already been eliminated earlier in the year. - The Executive "never considered removing the subsidy on gas used for cooking by lower income population." - In mid-October, the authorities decided to suspend the elimination of energy subsidies "to reestablish social cohesion." - Authorities maintain that energy subsidies are regressive, biased towards wealthier segments, have negative environmental impacts, and "lead to considerable smuggling of gasoline and diesel across the Ecuadorian border." - Negotiations with broad sectors of civil society are underway to reach agreement on "the progressive reduction of subsidies during next year" with measures to protect the most vulnerable. - Authorities are "working with the World Bank to rapidly update the social registry and its thresholds" to maximize social protection impact. ### Tax reform and alternative revenue measures - Despite lack of support for VAT increases and subsidy reductions, authorities pursued alternatives. - "An important milestone was the successful approval by the National Assembly of a tax reform on December 9, 2019." - This reform is expected to enable the government to collect additional taxes "amounting to approximately 0.5 percent of GDP in both 2020 and 2021," compared with "0.7 percent of GDP in net terms expected to be collected with the package of economic reforms rejected by the Assembly on November 17, 2019." ### Planned structural and governance reforms - Authorities intend to present additional reforms to the Assembly in due course. - Reforms to be reintroduced at the beginning of next year: the Organic Budget Code and the Central Bank Code. - Anticorruption reforms to be presented "at the end of this month." - State-owned enterprises and Public-Private Partnerships bills to be presented in 2020. - Government intends to build sufficient legislative support to pass these laws. ### Public financial management and fiscal governance - Authorities are "firmly committed to strengthening public financial management (PFM), improving the credibility of the budget, enhancing cash management operations and better managing expenditure arrears." - Objectives include boosting fiscal transparency, improving budget formulation and expenditure controls, and aligning fiscal reporting with international best practice. - Efforts are underway to strengthen tax administration. ### Macroeconomic performance and outlook - Real GDP performance: "real GDP expanded by 0.3 percent year-on-year in the second quarter of 2019, compared with growth of 0.6 percent in the previous quarter." - "Household consumption and net exports contributed positively to quarterly GDP growth during the two first quarters of GDP, while government consumption and gross fixed capital formation contracted in the period." - Growth outlook for the second half of 2019: "estimated to be weaker given the adverse impact of protest actions on the oil, agriculture and retail sectors, ongoing fiscal consolidation and weaker confidence compared to the first half of the year." ### Inflation and external competitiveness - Inflation developments: "headline inflation was zero percent in November 2019, a deceleration from the temporary uptick of 0.5 percent in the previous month" caused by the short-lived withdrawal of fuel subsidies. - "Inflation is expected to remain low over the medium term, contributing to increase Ecuador’s external competitiveness." ### Financial sector indicators - Private sector credit and banking deposits: "In the twelve months prior to October, lending to the private sector increased by 12.1 percent." - Deposits continued to increase over the year despite social and political instability; deposits are highlighted as a fundamental indicator of confidence in a dollarized economy. - Historical note: Ecuador experienced "a dangerous contraction of deposits in 2015-2016." ### Fiscal outlook, NOPBS, and program recalibration - Fiscal consolidation in 2019 is "relatively less than initially expected" due to delays in asset monetization operations, lower savings on compensation in the public sector, and lower anticipated savings from reducing fuel subsidies. - Projection: "the non-oil primary balance is projected to be -3.4 percent of GDP for 2019, down from -2.9 percent of GDP at the time of the first review." - Authorities will continue fiscal consolidation in 2020 and 2021, with "an estimated 1.7 percent of GDP and 1 percent of GDP adjustment, respectively." - Authorities emphasize the importance of effective public consultation to mitigate adverse social consequences. - Adjustment in NOPBS target: recalibrated "from 5 percent of GDP between 2018 and 2021 to 3.9 percent of GDP." - Authorities consider a "3.9 percent of GDP adjustment in three years" to be significant, realistic, and sufficient to ensure public debt sustainability. - Net international reserves "have also been reduced for the rest of the program to adjust to the new reality," while preserving dollarization foundations and financial stability (e.g., "fully covering their deposits at the Central Bank"). - These modifications are intended to "give the government some room to have necessary policies that permit resuming growth in 2020 and maintaining social stability." ### Conclusion - Authorities thank the Executive Board for support. - With slight adjustments to the EFF agreed with staff, authorities are confident "that the program with the Fund will advance and reach a successful conclusion in 2022, overcoming the country's fiscal challenges, while promoting inclusive growth and protecting the most vulnerable." *Source: 1ecuea2019005* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1ecuea2019005.pdf_