## 1ecuea2020001 - 67.3 percent of quota) to meet urgent balance of payment needs stemming from the outbreak

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### Executive summary and immediate financing needs
- Ecuador faces urgent BOP needs driven by the Covid-19 outbreak, plummeting oil prices, and collapse of global demand.
- Real GDP projection: contract by 6.7 percent in 2020.
- External financing gap: about 8.4 percent of GDP in 2020 and 7.6 percent of GDP in 2021.
- RFI request: purchase of 67.3 percent of quota (SDR 469.7 million, about US$644 million).
- RFI represents about 10 percent of the total increase in budgetary needs (US$6 billion).
- Authorities cancelled the EFF approved on March 11, 2019 and indicated interest in a successor arrangement.
- Staff recommendation: Board approval of Ecuador’s RFI purchase request of 67.3 percent of quota (SDR 469.7 million).

### Recent macro-financial developments and vulnerabilities
- Growth and labor:
  - Real GDP contracted in Q4 2019 by 1 percent (y-o-y); growth in 2019 was 0.1 percent.
  - Unemployment rate: 3.8 percent in December 2019.
  - Inflation: 0.2 percent (y-o-y) in March.
- Reserves:
  - Gross international reserves: US$2.9 billion at end-2019; declined to US$1.4 billion in March (about 8 percent of ARA metric).
  - Net international reserves (NIR, excluding all Fund disbursements): negative US$3.1 billion as of end-March.
- Financial system indicators:
  - Capital Adequacy Ratio (CAR): 13.5 percent (average).
  - Liquid assets to short-term deposits: 24 percent.
  - Non-performing loans (NPLs): 3 percent of total loans.
  - Provisions coverage: over 250 percent.
  - Return on Assets (ROA): 1 percent.
  - Return on Equity (ROE): 8 percent.
  - Deposits declined by US$1 billion (2.3 percent of total) during March.
- Fiscal statistics revisions:
  - NOPBS deficit estimated at 6.7 percent of GDP in 2018 and 5.3 percent of GDP in 2019 (revised), versus earlier estimates of 4.9 and 3.4 percent.
  - Overall deficit for 2018 and 2019 assessed at 3.2 percent of GDP in both years, compared with earlier estimates of 1.2 and 1.1 percent.
  - Revisions stem from deficiencies in recording local governments, state-owned enterprises, and social security financial asset transactions.

### Impact of the dual oil price and COVID-19 shock
- Oil sector importance:
  - Oil comprises 40 percent of exports and about 35 percent of public sector revenues.
- COVID-19 epidemiology (reported):
  - As of April 28: 24,258 confirmed cases and 2,083 reported deaths (other excerpts give 23,240 confirmed cases and 1,801 deaths as of April 27; 24,258 confirmed and 871 confirmed deaths plus 1,212 presumed deaths in another excerpt).
- Financial markets and competitiveness:
  - Sovereign spreads rose to 5,500 basis points.
  - Appreciation of the US$ is eroding competitiveness.
- Quantified fiscal and growth impacts from oil shock:
  - Oil price collapse adds US$3.4 billion (3.5 percent of GDP) to the fiscal deficit.
  - Loss of oil revenues about US$4.8 billion (4.9 percent of GDP), partly offset by fiscal savings from oil subsidies of US$1.4 billion (1.4 percent of GDP).
  - Oil price decline expected to subtract about 2 percentage points from real GDP growth in 2020.
  - Pipeline damages imply loss of 8–10 million barrels in 2020Q2, adding a 0.4 percentage point markdown in 2020 growth forecast.

### Impact on public spending and growth (COVID-19 channels)
- Expected increase in public spending by US$600 million (0.6 percent of GDP).
  - Additional health spending: about US$350 million (0.35 percent of GDP); estimated health costs range from US$100 million to US$800 million.
  - Additional social assistance spending: about US$250 million (0.25 percent of GDP).
- Expected subtraction of 4.5 percentage points from real GDP growth in 2020 from COVID-19.
- Combined shocks (selected indicators from table):
  - Growth (Percent change): COVID-19: -4.5; Oil price: -2.0; Combined Shock: 0.0; Total Impact: -6.5.
  - Overall balance (percent of GDP): COVID-19: -1.4; Oil price: -3.8; Combined Shock: -0.8; Total Impact: -6.0.
  - Oil revenues (gross) (percent of GDP): COVID-19: 0.0; Oil price: -4.9; Combined Shock: 0.0; Total Impact: -4.9.
  - Fuel subsidies (percent of GDP): COVID-19: 0.0; Oil price: 1.4; Combined Shock: 0.0; Total Impact: 1.4.
  - Non-oil tax revenues (percent of GDP): COVID-19: -0.8; Oil price: -0.3; Combined Shock: 0.0; Total Impact: -1.1.
  - Asset monetization (percent of GDP): COVID-19: 0.0; Oil price: 0.0; Combined Shock: -0.8; Total Impact: -0.8.
  - Health spending and cash transfers related to Covid-19 (percent of GDP): COVID-19: -0.6; Oil price: 0.0; Combined Shock: 0.0; Total Impact: -0.6.
- Fiscal and BOP impacts and projections:
  - Real GDP expected to contract by 6.5 percentage points in 2020 (combined shocks).
  - Overall fiscal deficit higher by US$5.8 billion (about 6 percentage points of GDP) due to oil and COVID-19 shocks alone.
  - Sharp contraction reduces fiscal revenues by about US$1 billion (1.1 percent of GDP) due to weakened tax compliance (staff assumes tax compliance gap increase of 5 percentage points).
  - Loss of fiscal revenue from asset monetization: US$0.8 billion.
  - NIR expected broadly unchanged versus 2019 at negative US$1.5 billion (US$3.5 billion lower than expected in December 2019).
  - Underlying NOPBS expected to widen by 0.5 percentage points of GDP between 2019 and 2020, versus cancelled EFF commitment of consolidation of 1.7 percentage points.
  - BOP gross financing needs assessed at US$13.7 billion in 2020 (13.9 percent of GDP); estimated external financing gap US$8.4 billion.
  - BOP financing gap large in 2021 at about US$7.6 billion.
  - Recovery expected relatively strong from COVID-19, but lower oil prices will dampen 2021 growth; return to 2019 GDP level not expected until early 2023.

### Policies implemented and near-term authorities’ actions
- Public health and containment:
  - Closure of schools and universities, public spaces and noncritical commercial activities; halting public transport; nationwide curfew.
  - Accommodation of needed health care spending.
- Social protection:
  - Increase social assistance and shift fiscal resources from lower-priority programs to health and social assistance.
- Macro and financial stance:
  - Authorities reaffirm dollarization regime and commitment to sustained fiscal adjustment medium-term.
- Debt and financing strategy:
  - Engaged private creditors; accepted consent solicitation for ongoing standstill to debt service payments (initial progress).
  - Secured official bilateral creditors’ support for 2020; good prospects for further financing from bilaterals and IFIs.
- Statistical and governance improvements:
  - Reevaluation of public finance statistics with IMF support; corrections for 2018 and 2019 undertaken.
  - Amendments to COPLAFIP submitted to strengthen control, reporting, and transparency.
  - Commitment to transparent disclosure and audit of COVID-related spending.

### Policy recommendations — Fiscal policy (immediate response)
- Priorities:
  - Increase public health spending; health spending and social assistance are overarching priorities.
  - A purchase under the RFI could help finance health and social assistance spending.
  - Redirect resources from non-priority spending to health and emergency services if needed.
  - Transparently allocate health spending to monitoring incidence, containing spread, upgrading capacity (intensive care beds, respirators).
  - Carefully cost activities and estimate human and financial resources including external resources while maintaining essential services.
- Protect vulnerable groups:
  - Expand the “Bono de Protección Familiar por Emergencia” of US$120 per family (April and May) from 400 thousand families to all families in the social registry (about 2 million families).
  - Distribute additional cash transfers to poor households not in the social registry using non-bank correspondents and ATM payments without electronic card; consider in-kind provision.
- Support firms and employment:
  - Emergency law (submitted April 16) contains temporary relaxation of unemployment insurance eligibility and labor contract modifications to protect jobs.
- Measures to reduce 2020 budgetary pressures:
  - Support income measures in emergency package to generate additional savings of 1.9 percentage points of GDP.
  - Measures include temporary solidarity contribution of 5 percent of corporate profit tax by companies with revenues above US$1 million; temporary solidarity contribution from wages paid by private and public employees.
  - Ministry guidelines for Q2 2020: hiring freeze except priority sectors; non-renewal of certain contracts; suspension of overtime authorizations.
  - Fiscal savings from additional expenditure measures estimated at 0.2 percent of GDP.
  - Authorities committed to tax and customs administration strengthening (IMF TA); not incorporated in fiscal baseline and represent upside risk to 2020 fiscal balance.

### Fiscal policy post-pandemic (medium-term)
- Roll-back of pandemic-related spending (including 0.6 ppt of GDP in health-related expenditure and cash transfers) once crisis subsides.
- Need for ambitious expenditure rationalization and growth-friendly tax reform beyond 2020.
  - Staff estimates fiscal consolidation in NOPBS of about 6.2 percentage points of GDP over 2019-2025 (4.8 ppts of GDP in overall balance), compared to baseline consolidation of 4.4 ppts of GDP in NOPBS and 2.2 ppts in overall balance.
  - Re-align current spending toward growth-enhancing outlays and social assistance; reverse decline in non-oil revenues.
  - Scope to review and rationalize non-priority capital spending.
- Institutional measures:
  - Reform of COPLAFIP to strengthen fiscal discipline and transparency; amendments submitted April 16 as an emergency law (prior action for the RFI).

### Monitoring, supervision, and crisis preparedness (financial sector)
- Priority: deepen supervision, increase frequency of supervisory activities, sharpen supervisory focus.
- Main channel for financial stability risk: liquidity (affected by fall in deposits and payment deferral measures).
- Contingency planning needed for liquidity pressures and asset deterioration.
- First line of defense actions:
  - Ensure liquidity fund windows are accessible and flexible; eliminate stigma.
  - Make BCE rediscount window operational if needed.
- Supervisory priorities:
  - Monitor loan portfolio subject to payment deferrals; focus on interlinkages across financial system segments.
- Preparedness elements:
  - Business continuity plans; communications strategy; intensified coordination among BCE, MEF, Superintendencies, and Junta Monetaria.
- Liquidity observations and recommendations:
  - Banks reported sufficient liquidity initially, but balance-sheet pressure expected.
  - Reserve requirement reductions could inject liquidity but risk hoarding; authorities should stand ready to provide liquidity relief, especially from liquidity fund.

### Risks overview and mitigation
- Risks tilted to the downside and heightened substantially.
- External acute risks:
  - Lower-than-projected oil prices; more severe/protracted pandemic; weaker global growth; further rise in risk premia.
- Domestic acute risks:
  - Wider/prolonged spread of COVID-19; longer pipeline repair times; fiscal revenue shortfalls; higher-than-estimated health spending; social discontent; political fragmentation; intensification of financial sector vulnerabilities.
- Specific creditor-agreement risk:
  - Failure to reach an agreement consistent with debt sustainability by mid-August (when the standstill expires) and lack of bilateral creditor contribution would leave the country vulnerable.
- Potential outcomes:
  - Further growth dampening, increased poverty, additional BOP needs, adverse effects on budget revenues and expenditures.
- Mitigation steps:
  - Authorities requested technical assistance to improve tax administration and boost revenues.

### Debt sustainability outlook and scenarios
- Base projections:
  - Debt expected to peak in 2023 at around 69.8 percent of GDP and decline to 67.7 percent of GDP by 2025 (other paragraph notes a peak at 69.9 percent of GDP in 2023 before declining to 67.7 percent by 2025).
  - Gross financing needs (GFNs) are 13.9 percent of GDP in 2020 and remain large over the medium term.
- Vulnerabilities:
  - Debt profile sensitive to real GDP growth, primary balance, and interest rate shocks.
  - Large financing gaps put debt at a “knife’s edge.”
- Required response:
  - Substantive debt operation in motion; continuous fiscal consolidation necessary.
- Authorities’ targets:
  - Debt-to-GDP of no more than 45 percent by 2030, intermediate target of 55 percent by 2025.
  - GFN targets averaging 6 percent of GDP in 2025-2030.
- Illustrative scenarios:
  - Adverse (elevated borrowing costs): debt rises after 2020 shock, reaching 71.4 percent of GDP by 2025; GFNs 10.6 ppts of GDP in 2025 (2 ppts above baseline).
  - Viable (sustainable) scenario: requires fiscal consolidation of about 6 ppts of GDP in NOPBS over 2019-2025, substantial creditor participation, and multilateral financing; achieves debt targets described above.
- Stress test results (selected):
  - Real GDP growth shock: debt would reach 78.7 percent of GDP in 2023.
  - Primary balance shock: debt would increase to 72.9 percent of GDP in 2024.
  - Interest rate shock: debt would increase to 70.8 percent of GDP in 2024.
- Risks noted:
  - Ratio of public debt held by non-residents about 75 percent of total debt; significant increases in spreads have raised market risk perception.

### Modalities of IMF support and RFI request
- Staff supports the authorities’ RFI request.
- Proposed IMF support: 67.3 percent of quota (SDR 469.7 million or US$644 million) under the RFI.
- Rationale:
  - Urgent BOP need; UCT-quality program not feasible given uncertainty and logistical constraints.
  - Debt assessed as sustainable on a forward-looking basis conditional on fiscal consolidation and creditor contributions.
- Access context:
  - Ecuador cancelled EFF (access 435 percent of quota) approved March 11, 2019.
  - Proposed RFI access of 67.3 percent of quota represents 8 percent of the estimated financing gap in 2020.
  - Remaining needs expected to be filled by fiscal adjustment (measures of 1.7 percent of GDP announced by President Moreno), multilateral, bilateral, and private creditor resources.
  - Authorities interested in pursuing a successor EFF in parallel.
- Disbursement and on-lending:
  - RFI purchase to be disbursed to the central bank and on-lent to the government for virus- and emergency spending.
  - MoU between MEF and BCE (March 2019) to be updated for the new disbursement.

### Safeguards, governance, and transparency conditions
- Safeguards assessment completed in 2019; update not required for RFI disbursement.
- Implementation of safeguards recommendations depends on passage of new BCE law.
- Last assessment (June 2019) found structural reforms needed to restore BCE independence; some recommendations addressed (risk management committee), but lack of new central bank law impeded reforms.
- BCE progressing toward IFRS, but legal framework prohibits publication of full audited financial statements.
- Transparency commitments:
  - Publish COVID-19-related public procurement contracts and related documents (including names of awarded companies and beneficial owners) and ex-post delivery validation.
  - Independent audit of COVID-19-related spending by the Office of the Comptroller General by mid-2021 and publication of results.

### Staff appraisal and policy priorities
- Staff welcome authorities’ policy response to pandemic and oil shock.
- Emphasized priorities:
  - Allocate sufficient resources to health spending.
  - Provide cash transfers and social assistance to vulnerable groups; increasing health spending and cash transfers is first priority.
- Staff welcome social assistance action plan and commitments to transparency and accountability of COVID-related spending.

### Annex I — Impact of COVID-19 on healthcare spending (summary)
- Methodology: IMF Fiscal Affairs Department model customized for Ecuador; SIR epidemiological model; assumes 10 percent of existing hospital beds available; assumes without mitigation each infected person infects 3.1 persons; three scenarios differ by transmission evolution; week 1 corresponds to week ending March 22, 2020.
- Scenario estimates (totals over the year following outbreak start):
  - Scenario 1: additional public healthcare costs total $97 million.
  - Scenario 2: additional public healthcare costs total $360 million.
  - Scenario 3: additional public healthcare costs total $769 million.
- Assumptions: public healthcare costs assumed 60 percent of total COVID-19 healthcare costs; projections illustrative and highly sensitive to transmission rate assumptions.

### Annex II — Public sector debt sustainability (summary)
- Baseline and outlook:
  - Debt expected to peak in 2023 at around 69.8 percent of GDP and decline to 67.7 percent of GDP by 2025 (alternative text notes peak at 69.9 percent).
  - GFNs estimated at 13.9 percent of GDP in 2020; decline to 7.3 percent of GDP over the medium term if market access at reasonable cost is reestablished.
  - Public-sector debt increased from 17.5 percent of GDP in 2012 to 49.6 percent of GDP in 2019.
- Macroeconomic/fiscal assumptions:
  - Growth in 2020 forecasted at -6.7 percent.
  - Inflation (GDP deflator) in 2020 forecasted at -3.1 percent.
  - Medium-term growth expected to recover to 2.2 percent; inflation to converge to 1.5 percent.
  - Fiscal position projected to improve to a primary surplus of about 3.1 percent of GDP by 2025 conditional on policies.
  - 2020-21 financing gaps assumed filled by bilateral and multilateral loans and significant contribution from private external creditor debt treatment; from 2022 onwards by bilateral and market financing assuming market access at reasonable cost.
- Stress tests and vulnerabilities summarized above.

### Letter of Intent — key facts (excerpt)
- Quito, April 30, 2020. Letter addressed to Ms. Kristalina Georgieva.
- COVID-19 situation as of April 27: Confirmed cases 23,240; Deaths 1,801.
- Emergency measures: State of Emergency from March 12; full lockdown from March 15; border closure March 17; national curfew March 21.
- Emergency measures and financing actions:
  - Prior action #1: Submission to the National Assembly of amendments to COPLAFIP.
  - Bondholders accepted consent solicitation (April 17) to defer payments over USD 800 million until August 15.
  - Request urgent RFI assistance: SDR 469.7 million (approximately USD 641 million referenced elsewhere).
  - Authorities intend to pursue a new medium-term EFF when conditions allow and consent to publication of this letter and accompanying Executive Board documents.

*Source: 1ecuea2020001 — extracted from the supplied IMF chapter/section text.*

### 67.3 percent of quota) to meet urgent balance of payment needs stemming from the outbreak

### 1ecuea2020001 - 67.3 percent of quota) to meet urgent balance of payment needs stemming from the outbreak

### Executive summary and immediate financing needs
- Ecuador faces urgent and immediate balance of payment (BOP) needs driven by the sharp propagation of the Covid-19 outbreak, a plummeting of oil prices, and a dramatic collapse of global demand.
- Economic projection: real GDP is expected to contract by 6.7 percent in 2020.
- External financing gap: about 8.4 percent of GDP in 2020 and 7.6 percent of GDP in 2021.
- RFI request: purchase of 67.3 percent of quota (SDR 469.7 million, about US$644 million).
- RFI represents about 10 percent of the total increase in budgetary needs (US$6 billion) due to the combined shocks and revealed fiscal deficits.
- Authorities have cancelled the Extended Fund Facility (EFF) approved on March 11, 2019 and indicated interest in a successor arrangement with the Fund.
- Staff recommendation: Board approval of Ecuador’s request for a purchase under the Rapid Financing Instrument of 67.3 percent of quota (SDR 469.7 million).

### Recent macro-financial developments and vulnerabilities
- Pre-crisis growth and labor:
  - Real GDP contracted in Q4 2019 by 1 percent (y-o-y).
  - Growth in 2019 was 0.1 percent.
  - Unemployment rate: 3.8 percent in December 2019.
  - Inflation: positive 0.2 percent (y-o-y) in March.
- Reserves and NIR:
  - Gross international reserves: US$2.9 billion at end-2019; declined sharply in March to US$1.4 billion (about 8 percent of ARA metric).
  - Net international reserves (NIR, excluding all Fund disbursements): negative US$3.1 billion as of end-March.
- Financial system indicators:
  - Capital Adequacy Ratio (CAR): 13.5 percent (average).
  - Liquid assets to short-term deposits: 24 percent.
  - Non-performing loans (NPLs): 3 percent of total loans.
  - Provisions coverage: over 250 percent.
  - Return on Assets (ROA): 1 percent.
  - Return on Equity (ROE): 8 percent.
  - Deposits declined by US$1 billion (2.3 percent of total) during March.
- Fiscal statistics revisions and deficits:
  - NOPBS (non-oil primary balance or comparable measure) deficit estimated at 6.7 percent of GDP in 2018 and 5.3 percent of GDP in 2019 (revised), versus earlier estimates of 4.9 percent and 3.4 percent respectively.
  - Corresponding overall deficit for 2018 and 2019 assessed at 3.2 percent of GDP in both years, compared with earlier estimates of 1.2 and 1.1 percent of GDP.
  - Revisions stem from serious statistical deficiencies in recording revenues and expenditures of local governments, state-owned enterprises, and social security financial asset transactions.

### Impact of the dual oil price and COVID-19 shock
- Oil sector importance:
  - Oil comprises 40 percent of Ecuador’s exports and about 35 percent of the public sector revenues.
- COVID-19 epidemiology (as reported):
  - As of April 28, Ecuador has 24,258 confirmed cases and 2,083 reported deaths.
- Financial markets and competitiveness:
  - Sovereign spreads shot up to 5,500 basis points, effectively closing access to capital markets.
  - Appreciation of the US$ is eroding competitiveness.
- Quantified fiscal and growth impacts from oil shock:
  - Oil price collapse estimated to add US$3.4 billion (3.5 percent of GDP) to the fiscal deficit.
  - Loss of oil revenues about US$4.8 billion (4.9 percent of GDP), partly offset by fiscal savings from oil subsidies of US$1.4 billion (1.4 percent of GDP).
  - Oil price decline expected to subtract about 2 percentage points from real GDP growth in 2020.
  - Recent damages to two large pipelines expected to result in a loss in crude oil production of 8–10 million barrels in 2020Q2, explaining an additional 0.4 percentage point markdown in the 2020 growth forecast.

### Policies implemented and near-term authorities’ actions
- Public health and containment:
  - Closure of schools and universities, public spaces and noncritical commercial activities, halting public transport, and imposition of a nationwide curfew.
  - Accommodation of needed health care spending to ensure population well-being.
- Social protection:
  - Plans to increase social assistance to protect the most vulnerable and strengthen the framework for such assistance.
  - Efforts to shift fiscal resources from lower-priority programs towards health and social assistance.
- Macro and financial policy stance:
  - Authorities continue to see the dollarization regime as a fundamental pillar to anchor macroeconomic stability.
  - Reaffirmation of commitment to sustained and ambitious fiscal adjustment over the medium-term once immediate effects wane.
- Debt and financing strategy:
  - Authorities engaged with private sector creditors on a debt operation and have accepted a consent solicitation for the ongoing standstill to debt service payments (initial progress).
  - Secured official bilateral creditors’ support for 2020, with good prospects for financing from bilateral creditors and IFIs going forward.
- Statistical and governance improvements:
  - Authorities reevaluated processes for collecting and compiling public finance statistics with IMF support; corrections to fiscal data for 2018 and 2019 have been undertaken.
  - Amendments to the Organic Planning and Public Finance Law submitted to the Assembly to strengthen control, reporting, and transparency of public finances.
  - Commitment to transparent disclosure and audit of COVID-related spending and to prevent misuse of emergency financing.

### Staff assessment, risks, and recommended safeguards
- RFI eligibility and rationale:
  - Staff assess that Ecuador meets eligibility requirements for the RFI given urgent BOP need and logistical constraints for an upper credit tranche-quality program.
  - Capacity to repay is constrained and subject to higher-than-usual risks; depends on steps to safeguard debt sustainability.
- Debt sustainability strategy:
  - Authorities aim to reach expeditiously a comprehensive debt restructuring agreement with private creditors, pursue sustained fiscal consolidation, and secure additional medium-term debt relief and financing on favorable terms from official bilateral creditors and other stakeholders.
- Staff recommendation:
  - Staff recommend Board approval of Ecuador’s request for a purchase under the RFI of 67.3 percent of quota (SDR 469.7 million).
- Identified risks:
  - Heightened risks to debt sustainability put public debt at a “knife’s edge.”
  - Worsening economic conditions will test financial system resilience, particularly among smaller banks and cooperatives with concentrated consumer and microfinance exposure.
  - Uncertainty about the outlook complicates designing an UCT-quality program.

*Source: 1ecuea2020001 - 67.3 percent of quota) to meet urgent balance of payment needs stemming from the outbreak*

### 8.      The rapid spread of COVID-19 in Ecuador—and the attendant domestic disruptions—is

### 8.      The rapid spread of COVID-19 in Ecuador—and the attendant domestic disruptions—is

### Impact on public spending and growth
- Expected increase in public spending by US$600 million (0.6 percent of GDP).
- Expected subtraction of 4.5 percentage points from real GDP growth in 2020.
- Main channels:
  - Additional health spending of about US$350 million (0.35 percent of GDP).
    - Estimated health costs range from US$100 million to US$800 million.
  - Additional social assistance spending of about US$250 million (0.25 percent of GDP).
  - Lower GDP growth: staff estimates a loss of 4.5 percentage points in real GDP growth in 2020 relative to the pre-virus baseline.
    - Estimates based on a lockdown of 8 weeks announced by the government, with losses concentrated in services (particularly travel and tourism) and in construction.

### Combined shocks: COVID-19 and oil price (selected indicators from text Table)
- Growth (Percent change):
  - COVID-19: -4.5
  - Oil price: -2.0
  - Combined Shock: 0.0
  - Total Impact: -6.5
- Overall balance (percent of GDP):
  - COVID-19: -1.4
  - Oil price: -3.8
  - Combined Shock: -0.8
  - Total Impact: -6.0
- Oil revenues (gross) (percent of GDP):
  - COVID-19: 0.0
  - Oil price: -4.9
  - Combined Shock: 0.0
  - Total Impact: -4.9
- Fuel subsidies (percent of GDP):
  - COVID-19: 0.0
  - Oil price: 1.4
  - Combined Shock: 0.0
  - Total Impact: 1.4
- Non-oil tax revenues (percent of GDP):
  - COVID-19: -0.8
  - Oil price: -0.3
  - Combined Shock: 0.0
  - Total Impact: -1.1
- Asset monetization (percent of GDP):
  - COVID-19: 0.0
  - Oil price: 0.0
  - Combined Shock: -0.8
  - Total Impact: -0.8
- Health spending and cash transfers related to Covid-19 (percent of GDP):
  - COVID-19: -0.6
  - Oil price: 0.0
  - Combined Shock: 0.0
  - Total Impact: -0.6

### Fiscal and balance-of-payments impacts and projections
- Real GDP expected to contract by 6.5 percentage points in 2020 (combined shocks).
- Overall fiscal deficit projected to be higher by US$5.8 billion (about 6 percentage points of GDP) due to oil and COVID-19 shocks alone.
- Sharp contraction in GDP estimated to reduce fiscal revenues by about US$1 billion (1.1 percent of GDP) due to a projected weakening in tax compliance (staff estimates based on an increase in tax compliance gap of 5 percentage points).
- Loss of fiscal revenue from reduced interest by outside investors in asset monetization: US$0.8 billion.
- Net international reserves expected to remain broadly unchanged compared to 2019 at negative US$1.5 billion (US$3.5 billion lower than expected in December 2019).
- Underlying NOPBS is now expected to widen by 0.5 percentage points of GDP between 2019 and 2020, versus the cancelled EFF commitment of a consolidation of 1.7 percentage points of GDP.
- Resulting BOP gross financing needs assessed to be US$ 13.7 billion in 2020 (13.9 percent of GDP), with an estimated external financing gap of US$8.4 billion.
- BOP financing gap remains large in 2021 at about US$7.6 billion.
- Recovery: expected to be relatively strong from COVID-19, but lower oil prices will dampen real GDP growth in 2021; return to the 2019 GDP level not expected until early 2023.

### Authorities’ policies already implemented
- Containment measures: closing schools and universities, public spaces and non-critical commercial activities; halting public transport; nationwide curfew; borders shut; military requested to manage the province of Guayas (where 75 percent of confirmed cases are concentrated).
- Fiscal policy measures (announced March 19 and March 23):
  - Deferral of payroll contributions.
  - Exceptional cash transfer amounting to US$120 (in April and May) to 400 thousand poor families.
  - Distribution of food baskets.
  - Credit lines for small- and medium-size businesses.
  - Fiscal tightening measures on March, 23 to the tune of about 2 percent of GDP with respect to the 2020 original budget.
  - Package included some 2½ percent of GDP in new financing and refinancing of some current obligations.
  - Measures to boost revenue: increase in withholding tax for banks, SOEs and other commercial corporations; temporary increase in import duties.
- Monetary and financial measures:
  - Monetary and Financial Policy and Regulation Board issued temporary modifications supporting private sector, including extraordinary deferrals of credit obligations and requirement of additional generic provisioning on banks’ gross lending portfolio during 2020.
  - Reduction in the contribution by financial institutions to the Liquidity Fund from 8 to 5 percent of eligible deposits, freeing about US$950 million in liquid resources.
  - Government preparing a facility to support working capital needs of real sector enterprises, funded by the World Bank and intermediated by CFN.

### Policy recommendations going forward — Fiscal policy (immediate response)
- Increase public health spending combined with mitigation measures; health spending and social assistance are overarching priorities.
  - A purchase under the RFI could help finance health and social assistance spending.
  - Redirect resources from non-priority spending into health and emergency services if needed.
  - Transparently allocate increased health spending to interventions likely most effective: monitoring incidence, containing spread, upgrading capacity (e.g., number of intensive care beds, stock of respirators or other necessary equipment).
  - Staff recommended careful costing of activities and sound estimates of human and financial resources, including external resources, while maintaining other essential health services.
- Protect vulnerable groups:
  - Staff recommended expanding the “Bono de Protección Familiar por Emergencia” of US$120 per family currently designated to 400,000 families, to all families in the social registry (about 2 million families).
  - Additional cash transfers to poor households not listed in the social registry could be distributed using non-bank correspondents and payments through ATMs without electronic card.
  - In-kind provision of goods and services can also be considered given low coverage of the social registry.
- Support household spending capacity and firms to retain workers:
  - Emergency law submitted to the National Assembly on April 16 contains a temporary relaxation of eligibility criteria for unemployment insurance and modifications to labor contracts to protect jobs and permit flexible work schedules.
- Measures to reduce budgetary pressures in 2020 given limited fiscal space:
  - Staff supports income measures submitted as part of an emergency package with tentative view to generate additional savings of 1.9 percentage points of GDP.
  - Measures include:
    - Temporary solidarity contribution of 5 percent of corporate profit tax by companies with revenues above US$1 million.
    - Temporary solidarity contribution from wages, paid by both private and public sector employees.
  - Ministry of Economy and Finance guidelines for Q2 2020: hiring freeze except priority sectors; non-renewal of occasional and provisional contracts expiring in March; suspension of payment authorizations for overtime in the public sector; other measures to reduce spending on goods and services.
  - Fiscal savings from additional expenditure measures estimated at 0.2 percent of GDP.
  - Authorities committed to measures to strengthen tax and customs administration (in consultation with IMF TA); these measures not incorporated in fiscal baseline and represent an upside risk to the fiscal balance in 2020.

### Fiscal policy post-pandemic (medium-term)
- Roll-back of pandemic-related spending will be important, including 0.6 ppt of GDP in health-related expenditure and additional cash transfers.
- Need for ambitious expenditure rationalization and growth-friendly tax reform beyond 2020:
  - Staff estimates a fiscal consolidation in NOPBS of about 6.2 percentage points of GDP over 2019-2025 (4.8 ppts of GDP in overall balance), compared to consolidation assumed in the baseline scenario (4.4 ppts of GDP in NOPBS and 2.2 ppts of GDP in overall balance).
  - The low-for-long oil price outlook necessitates reducing and re-aligning current spending towards growth-enhancing outlays and social assistance, and reversing the decline in non-oil revenues.
  - Staff sees scope to review and rationalize non-priority capital spending.
- Institutional measures:
  - Reform of the organic code of budget and planning (COPLAFIP) over the medium-term to strengthen fiscal discipline and transparency; amendments submitted to the National Assembly on April 16 as an emergency law (prior action for the RFI).

*Italicized source: Content unit 1ecuea2020001 — extracted from the supplied IMF chapter/section text.*

### 21.      The priority is to step up monitoring activities while preparing the toolbox for a

### 21. The priority is to step up monitoring activities while preparing the toolbox for a proper policy response to the combined shocks

### Monitoring, supervision, and crisis preparedness
- Priority: deepen supervision, increase frequency of supervisory activities, and sharpen supervisory focus.
- Main channel for financial stability risk: liquidity, already affected by the fall in deposits and the payment deferral measure.
- Contingency planning needs to be enhanced to face liquidity pressures and possible asset deterioration.
- First line of defense actions:
  - Ensure liquidity fund windows are accessible and flexible, eliminating stigma elements.
  - Make the rediscount window of the Central Bank of Ecuador (BCE), largely inactive for years, operational if additional liquidity injection is required.
- Supervisory priorities:
  - Start monitoring closely the loan portfolio subject to payment deferrals.
  - Intensify focus on interlinkages across different segments of the financial system.
- Preparedness elements to put in place:
  - Business continuity plans for authorities and supervised entities.
  - A communications strategy to the public.
  - Intensified coordination among BCE, Ministry of Economy and Finance (MEF), Superintendencies, and the Junta Monetaria.

### Liquidity, banking sector pressures, and policy tools
- Observation: Ecuadorean banks on average reported sufficient liquidity levels at the outset of the crisis, but increased demand for credit to manage a perceived temporary shock will create balance-sheet pressure.
- Risks to liquidity supply:
  - Reserve requirement reductions could inject liquidity, but in recessions banks may hoard liquidity and not respond as expected; reducing reserve requirements may also decrease liquid reserves at the BCE.
- Recommendation: authorities should stand ready to continue providing liquidity relief, especially from the liquidity fund.

### Risks overview
- Risks are firmly tilted towards the downside and have heightened substantially.
- External acute risks include:
  - Lower-than-projected oil prices.
  - A more severe and/or protracted Covid-19 pandemic globally.
  - Weaker-than-expected global growth, including through rising protectionism.
  - A further sharp rise in risk premia that would generate additional pressures on public finances.
- Domestic acute risks include:
  - Wider and prolonged spread of the COVID-19 pandemic.
  - Longer-than-expected time for repairing damaged oil pipelines.
  - Shortfall in fiscal revenues and higher-than-estimated health spending related to COVID-19.
  - Social discontent causing economic disruptions and policy missteps.
  - Lack of political cohesion in pursuing structural reforms and stabilization policies.
  - Intensification of financial sector vulnerabilities.
- Specific risk of failure to reach creditor agreement:
  - Failure to achieve an agreement consistent with debt sustainability with creditors by mid-August (when the standstill on debt service to external private sector creditors expires), as well as lack of sufficient contribution by bilateral creditors, would result in insufficient relief in the near and medium term and keep the country under very vulnerable conditions for a long period, including through the forthcoming presidential election period.
- Potential outcomes of risks:
  - Further dampening of economic growth, increased poverty, and additional balance of payments needs.
  - Adverse effects on budget revenues (both oil and non-oil) and expenditures due to higher-than-expected health and income-support spending.
- Authorities’ mitigation steps include requesting technical assistance to improve tax administration practices and boost revenues.

### Debt sustainability outlook
- Base projections:
  - Debt is expected to peak in 2023 at around 69.8 percent of GDP and then decline to 67.7 percent of GDP by 2025.
  - Gross financing needs (GFNs) are 13.9 percent of GDP in 2020 and remain large over the medium term even under favorable assumptions.
- Vulnerabilities:
  - Debt profile is particularly sensitive to real GDP growth, the primary balance, and interest rate shocks.
  - Large financing gaps in 2020 and beyond put debt at a knife’s edge of unsustainability.
- Required policy response:
  - A substantive debt operation is required (and in motion) to address large and protracted financing gaps over the medium term.
  - Continuous fiscal consolidation over the medium term is necessary; authorities are committed to such consolidation.
- Authorities’ targets:
  - Debt-to-GDP ratio of no more than 45 percent by 2030, with an intermediate target of 55 percent by 2025.
  - GFN targets averaging 6 percent of GDP in 2025-2030.
- Fiscal consolidation example:
  - Staff notes a viable scenario underpinned by fiscal consolidation of about 6 ppts of GDP in NOPBS over 2019-2025, combined with significant participation of external private and official creditors and multilateral stakeholders.

### Illustrative scenarios (Box 1)
- Baseline: public debt is assessed as sustainable on a forward-looking basis, but sustainability is a “knife-edge” given downside risks.
- Illustrative adverse scenario (focused on elevated borrowing costs):
  - Motivation: sensitivity of Ecuador’s sovereign spreads to global oil prices, current very high level of spreads (5500 bp), and uncertainty in oil prices and market conditions.
  - After increasing by 15 ppts to 64.6 percent of GDP in the wake of the dual COVID-19 and oil price shock in 2020, public debt continues to rise, reaching 71.4 percent of GDP by 2025.
  - GFNs remain elevated at 10.6 ppts of GDP in 2025, 2 ppts above the baseline level.
- Viable (sustainable) scenario:
  - Underpins debt path to achieve debt-to-GDP of no more than 45 percent by 2030 and 55 percent by 2025.
  - Requires fiscal consolidation of about 6 ppts of GDP in NOPBS over 2019-2025, substantial creditor participation, and multilateral financing; GFNs averaging 6 percent of GDP in 2025-2030.

### Modalities of IMF support and RFI request
- Staff supports the authorities’ request for an RFI (Rapid Financing Instrument).
- Proposed IMF support:
  - 67.3 percent of quota (SDR 469.7 million or US$644 million) under the RFI, given the 145 percent normal annual access limit on purchases within 12 months and past EFF purchases in 2019.
- Key staff considerations supporting RFI:
  - Ecuador faces an urgent BOP need that would cause immediate and severe economic disruption if not addressed.
  - A UCT program is not feasible given high uncertainty and practical difficulties for comprehensive policy discussions in the no-travel/work-at-home environment.
  - Ecuador’s debt is assessed as sustainable on a forward-looking basis after incorporating the government’s commitment to fiscal consolidation and expected creditor contributions consistent with IMF debt and GFN targets (¶26), including the in-train debt operation and assurances of support for 2020 from major official bilateral creditors.
  - Under the baseline scenario, closing remaining financing gaps assumes borrowing at interest rates close to 10 percent in 2022-2025; Ecuador’s capacity to repay is constrained and subject to risks.
- Context on access and gaps:
  - Ecuador canceled the existing EFF arrangement approved on March 11, 2019, with an access level of 435 percent of quota.
  - Access of 100 percent of quota in addition to the EFF access would not be within normal annual access limits under the GRA.
  - The proposed access of 67.3 percent of quota represents only 8 percent of the estimated financing gap in 2020.
  - Remaining needs expected to be filled by:
    - The fiscal policy adjustment (measures of 1.7 percent of GDP recently announced by President Moreno).
    - Resources from multilaterals as well as bilateral and private creditors.
  - Authorities have indicated interest in pursuing a successor EFF that staff is working on in parallel.
- Disbursement and on-lending:
  - RFI purchase will be disbursed to the central bank and on-lent to the government to provide financing for virus- and other emergency spending.
  - The Memorandum of Understanding (MoU) signed in March 2019 between the MEF and the BCE will be updated to account for the new disbursement.

### Safeguards, governance, and transparency conditions
- Safeguards assessment:
  - The safeguards assessment for Ecuador was completed in 2019; an update will not be required for the RFI disbursement.
  - Implementation of safeguards recommendations will depend on the passage of the new BCE law.
  - The last assessment, finalized in June 2019, found structural reforms were required to restore the BCE’s independence.
  - Some safeguards recommendations were addressed (e.g., establishment of a risk management committee), but the lack of enactment of the new central bank law has impeded envisaged reforms, including new governance arrangements.
  - The BCE is making progress in the transition to International Financial Reporting Standards (IFRS), but current legal framework continues to prohibit publication of the full set of audited financial statements.
  - Authorities are committed to pursuing BCE reform after the current legislative emergency package has been discussed.
- Transparency commitments:
  - Authorities commit to regularly publishing on the government’s website COVID-19-related public procurement contracts and related documents, including names of awarded companies and their beneficial owners and ex-post validation of delivery, as well as information on all other COVID-19 related spending.
  - Authorities commit to an independent audit of COVID-19-related spending by the Office of the Comptroller General by mid-2021 and to publish the results.

### Staff appraisal and policy priorities
- Staff welcome the authorities’ bold policy response to the confluence of shocks (pandemic, plummeting oil prices, slump in global demand).
- Staff underscore the importance of:
  - Allocating sufficient resources to health spending to fight the pandemic.
  - Providing cash transfers and social assistance to support vulnerable groups; increasing health spending and cash transfers is the first priority.
- Staff welcome the social assistance action plan published by the authorities and their commitment to transparency and accountability of COVID-related spending.

*Italic: IMF staff summary of content unit 1ecuea2020001*

### 36.      Once the crisis subsides, the authorities should stand ready to revert the emergency

### 1ecuea2020001 - 36.      Once the crisis subsides, the authorities should stand ready to revert the emergency

### Fiscal policy and consolidation
- Authorities should stand ready to revert the emergency mitigating measures once the crisis subsides and anchor fiscal consolidation efforts around a credible forward-looking medium-term plan.
- Additional fiscal savings would help restore confidence and put public finances on a more sustainable footing.
- Submission to the National Assembly of amendments to the COPLAFIP will strengthen fiscal discipline and transparency.
- The authorities’ proposals for additional spending are described as consistent with medium-term economic sustainability and necessary to maintain social cohesion and protect the most vulnerable during the crisis.

### Financial sector liquidity and stability
- Authorities should strike a balance between liquidity provision to re-ignite growth and financial stability risk.
- New credit lines for small- and medium-size enterprises would provide cash flow relief to credit-constrained firms.
- The approved regulation by the Monetary and Financial Board to lower the contribution of financial institutions to the liquidity Fund should be temporary to prevent a potential adverse impact on financial stability.

### Strengthening fiscal statistics and institutions
- Ecuador should continue to strengthen institutional arrangements and technical capacity for compiling public finance statistics.
- This includes:
  - Stronger collaboration among the agencies involved in the compilation of fiscal statistics.
  - Enforcement of reporting standards.
  - Systematic reconciliation of above- and below-the-line data.
  - Compilation of fiscal accounts by sub-sectors of the NFPS.

### IMF purchase under the Rapid Financing Instrument (RFI)
- Staff views the request for purchase under the RFI to be justified and recommends approval by the Board despite heightened downside risks.
- Key points:
  - Requested purchase amount: 67.3 percent of quota.
  - Justification: scale and severity of the confluence of shocks and the impact on Ecuador’s balance of payments.
  - Treating the disbursement as budget support is warranted by pressing healthcare and humanitarian needs.
  - Ecuador’s capacity to repay the Fund is constrained and subject to higher than usual risks.
  - Debt is deemed sustainable on a forward-looking basis given progress on the debt operation with private sector creditors, presence of specific and credible bilateral creditor assurances for 2020, and commitments to fiscal sustainability, although important risks remain.

### Annex I — The impact of COVID-19 on healthcare spending (summary)
- Methodology:
  - Uses an IMF Fiscal Affairs Department model customized for Ecuador.
  - Projects cases and required hospitalizations using a SIR epidemiological model with potential hospital capacity constraints.
  - Assumes 10 percent of existing hospital beds in Ecuador are available to accommodate COVID-19 patients; bed availability can be expanded but with limits.
  - Assumes without mitigation each infected person infects 3.1 persons over the duration of infection; three alternative scenarios differ in how transmission rate evolves over time.
- Scenario estimates (totals over the year following the beginning of the outbreak):
  - Scenario 1: additional public healthcare costs total $97 million.
  - Scenario 2: additional public healthcare costs total $360 million.
  - Scenario 3: additional public healthcare costs total $769 million.
- Assumptions and notes:
  - Healthcare costs do not increase in direct proportion to infected people because under Scenario 3 many critically ill do not receive hospital treatment.
  - Estimates assume public healthcare costs are 60 percent of total healthcare costs associated with COVID-19.
  - Week 1 corresponds to the week ending on March 22, 2020.
  - Projections are illustrative and highly sensitive to assumptions about the transmission rate.

### Annex II — Public sector debt sustainability (summary)
- Baseline projections and outlook:
  - Under the baseline, debt levels rise significantly in 2020 and beyond due to COVID-19 shocks and a decline in oil prices.
  - Debt is expected to peak in 2023 at around 69.8 percent of GDP and then decline to 67.7 percent of GDP by 2025. (Note: a later paragraph states a forecasted peak at 69.9 percent of GDP in 2023 before declining to 67.7 percent by 2025.)
  - Gross financing needs are estimated at 13.9 percent of GDP in 2020 and would decline to 7.3 percent of GDP over the medium term if market access at reasonable cost is reestablished.
  - Public-sector debt (non-financial public sector obligations) increased from 17.5 percent of GDP in 2012 to 49.6 percent of GDP in 2019.
- Macroeconomic and fiscal assumptions:
  - Growth in 2020 is forecasted at -6.7 percent.
  - Inflation (GDP deflator) in 2020 is forecasted at about -3.1 percent.
  - Over the medium-term, growth is expected to recover and reach 2.2 percent.
  - Over the medium-term, inflation is expected to converge to 1.5 percent.
  - Fiscal position is projected to improve gradually to reach a primary surplus of about 3.1 percent of GDP by 2025, conditional on continuous policy efforts over 2022-25.
  - For 2020 and 2021, projected large financing gaps are assumed to be filled with a mix of bilateral and multilateral loans and a significant contribution from a debt treatment with private external creditors; from 2022 onwards with a mix of bilateral and market financing assuming market access at reasonable cost.
- Debt path and vulnerabilities:
  - At 64.6 percent of GDP, the debt level in 2020 is forecasted to be higher than projected at the time of the second and third review.
  - Higher financing needs are driven by the collapse of oil prices, decline in trade, lower non-commodity growth, payments for margin calls, and issuance of domestic debt for the repo operation with the central bank.
  - Given planned debt operations with private creditors, near-term bilateral creditor liquidity support, and prospects for MDB and bilateral financing, debt can be assessed as sustainable on a forward-looking basis, but remains at a knife’s edge.
- Stress test results (selected outcomes):
  - Real GDP growth shock: debt would reach 78.7 percent of GDP in 2023.
  - Primary balance shock: debt would increase to 72.9 percent of GDP in 2024.
  - Interest rate shock: debt would increase to 70.8 percent of GDP in 2024.
  - In all shocks the debt-to-GDP ratio is expected to then gradually decline.
- Risks and policy priorities:
  - A successful debt operation, further fiscal adjustment, and additional official financing are needed to safeguard forward-looking debt sustainability.
  - Authorities have announced a consent solicitation to extend debt maturities and have accepted this by a qualified majority of bondholders.
  - The ratio of public debt held by non-residents remains a high risk at about 75 percent of total debt.
  - Significant increases in spreads have increased the market perception of risk.

### Letter of Intent — key facts (excerpt)
- Date and addressee:
  - Quito, April 30, 2020. Letter addressed to Ms. Kristalina Georgieva, Managing Director, International Monetary Fund.
- COVID-19 situation as of April 27:
  - Confirmed cases: 23,240.
  - Deaths: 1,801.
- Emergency measures and social impact:
  - State of Emergency declared starting March 12.
  - Full lockdown (excluding critical activities) from March 15.
  - Border closure on March 17.
  - National curfew on March 21.
  - Healthcare system under severe pressure with urgent need for medical equipment and supplies, testing kits, protective garments, and additional medical staff.
  - High informality in the economy increases the need to expand social protection to protect the most vulnerable.
  - A recently developed action plan—to implement social assistance thresholds and upgrade the social registry—was developed with inputs from both the World Bank and the Fund.

*Source: IMF staff report excerpt (selected sections and annexes) contained in the provided content unit.*

### 2.      In addition to the tragic loss of life, the pandemic is an unprecedented external shock that

### 1ecuea2020001 - 2.      In addition to the tragic loss of life, the pandemic is an unprecedented external shock that

### Pandemic impact and immediate challenges
- The pandemic is an unprecedented external shock that affects severely export and domestic production chains.
- Ecuador’s economic vulnerabilities highlighted:
  - dollarized system and deep dependence on oil exports;
  - sharp fall in world oil prices;
  - unexpected rupture of two main oil pipelines;
  - lower world demand and adverse capital market conditions.
- Public finance strains from:
  - lower tax collection and oil revenues;
  - surging crisis-related healthcare and social assistance outlays.
- Result: urgent and sizable Balance of Payment needs.

### Health and humanitarian situation (facts and measures)
- COVID-19 statistics (as of April 28):
  - 24,258 confirmed cases;
  - 871 confirmed deaths;
  - 1,212 presumed deaths based on symptoms and possible exposure but not confirmed through testing.
- Geographic concentration:
  - Guayas province: about 24 percent of Ecuador’s population, accounts for 65 percent of COVID-19 cases.
- Health sector measures:
  - Free COVID-19 tests for people who present symptoms and for those who are in the epidemiological area of a positive case;
  - increase in response capacity in the health system, particularly on intensive care facilities and hiring health professionals;
  - elimination of tariffs on medical products necessary to attend the emergency;
  - increasing medical imports and eliminating import tariffs on medical supplies.

### Social protection and business support measures
- Measures to support the vulnerable:
  - Disbursement of ad-hoc emergency cash transfers for families in vulnerable conditions;
  - no cuts in residential utility services for non-payment while the emergency lasts.
- Measures to support businesses:
  - Opening financing credit lines for small and medium businesses for USD50 million;
  - deferment of tax payments for the months of April, May and June over 6 months;
  - suspension of social security contributions for 90 days;
  - reprofiling of private and public sectors credits.

### Fiscal, liquidity and debt management actions
- Emergency legal actions:
  - Submission to the National Assembly of an Economic Emergency Law on April 16 to create a fund to manage two solidarity contributions redistributing resources from the richest segments to those unable to work.
  - Emergency law sent to National Assembly on April 16 includes amendments to the Organic Planning and Public Finance Law (COPLAFIP).
- Fiscal sustainability targets and adjustment plans:
  - target public debt to GDP ratio of 55 percent of GDP in 2025, declining to 45 percent of GDP by 2030;
  - broadly consistent with targeting average gross financing (GFNs) needs of about 6 percent of GDP in 2025-30;
  - plan to embark on a fiscal adjustment once the pandemic wanes, amounting to around 6 percentage points of GDP of the non-oil primary balance including fuel subsidies of the NFPS anchored on credible and durable measures mainly linked to non-oil revenues and primary spending over the period 2019-25;
  - planned adjustment over the medium term described elsewhere as an increase of 6 percent of GDP of the non-oil primary balance including fuel subsidies until 2025.
- Debt management actions and creditor engagement:
  - On Friday April 17 bondholders accepted a consent solicitation put forward by the Republic to defer all payments worth over USD 800 million until August 15 (four months);
  - during the grace period, authorities will work with advisors to put forward a second consent solicitation to restructure Ecuador’s outstanding debt;
  - received assurances on 2020 financing and prospects for financing from multilateral development banks and bilateral creditors.
- Prior action noted:
  - Prior action #1: Submission to the National Assembly of amendments to the Organic Code for Planning and Public Finances (COPLAFIP), in line with IMF technical recommendations.

### Financial stability and macroprudential measures
- Temporary provisions issued by Monetary and Financial Policy and Regulation Board:
  - short-term payment deferral for borrowers from the financial system;
  - requirement of additional generic provisioning on banks’ gross lending portfolio during 2020;
  - reduction in the contribution by financial institutions to the Liquidity Fund of three percentage points to enhance liquidity.
- Authorities stand ready to take any action necessary to preserve macro-financial stability.

### Transparency, governance, and public financial management
- Emergency law amendments to COPLAFIP aim to strengthen control, reporting, and transparency requirements concerning public sector finance statistics and crisis-related government spending.
- Commitments:
  - regularly publish on the government’s website (SERCOP) COVID-19-related public procurement contracts and related documents, including the names of the awarded companies and their beneficial owners, and ex-post validation of delivery, as well as information on all other COVID-19 related spending;
  - undertake an independent audit of COVID-19-related spending by the Office of the Comptroller General by mid-2021 and publish the results;
  - any additional spending or initiatives to combat the pandemic will be subject to similar assurances.
- Publication of revised statistics:
  - published revised 2019 Non-Financial Public Sector finance statistics by sub-sectors and a calendar for backward revisions from 2018 to 2012.

### Structural reforms and institutional commitments
- Ongoing and planned reforms:
  - modernize labor contracts (included in the Emergency Economic Law submitted to the National Assembly);
  - reform the organic monetary and financial code (COMYF);
  - reform the AML framework;
  - implement an asset declaration regime;
  - reform PPP regulations.
- Compliance and international obligations:
  - Ecuador will comply with the provisions of the IMF’s Articles of Agreement and intends to avoid imposing new or intensifying existing restrictions inconsistent with Article VIII of the IMF’s Articles of Agreement;
  - update the Memorandum of Understanding (MoU) signed in March 2019 between the Ministry of Economy and Finance and the Central Bank of Ecuador to account for the new disbursement;
  - Ecuador will continue to comply with the Fund’s safeguards policies.

### IMF financing requests and program status
- Program notifications and requests:
  - notify the current Extended Fund Facility (EFF) approved on March 11, 2019 to be cancelled with immediate effect;
  - request urgent assistance under the Rapid Financing Instrument (RFI) in the maximum amount available to Ecuador at this point under current IMF policies, SDR 469.7 million, to address urgent balance-of-payment and fiscal needs;
  - approximately USD 641 million (67.3 percent of quota) in IMF financial assistance is referenced with appreciation for timely response under the RFI.
- Authorities’ program intentions:
  - intend to conclude a new medium-term EFF program as soon as possible once conditions allow;
  - stand ready to implement additional measures and to provide information requested by the Fund and consent to publication of this letter and accompanying Executive Board documents.

### Contextual chronology and final remarks
- Key dates mentioned:
  - first reported case: late February;
  - second week of March: state of emergency declared and nationwide lockdown imposed;
  - March 21: national curfew implemented;
  - April 16: Economic Emergency Law and COPLAFIP amendments submitted to the National Assembly;
  - April 17: consent solicitation accepted by bondholders to defer payments over USD 800 million;
  - April 28: COVID-19 case and death counts reported;
  - May 1, 2020: Statement by Ecuador’s Executive Director and delegation.
- Final policy posture:
  - remain deeply committed to preserving fiscal discipline and ensuring debt sustainability;
  - concerted dialogue with business, social sectors, and international partners to preserve confidence and financial stability and protect the most vulnerable;
  - authorities stand ready to take additional measures as the situation evolves and view the Fund as a vital partner in pursuing a sustainable, inclusive recovery.

*Source: 1ecuea2020001 - 2.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ecuea2020001.pdf_