## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1ecuea2020002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1ecuea2020002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1ecuea2020002.pdf.json) --- ### Context and overview - On May 1, 2020, the Executive Board approved an RFI (US$643 million, 67.3 percent of quota); the authorities cancelled the three-year Extended Fund Facility arrangement (US$ 4.2 billion, 435 percent of quota). - Authorities requested a 27-month EFF of SDR 4.615 billion (about US$6.5 billion, 661 percent of quota) to: - Mitigate the crisis by protecting lives and livelihoods and restoring macroeconomic stability. - As recovery proceeds, ensure sustainability of public finances and strengthen domestic institutions to lay foundations for strong, job-rich, and long-lasting growth. - Staff estimates Ecuador’s financing needs through 2022 are around US$6.5 billion after factoring in: the successful restructuring of external bonds, specific and credible financing/debt relief from official bilateral creditors, other committed financing and prospects for additional IFI contributions, and an ambitious fiscal consolidation. - The proposed access would be made available to the budget. ### Exceptional access, political/institutional conditions, and risks - Exceptional access criteria: - Criteria 1 and 3: met based on Ecuador’s BOP needs and prospects for regaining market access. - Criterion 2: met given the successful debt exchange, credible financing assurances, other committed financing, and an ambitious fiscal plan — debt assessed sustainable with high probability. - Criterion 4: met owing to timely implementation of prior actions and commitments to early structural benchmarks; President signed a letter of support (September 22, 2020); National Assembly issued a supporting statement. - Political assurances: - Political assurances received from a broad range of presidential candidates supportive of program objectives; one candidate agreed to close dialogue; one candidate not yet ready to engage. - Key risks: - Heightened global uncertainties, domestic political fragmentation, limited buffers. - Successful implementation hinges on buy-in and political will of the next administration and legislators. - Little room for deviations; slippages could severely strain capacity to repay and delay capital market re-access. ### Background and recent developments - Pre-COVID vulnerabilities: - Ecuador entered the pandemic addressing vulnerabilities under a 2019 EFF (about $4.2 billion, SDR 3,035 million or 435 percent of quota) approved March 2019. - Progress under 2019 EFF: - Improved fiscal balances; initial steps to strengthen central bank independence; governance and transparency reforms; measures to strengthen social safety net. - Implementation challenges: - Political fragmentation and capacity constraints; major tax reform watered down; central bank reform substituted with partial legislation; program targets were reset; misreporting case in December 2019. - COVID-19 shocks and impact: - Containment measures, slump in external demand, collapse in oil prices, temporary disruption of oil production. - Projected contraction of economic activity by 11 percent in 2020 and deep government revenue contraction alongside increased health and social spending. - Loss in competitiveness from a strong US dollar weakened exports. ### High-frequency indicators and macro-financial developments - Oil and exports: - Landslide damaged pipelines in April, disrupting production ~5 weeks and causing loss of about 14 million barrels. - Ecuador mix oil prices plunged in 2020:Q2, touching US$27. - Exports collapsed more than 45 percent (about US$600 million) between 2020:Q1 and 2020:Q2. - Activity, inflation, employment, external current account: - Real GDP dropped by 2.4 percent (y-o-y) in 2020:Q1; economic activity index plunged about 35 percent (y-o-y) in April and recovered to -15½ percent in June. - Inflation rose to 1 percent (y-o-y) in April/May and retreated to -0.8 percent in August. - Private sector job losses exceeded 200,000 between March and June; unemployment rose to over 13 percent in June, from 3.8 at end-December 2019. - Current account registered a modest surplus of roughly $0.4 billion in 2020:Q1 due to sharp import compression despite dollar appreciation. - Fiscal developments: - Fiscal position improved in 2020:Q1, recording a surplus of about US$500 million at the NFPS level. - Deteriorated in Q2 to a deficit of about US$2.1 billion, driven by lower tax revenues, COVID-related spending and social security contributions, resulting in large domestic payment arrears by the central government to other public entities. - Financial system and market indicators: - Banking system deposits contracted by 2.8 percent at the onset in March; credit growth declined sharply. - Bank capitalization and portfolio quality reportedly remain adequate; liquidity buffers recovered partly due to drop in credit demand. - EMBI spread rose to nearly 6000 bps early in the crisis and dropped below 1,000 bps after rebound in oil prices and a market-friendly debt exchange of $17.4 billion in global bonds. - S&P and Fitch upgraded Ecuador’s sovereign credit rating from selective/restrictive default to “B-”. - Gross international reserves stood at about $3.2 billion at end-August, supported by IFI disbursements; NIR remains deeply negative. ### Policy response and social/financial measures (amounting to $1.2 billion in 2020) - Health and social support: - Exceptional cash transfers to poor families: $250 million. - Distribution of food baskets. - Temporary relaxation of eligibility criteria for unemployment insurance: $372 million. - Additional spending on health: $550 million. - Measures supplemented by deferrals (payroll contributions, tuition, health insurance), utilities, housing support, temporary price controls for basic food items, employment support (mutually agreed contract changes, shorter work weeks, flexible arrangements). - Liquidity and credit support: - Banks’ contribution rate to the Liquidity Fund reduced by three percentage points of deposits (to 5 percent), freeing about $950 million in liquid assets. - Extraordinary deferral of private credit obligations on a voluntary basis (recently extended); mandated revision of ceilings on interest rates; Reactivate Ecuador working capital facility partly financed by the World Bank. - Note: prolonged deferment measures could weaken financial institutions’ balance sheets and present downside risks. ### Program financing, conditionality, and timelines - RFI approved May 1, 2020 covered only 8 percent of estimated financing gap for 2020 at the time. - Requested 27-month EFF (about $6.5 billion, SDR 4.615 billion or 661 percent of quota) designed to cover financing needs through 2022, subject to exceptional access criteria and conditionality, including prior actions and early structural benchmarks to strengthen institutions, policy frameworks, and governance. --- ### Fiscal measures to limit crisis impact and composition - Annual yield of measures implemented: $2.4 billion. - Measures included: - Sharp reduction in capital spending. - Temporary reduction in working hours of public sector employees (excluding critical sectors), reducing public sector wage bill. - Closure of selected SOEs and embassies. - Cuts in goods and services spending. ### Fuel subsidy reform and redistribution (May 2020) - Reform features: - Formula-based pricing mechanism linking domestic diesel and gasoline retail prices to supply costs. - Monthly changes capped to prevent large swings in retail prices. - Expected outcomes: - Long-lasting fiscal savings. - Part of savings to compensate low-income households for fuel price increases. - Encourage efficient energy use and reduce inequality by reallocating resources to lower income households. - Fiscal savings estimate: - Landmark subsidy reform expected to generate fiscal savings totaling almost $3 billion between 2020 and 2025 compared to a no-reform scenario. ### Public financial management: COPLAFIP and debt anchor - COPLAFIP (amended organic budget code, adopted July 2020) provisions: - Public debt anchor: 40 percent of GDP to be achieved by 2032. - Intermediate debt limits: 57 and 45 percent of GDP to be reached by 2025 and 2030, respectively. - Establishes operational fiscal rules at the central government level to guide policy toward NFPS debt target. - Includes provisions for strengthening public financial management and reducing discretionary budget spending. ### Debt restructuring - Global bonds restructured with 98 percent participation covering $17.4 billion of global bonds. - Operation parameters aligned with RFI DSA targets: - Debt-to-GDP ratio targets: 55 and 45 percent in 2025 and 2030, respectively. - Average gross financing needs of 6 percent over 2025-30. - New bonds: - Extend average maturity of external bonds by 10 years, to 2040. - Carry coupons about half those of old bonds. - Principal amortization begins in 2026, providing liquidity relief in next 5 years. ### Outlook: activity, inflation, financial sector, external balance - 2020 GDP contraction drivers (aggregate -11 percentage points): - Containment measures: -8.2 ppts. - Drop in oil prices: -2 ppts. - Damages to crude oil pipelines: -0.8 ppts. - Real GDP expected to return to 2019:Q4 level only by 2025:Q2. - Potential growth expected at 2½ percent. - Inflation: - Expected to average zero in 2020. - Expected to rise to 1 percent in 2021 and remain 1 percent in the medium term. - Banking sector asset quality and liquidity: - Current NPLs: 2.7 percent of total loans. - Private banks’ provisioning coverage: 278 percent of reported NPLs at end-July. - Non-banks NPLs: 4.3 percent. - Public banks NPLs: 8.1 percent. - Liquidity: 30 percent in liquid assets to short-term liabilities. - External sector: - Oil export receipts in 2020 expected to be cut by half. - Tourism income decline: by more than 30 percent vs 2019. - Workers’ remittances decline: 27 percent. - Imports compressed by 19 percent. - Current account expected to post a deficit of about 2 percent of GDP in 2020 (from near-balanced in 2019). - Medium-term current account expected to strengthen to 0.7 percentage points of GDP. - REER judged overvalued by about 30 percent. ### Risks (selected downside and upside) - Downside: - More severe/protracted COVID-19; protracted recovery; further collapse/volatility in oil prices; reemergence of social tensions; policy slippages; long-term scarring and protectionism. - In dollarized economies, downside risks would require greater fiscal effort to meet COPLAFIP debt targets. - Upside: - Faster global recovery, improved asset monetization environment, more depreciated US dollar, and more ambitious structural reforms boosting productive capacity. ### Social safety nets and poverty impacts - UNICEF estimates poverty rate would increase by 10 percentage points in 2020, pushing an additional 1.8 million persons into poverty. - Social assistance expansion targets: - Increase coverage of low-income beneficiaries of cash transfers from 37 percent of families in the bottom three deciles to 80 percent by December 16, 2021 (structural benchmark, MEFP ¶4). - Program envisages gradual expansion of benefits to 225,000 and 400,000 new beneficiary families in 2020 and 2021, respectively. - Cost and financing: - Additional cumulative cost for expanding coverage: about $650 million between 2020 and 2022. - Partly financed by excluding non-poor families yielding cumulative savings of around $130 between 2021 and 2022, and by savings from subsidy reform. - Implementation requirement: update the Social Registry to identify families below the poverty line; authorities to monitor progress. ### Restoring fiscal sustainability while supporting population - 2020 fiscal changes (US$ millions, change 2020-19): - Revenues: -7,908 - Oil Revenues: -3,247 - Non-oil Revenues: -4,014 - o.w. Tax Revenues: -2,610 - Operating Surplus of SOEs: -647 - Expenditures: -3,011 - Current (excl. Covid-related spending): -2,428 - o.w. Wages and Salaries: -751 - CFDD +SH: -1,594 - Capital: -1,317 - Interest Payments: -46 - Covid-related spending: 800 - Overall Balance: -4,898 - Revenues expected to fall by $8 billion in 2020 vs 2019. - Lower oil prices expected to generate savings on imports of oil byproducts: $1.4 billion. - Expenditure cuts in Q2: $2.4 billion annual savings, allowing support for vulnerable households and health (~$800 million) and expanding social security benefits (~$300 million). - Result: higher fiscal deficit reaching $8.3 billion in 2020, around $5 billion higher vs 2019; overall balance expected to deteriorate by 5.7 ppt of GDP from previous year. ### Path to fiscal sustainability (post-pandemic) - Mechanical improvements in 2021 expected from: - Lower interest payments following bond restructuring. - Higher oil revenues from higher domestic sales prices. - Improvement in economic activity bringing higher tax revenues. - Rolling back $800 million in COVID-related spending once crisis subsides. - Rationalizing capital expenditures and reducing goods and services spending. - These changes would allow an improvement in the overall balance of $5.4 billion (6 ppt of GDP) in 2021 vs 2020. - Medium-term consolidation target: - Fiscal consolidation of 5.5 ppt of GDP of the overall NFPS balance over 2019-25 (about 5.5 ppt improvement in the non-oil primary balance including fuel subsidies). - Aim to achieve public debt sustainability reflected in COPLAFIP targets. ### Fiscal consolidation measures (composition and yields) - Consolidation to include both revenue and expenditure measures: - Permanent measures balancing revenue increases (2½ ppts of GDP) and expenditure restraint (2.9 ppts of GDP), while protecting lower income families. - Key elements: - Growth-friendly tax reform (structural benchmark end-September 2021) expected permanent yield: over 2½ ppt of GDP. - Wage bill rationalization: temporary reductions in working hours extended through May 2021 for non-critical sectors; medium-term measures include wage cuts for new hires, hiring freezes, promotion freezes, attrition (one for two replacement rate). - Improved public procurement: target savings in goods and services of 0.7 percent of GDP by 2025. ### VAT and other tax measures (aggregate figures and selected items) - VAT measures and revenue impacts (numeric items as presented): - 3 percentage point increase in VAT rate (from current 12 percent): 1.38 - Reduction in VAT exemptions for the universities: 1.25 - Eliminate VAT refund to the elderly: 0.02 - Other tax measures (selected): - Inclusion of the 13th and 14th salaries in PIT base: 0.65 - Modification to PIT brackets to increase progressivity: 0.09 - VAT creditable against PIT: 0.14 - Eliminate reduced CIT rate for productive assets: 0.40 - Introduction of accelerated depreciation: 0.10 - Outflow tax creditable against the CIT: -0.20 - Excise tax on gasoline: 0.39 - Introduction of an environmental tax on CO2 emissions: 0.10 (another environmental tax entry repeated): 0.25 - Key aggregate figure: - Total revenue increase: 2.52 - Source: Ministry of Finance and IMF staff calculations. - Rebalancing spending from fuel subsidies to social assistance: - Subsidy reform expected to generate almost $3 billion between 2020 and 2025; about 0.9 percent of GDP of those savings to finance higher priority public spending. ### Select fiscal projections (change from previous year, percent of GDP) - Revenue yearly changes: - 2020: -0.6 - 2021: 0.3 - 2022: 2.2 - 2023: 0.6 - 2024: 0.1 - 2025: 0.0 - 2020-2025: 2.6 - Expenditure (total, yearly): - 2020: -1.9 - 2021: 3.0 - 2022: 0.8 - 2023: 0.8 - 2024: 0.2 - 2025: 0.0 - 2020-2025: 2.9 - Total summary (expenditure and revenue combined): - 2020: -2.6 - 2021: 3.3 - 2022: 3.0 - 2023: 1.4 - 2024: 0.3 - 2025: 0.0 - 2020-2025: 5.5 ### Strengthening fiscal frameworks, governance, and transparency (selected commitments) - Operationalize COPLAFIP: - Prior action: regulation to report subsector NFPS data adopted. - Structural benchmark: follow-up regulation to implement July 2020 amendments by end-November 2020. - Cash and debt management: - Prior action: financial plan prepared and approved by MEF Financial Committee for remainder of year. - Structural benchmark: similar plan for 2021 to be prepared (due December 16, 2020). - MTDS publication targeted end-February 2021. - Arrears evaluation and framework: structural benchmark end-April 2021. - Procurement transparency prior action: regulation mandating publication of all public procurement contracts and names of awarded entities and beneficial owners. - Transparency in public debt: authorities publishing sovereign debt contracts as legally permissible. ### Central Bank institutional framework and financial stability - COMYF amendments: - Amendments to COMYF targeted for adoption by National Assembly by end-January 2021 (structural benchmark). - Prior actions: JPRF resolution on BCE external auditor selection and rotation policy; establishment of an audit committee. - Audit committee to prepare charter aligned with best international practices by end-November 2020 (structural benchmark). - Financial stability measures: - Roll-back liquidity support as crisis subsides to preserve integrity of liquidity fund. - Stress tests and TA: Fund providing TA for stress-testing capabilities; World Bank working on medium- to long-term intermediation issues. - Authorities plan a financial sector coordination committee (JPRF, BCE, MEF, Superintendencies, deposit insurance). ### Competitiveness, SOEs, labor market, capital markets, and inclusion - SOE framework: - Revamp SOE law with IADB assistance; require SOEs to pay taxes at same rate as private firms; comply with same labor regulations and accounting standards; allow external auditors. - Business climate: - Ecuador ranks 90th out of 141 countries in global competitiveness indicators. - AML/CFT regulations amended to enhance due diligence for senior officials and PEPs. - Labor market: - Humanitarian Law measures led to estimate of 45,000 jobs saved and 100,000 new ones since enactment in late June. - Authorities to work with World Bank to anchor minimum wage to inflation and productivity. - Domestic capital markets and financial inclusion: - Plans to standardize government securities, develop a yield curve, lengthen maturities, implement MTDS, and a financial inclusion strategy with the World Bank (implementation start by end-January 2021). ### Program modalities, access, and conditionality - Proposed access level: $6.5 billion (SDR4,615 million) — Ecuador’s estimated residual financing needs in 2020–22. - Fund financing to be made available to the budget; access frontloaded. - Disbursement cadence: quarterly reviews in 2020, triannual cycle in 2021 when fiscal QPC shifts from central government to NFPS balance. - If additional financing becomes available, authorities would build deposits rather than raise the deficit. - Quantitative performance criteria (QPCs) include: - Floor on the overall balance of the central government until August 2021. - Floor on the overall balance of the NFPS from August 2021 onwards. - Floor on accumulation of NFPS deposits at the central bank. - Non-accumulation of external payments arrears (continuous). - No net credit to government from the central bank (continuous). - Indicative targets (ITs) include: - Floor on the non-oil primary balance of the NFPS (including fuel subsidies). - Floor on the overall balance of the NFPS until August 2021. - Floor on net international reserves. - Floor on coverage of cash transfer programs for lower income households (target: reach 80 percent by end-2021). --- ### Capacity to repay, financing assurances, and safeguards ### Capacity to repay — key findings - Proposed access leads to peak Fund credit reaching $8.6 billion (874 percent of quota) in 2022. - Gross financing needs (including Fund repayments) would range between 2.8 to 5 percent of GDP in the repayment period. - Peak Fund obligations constitute 5.1 percent of exports and 3.3 percent of government revenues; peak share of gross reserves at 20 percent. - Net international reserves projected to remain deeply negative at program completion; sustaining access to financing and creditor support is critical. - Staff judge adequate capacity to repay contingent on program implementation and other creditor support; limited room for maneuver. ### Financing assurances and reliance - Firm financing commitments for first 12 months and good prospects for remainder, including IFIs and official bilateral creditors. - Financing in post-program years partly predicated on conservative market access assumptions. - Authorities view asset monetization as important in latter program part; technical work for some asset monetization programs fairly advanced. - Authorities agree additional fiscal efforts may be needed if financing shortfalls occur. ### Political assurances and safeguards - Political assurances adequate from a broad range of candidates. - Safeguards: - Last BCE safeguards assessment finalized June 2019; updated safeguards assessment not required. - Fiscal safeguards review needed given exceptional access and >25 percent of resources to budget support. - Two prior actions (BCE external audit and audit committee) directly address safeguards recommendations; most remaining recommendations require enactment of new central bank law. ### Lending into arrears and Article VIII / CFM - Residual arrears to private bond holders from 2008/2009: US$52 million remain outstanding; authorities unable to identify holders to settle. - Authorities established public procedure if holder requests liquidation. - Staff judge good faith efforts have been made; will monitor requirements under policy on lending into arrears at each review. - Authorities indicated no outstanding arrears to bilateral or multilateral creditors. - Authorities committed to phase out tax on transfers abroad once macro stability restored and reserves strengthened; requested temporary Fund approval for exchange restriction arising from that tax for BOP reasons. ### Assessment of Exceptional Access Criteria (Box 1 summary) - Criterion 1: Exceptional BOP pressures; estimated financing gap $6.5 billion over 2020-22. - Criterion 2: Public debt projected to decline from projected peak 69 percent of GDP end-2020 to 56½ percent by 2025 and 39.1 percent by 2030 after restructuring and creditor assurances; staff assess debt sustainable with high probability. - Criterion 3: Historical evidence suggests regaining market access within 24-36 months; EMBI spread declined below 1000 bp and ratings upgraded to B-. - Criterion 4: Policy program provides reasonably strong prospect of success; prior actions and early structural benchmarks taken, though institutional capacity and political fragmentation pose risks. ### Staff appraisal — key recommendations - Swift policy responses prevented deeper crisis; combine short-term measures with steps toward long-term fiscal sustainability. - Expand social assistance coverage to limit fallout and compensate vulnerable households. - Implement ambitious public finance strengthening to complement debt exchange and ensure sustainability; rollback crisis-related measures and adopt comprehensive fiscal package. - Operationalize COPLAFIP regulations swiftly, adopt robust cash management (longer-horizon cash forecasting, financial planning). - Improve procurement transparency, strengthen anticorruption framework, continue debt transparency; publish MTDS by February 2021. - Strengthen BCE institutional framework to safeguard dollarization; align audit function with international standards. - Preserve liquidity fund assets, avoid further reductions in bank contributions, monitor credit risk accumulation, enhance supervision agility, and establish Financial Coordination Committee. - Implement longer-term structural reforms to raise growth potential and competitiveness (governance, anticorruption, AML/CFT, SOEs, labor markets, business environment). --- ### Data, capacity building, coordination, and monitoring ### Data gaps, capacity, and reporting commitments (selected) - Close coordination between MEF and NFPS subsectors required for internally consistent fiscal statistics. - STX and LTX support: - STA short-term expert to compile GFS time series for NFPS and subsectors and prepare compilation guide (end-May 2021 structural benchmarks). - IMF-funded LTX in PFM to start in October; STX to work through May 2021 to compile corrections and guides. - Reporting frequency and monitoring: - Weekly NFPS deposits at BCE provided within 5 business days after week end. - Monthly NFPS debt stock provided with lag no more than 60 days. - Daily monetary and financial data templates within 1 business day. - Monthly fiscal data within 60 days of test dates; preliminary monthly data with lag no more than 45 days. - Technical Memorandum of Understanding (TMU) defines adjustors (oil price: US$23.85 million per US$1 per barrel, capped at US$119.33 million) and precise definitions for program PCs and ITs. ### Program monitoring, prior actions, and structural benchmarks (selected) - Prior actions (selected): - Adopt regulation to implement July 2020 COPLAFIP amendments on reporting (PA). - Enact regulation to mandate publication of all public procurement contracts (PA). - Deliver PGE financial plan approved by MEF Financial Committee (PA). - JPRF resolutions to adopt external auditor policy and create audit committee (PA). - Structural benchmarks (selected with due dates): - Adopt remaining COPLAFIP regulations (End-Nov. 2020). - BCE internal audit charter aligned with international standards (End-Nov. 2020). - Enhance online asset declaration publication (End-Nov. 2020). - Deliver PGE financial plan for 2021 (Dec. 16, 2020). - Enactment of anticorruption legislation (End-Dec. 2020). - Enactment of COMYF amendments (End-Jan. 2021). - Publish MTDS (End-Feb. 2021). - Correct and publish historical NFPS data back to 2012 (End-May 2021). - Independent audit of COVID-related spending by Office of the Comptroller General (End-Jun. 2021). - Enact tax reform elaborated with Fund staff (End-Sep. 2021). - Upgrade social registry and expand coverage to at least 80 percent of families in bottom three deciles (Dec. 16, 2021). ### Program review schedule and communications - First review expected on or after December 15, 2020; second review on or after April 15, 2021. - A communications strategy developed and started implementation end-August 2020 to articulate program benefits and build social consensus. --- *Source: EXECUTIVE SUMMARY (Content unit: 1ecuea2020002) — IMF document.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and overview - On May 1, 2020, the Executive Board approved an RFI (US$643 million, 67.3 percent of quota) to support urgent needs after the COVID-19 crisis; the authorities cancelled the three-year Extended Fund Facility arrangement (US$ 4.2 billion, 435 percent of quota). - The authorities requested a 27-month EFF of SDR 4.615 billion (about US$6.5 billion, 661 percent of quota) to restore macroeconomic stability, support the most vulnerable, and advance the structural reform agenda initiated under the previous EFF. - Program objectives: - Mitigate the crisis by protecting lives and livelihoods and restoring macroeconomic stability. - As recovery proceeds, ensure sustainability of public finances and strengthen domestic institutions to lay foundations for strong, job-rich, and long-lasting growth. - Program modalities: - Staff estimates Ecuador’s financing needs through 2022 are around US$6.5 billion after factoring in: the successful restructuring of external bonds, specific and credible financing assurances on financing/debt relief from official bilateral creditors, other committed financing and good prospects for additional contributions from international financial institutions (IFIs), and an ambitious, yet realistic, fiscal consolidation. - The proposed access would be made available to the budget. ### Exceptional access and political/institutional conditions - The proposed access level is subject to the four exceptional access (EA) criteria, which have been met (Box 1): - Criteria 1 and 3: met based on Ecuador’s BOP needs and prospects for re-gaining market access. - Criterion 2: met given the successful debt exchange of external bonds, specific and credible assurances on financing/debt relief, other committed financing, and Ecuador’s commitment to an ambitious plan to ensure fiscal sustainability — debt is assessed to be sustainable with high probability. - Criterion 4: met owing to timely implementation of prior actions and commitments to early structural benchmarks, the President signing a letter of support to the program (September 22, 2020), and a statement by the National Assembly in support of broad program objectives. - Political assurances: - Political assurances have been received from a broad range of presidential candidates supportive of program objectives and key policies. - One candidate offered support and agreed to remain in close dialogue with Fund staff to address divergences; one candidate was not yet ready to engage. - Risks: - Program remains subject to substantive risks due to heightened global uncertainties, domestic factors requiring continued commitment from future administrations, and limited buffers. - Successful implementation hinges on buy-in and political will of the next administration and legislators in the National Assembly. - With program policies fully implemented and baseline projections materializing, debt is sustainable with high probability and capacity to repay is deemed adequate; however, there is little room for deviations and slippages could severely strain capacity to repay, including delaying capital market re-access. ### Background and recent developments - Pre-COVID vulnerabilities: - Ecuador entered the pandemic already addressing vulnerabilities under a 2019 EFF (about $4.2 billion, SDR 3,035 million or 435 percent of quota) approved March 2019. - The 2019 EFF aimed to restore growth, put debt on a downward path, build reserve buffers, restore international competitiveness, improve governance and policy/institutional frameworks, and improve the social assistance system. - Progress under the 2019 EFF: - Significant steps taken to improve fiscal balances, strengthen institutional foundations of dollarization, and provide support to vulnerable groups. - Reforms included reform of fiscal institutions, initial steps to strengthen central bank independence, governance and transparency reforms, and measures to strengthen the social safety net. - Implementation challenges: - Political fragmentation and capacity constraints impeded program implementation; lack of coordination across government entities hindered effective monitoring. - A major tax reform was watered down before approval by the Assembly; central bank reform was substituted with partial legislation; program targets were reset and there was a case of misreporting in December 2019. - COVID-19 and 2020 shocks: - A confluence of exogenous shocks in 2020 compounded pre-existing vulnerabilities: containment measures, slump in external demand, collapse in oil prices, and temporary disruption of oil production. - These shocks led to a projected contraction of economic activity by 11 percent in 2020 and a deep contraction of government revenues, alongside increased spending on health and social support. - Loss in competitiveness from a strong US dollar further weakened exports. ### High-frequency indicators and macro-financial developments - Oil and exports: - In April a landslide damaged two large crude oil distribution pipelines, disrupting production for about 5 weeks and resulting in a loss of about 14 million barrels. - Ecuador mix oil prices plunged in 2020:Q2, touching US$27. - Exports collapsed more than 45 percent (about US$600 million) between 2020:Q1 and 2020:Q2. - Real activity, inflation, employment, and external current account: - Real GDP dropped by 2.4 percent (y-o-y) in 2020:Q1; economic activity index plunged by about 35 percent (y-o-y) in April and recovered to -15½ percent in June. - Inflation rose to 1 percent (y-o-y) in April/May and retreated to -0.8 percent in August. - Private sector job losses exceeded 200,000 between March and June; unemployment rose to over 13 percent in June, from 3.8 at end-December 2019. - Despite dollar appreciation, the current account registered a modest surplus of roughly $0.4 billion in 2020:Q1 due to a sharp compression of imports. - Fiscal developments: - The fiscal position improved in 2020:Q1, recording a surplus of about US$500 million at the NFPS level. - It deteriorated significantly in Q2, reaching a deficit of about US$2.1 billion, driven by lower tax revenues, COVID-related spending and social security contributions, resulting in large domestic payment arrears by the central government largely to other public entities. - Financial system and market indicators: - Banking system deposits contracted by 2.8 percent at the onset of the Covid-19 crisis in March; credit growth declined sharply. - Bank capitalization and portfolio quality reportedly remain adequate and liquidity buffers have recovered partly due to a drop in credit demand. - EMBI spread rose to nearly 6000 bps early in the crisis and dropped below 1,000 bps following rebound in oil prices and a market-friendly debt exchange of $17.4 billion in global bonds. - S&P and Fitch upgraded Ecuador’s sovereign credit rating from selective/restrictive default to “B-“. - Gross international reserves stood at about $3.2 billion at end-August, supported by IFIs disbursements, but NIR remains deeply negative. ### Policy response and social/financial measures - Health and social support measures (amounting to $1.2 billion in 2020): - Exceptional cash transfers to poor families: $250 million. - Distribution of food baskets. - Temporary relaxation of eligibility criteria for unemployment insurance: $372 million. - Additional spending on health: $550 million. - Measures supplemented by deferral of payroll contributions, tuition, health insurance, utilities, housing support, temporary price controls for basic food items, and measures to support employment (mutually agreed changes in labor contracts, shorter work weeks, flexible arrangements). - Liquidity and credit support: - Banks’ contribution rate to the Liquidity Fund reduced by three percentage points of deposits (to 5 percent), freeing up about $950 million in liquid assets. - Extraordinary deferral of private credit obligations on a voluntary basis (recently extended), mandated revision of ceilings on interest rates, and a working capital facility (Reactivate Ecuador) partly financed by the World Bank. - Note: prolonged deferment measures could weaken financial institutions’ balance sheets and represent downside risks to the financial system during transition to the post-emergency period. ### Program financing, conditionality, and timelines - The RFI approved on May 1, 2020 covered only 8 percent of the estimated financing gap for 2020 at the time. - The requested 27-month EFF (about $6.5 billion, SDR 4.615 billion or 661 percent of quota) is designed to cover financing needs through 2022, subject to exceptional access criteria and conditionality, including prior actions and early structural benchmarks to strengthen institutions, policy frameworks, and governance. *Source: EXECUTIVE SUMMARY (Content unit: 1ecuea2020002) — IMF document.* ### 15. Given limited options amid increased COVID-related spending and revenue shortfalls, ### 15. Given limited options amid increased COVID-related spending and revenue shortfalls, ### Fiscal measures to limit the crisis impact - Government measures from the onset of the crisis rationalized spending and "kept the deficit in Q2 under control." - Annual yield of the measures: $2.4 billion. - Measures included: - Sharp reduction in capital spending. - Temporary reduction in the number of working hours of public sector employees (excluding critical sectors such as health, police, and the armed forces), with a corresponding reduction in the public sector wage bill. - Closure of selected SOEs and embassies. - Cuts in goods and services spending. ### Fuel subsidy reform and redistribution - Authorities reformed gasoline and diesel subsidies (May 2020) to reduce economic distortions and generate long-lasting fiscal savings. - Reform features: - Formula-based pricing mechanism for diesel and gasoline linking domestic retail prices to supply costs. - Monthly changes are capped to prevent large swings in retail prices. - Expected outcomes: - Long-lasting fiscal savings. - Part of savings used to compensate low-income households for fuel price increases. - Encourage more efficient energy use. - Reduce inequality by reallocating government resources to lower income households. - Rationale (as stated): - Fuel subsidies involve high fiscal costs and accrue mostly to higher income households. - Fuel subsidies can (i) magnify the macroeconomic and fiscal impact of volatile international prices; (ii) result in excessive environmental costs; and (iii) lead to illegal and disruptive cross-country smuggling. - Effect on social safety nets: - Reduction of regressive subsidies will allow reallocation of resources to strengthen social safety nets, consistent with Ecuador’s inclusive growth agenda. ### Public financial management: COPLAFIP and debt anchor - Recently amended organic budget code (COPLAFIP), adopted in July 2020, improves public financial management. - COPLAFIP provisions: - Public debt anchor of 40 percent of GDP to be achieved by 2032. - Intermediate debt limits of 57 and 45 percent of GDP to be reached by 2025 and 2030, respectively. - Establishes operational fiscal rules at the central government level aimed at guiding fiscal policy toward achieving the debt target of the nonfinancial public sector (NFPS). - Includes other provisions for strengthening public financial management and reducing discretionary budget spending. ### Debt restructuring - Authorities restructured global bonds with very high participation: - Support from 98 percent of bondholders holding $17.4 billion of Ecuador’s global bonds. - Operation parameters aligned with RFI debt sustainability targets: - Debt-to-GDP ratio targets: 55 and 45 percent in 2025 and 2030, respectively. - Average gross financing needs of 6 percent over 2025-30. - Features of new bonds: - Extend average maturity of external bonds by 10 years, to 2040. - Carry coupons with rates about half that of the old bonds. - Principal amortization begins in 2026, providing liquidity relief in the next 5 years. ### Outlook: activity, inflation, financial sector, and external balance - 2020 GDP contraction and drivers: - Collapse in real activity due to containment measures: -8.2 ppts. - Drop in oil prices: -2 ppts. - Damages to crude oil pipelines: -0.8 ppts. - Aggregate impact: economy dragged down by 11 percentage points in 2020. - Real GDP expected to return to its 2019:Q4 level only by 2025:Q2. - Growth medium-term: - Potential growth expected at 2½ percent. - Inflation projections: - Inflation expected to average zero in 2020. - Inflation forecast to rise to 1 percent in 2021. - Inflation to remain low at 1 percent in the medium term. - Asset quality and banking sector: - Current NPLs: 2.7 percent of total loans. - Private banks’ provisioning coverage: 278 percent of reported NPLs at end-July. - Non-banks NPLs: 4.3 percent. - Public banks NPLs: 8.1 percent. - Liquidity: 30 percent in liquid assets to short-term liabilities. - Current account and external position: - Oil export receipts in 2020 expected to be cut by half. - Tourism-related income decline: by more than 30 percent compared to 2019. - Worker’s remittances decline: 27 percent. - Imports compressed by 19 percent. - Current account expected to post a deficit of about 2 percent of GDP in 2020 (from a near-balanced position in 2019). - Medium-term current account expected to strengthen to 0.7 percentage points of GDP. - Real effective exchange rate (REER) judged to be overvalued by about 30 percent. - Recommendation: fiscal prudence and enhanced business environment to attract FDI given dollarization limits. ### Risks - Downside risks highlighted: - More severe and/or protracted COVID-19 pandemic leading to higher fiscal cost. - Protracted domestic or global economic recovery causing larger revenue declines and delayed private sector recovery. - Further collapses and/or volatility in oil prices and associated international financial volatility, raising risk premia and pressure on public and private finances. - Reemergence of social tensions, policy slippages, lack of political cohesion or social consensus undermining structural reforms. - Long-term scarring, increased protectionism, and structural de-globalization harming growth prospects. - In dollarized economies, downside risks would likely require greater fiscal effort to meet COPLAFIP debt targets. - Upside risks: - Faster recovery of global economy, trading partners, and oil prices. - Improved environment for asset monetization and a more depreciated US dollar. - More ambitious structural reforms boosting productive capacity, including labor market reforms. ### Objectives under the Extended Fund Facility (EFF) - Program aims (consistent with Plan de Prosperidad): - Mitigate the crisis by protecting lives and livelihoods and restoring macroeconomic stability. - Ensure sustainability of public finances and strengthen domestic institutions, including the foundation for dollarization, for strong, job-rich, and long-lasting growth. - Improve transparency, governance, and data quality and timeliness. ### Expanding social safety nets - Immediate priority: extend lifelines to households and increase social assistance coverage over time. - Poverty impact estimates: - UNICEF estimates poverty rate would increase by 10 percentage points in 2020, pushing an additional 1.8 million persons into poverty. - Social assistance expansion targets: - Goal to more than double coverage of low-income beneficiaries of cash transfers from 37 percent of families in the bottom three deciles to 80 percent by December 16, 2021 (structural benchmark, MEFP ¶4). - Program envisages gradual expansion of benefits (mostly Bono de Desarrollo Humano) to 225,000 and 400,000 new beneficiary families in 2020 and 2021, respectively. - Cost and financing: - Additional cumulative cost for expanding coverage: about $650 million between 2020 and 2022. - Partly financed by excluding non-poor families yielding cumulative savings of around $130 between 2021 and 2022, and by savings from the subsidy reform. - Implementation requirements: - Political commitment to update the Social Registry to identify families below the poverty line. - Authorities implementing measures to monitor progress in updating the social registry and expanding coverage. ### Restoring fiscal sustainability while supporting the population - 2020 fiscal picture: - Revenues expected to fall by $8 billion in 2020 compared to 2019. - Lower oil prices expected to generate savings on imports of oil byproducts: $1.4 billion. - Expenditure cuts implemented in Q2: $2.4 billion annual savings (¶13), allowing support for vulnerable households and the health sector (~$800 million) and expanding social security benefits (~$300 million). - Resulting higher fiscal deficit reaching $8.3 billion in 2020, around $5 billion higher compared to 2019. - Overall balance expected to deteriorate by 5.7 ppt of GDP from the previous year. - Ecuador: Change in the Overall Fiscal Balance in 2020 (in million, $US) — reported changes 2020-19: - Revenues: -7,908 - Oil Revenues: -3,247 - Non-oil Revenues: -4,014 - o.w. Tax Revenues: -2,610 - Operating Surplus of SOEs: -647 - Expenditures: -3,011 - Current (excl. Covid-related spending): -2,428 - o.w. Wages and Salaries: -751 - Goods and Services (excl. Covid-related spending): -150 - CFDD +SH: -1,594 - Capital: -1,317 - Interest Payments: -46 - Extrabudgetary Expenses: -20 - Covid-related spending: 800 - Overall Balance: -4,898 ### Path to fiscal sustainability (post-pandemic) - Mechanical improvements in 2021 fiscal balance expected from: - Significantly lower interest payments following bond restructuring. - Higher oil revenues owing to higher domestic sales prices. - Improvement in economic activity bringing higher tax revenues. - Rolling back $800 million in COVID-related spending once the crisis subsides. - Rationalizing capital expenditures and reducing goods and services spending. - These changes would allow an improvement in the overall balance of $5.4 billion (6 ppt of GDP) in 2021 compared with 2020. - Medium-term consolidation target: - Fiscal consolidation of 5.5 ppt of GDP of the overall NFPS balance over 2019-25 (about 5.5 ppt improvement in the non-oil primary balance including fuel subsidies). - Aim: achieve public debt sustainability reflected in COPLAFIP debt targets. - Consolidation, bond restructuring, and financial support from bilateral and multilateral creditors intended to place public debt on a declining path. ### Fiscal consolidation measures (composition and yields) - Consolidation to include both revenue and expenditure measures: - Permanent measures balancing revenue increases (2½ ppts of GDP) and expenditure restraint (2.9 ppts of GDP), while protecting lower income families. - Key elements: - Growth-friendly tax reform (end-September 2021 structural benchmark): - Address low tax revenues by reforming VAT, PIT, and CIT. - Expected permanent yield: over 2½ ppt of GDP. - VAT reform to be progressive with many goods consumed by lower-income households remaining exempt. - Complementary measures to reduce compliance risk, including creation of a full-fledged Large Taxpayer Office (LTO). - Wage bill rationalization: - Ecuador’s wage bill above Latin America average due to large increases over the past decade. - Measures: mix of employment reduction and lower salaries; extension of temporary reduction in working hours and employment through May 2021 for non-critical sectors; medium-term measures include continued wage cuts for new hires, hiring and promotion freezes, attrition (one for two replacement rate), and further employment rationalization in non-critical sectors. - Improved public procurement: - Target savings in goods and services of 0.7 percent of GDP by 2025 through improved procurement practices (increasing competitive procedures, consolidating procurement, improving electronic procurement). - Projections use conservative fiscal savings relative to a recent World Bank micro-based study. *International Monetary Fund (content unit 1ecuea2020002).* ### 1. VAT ### 1. VAT ### VAT revenue measures and related tax reforms - 3 percentage point increase in VAT rate (from current 12 percent): 1.38 - Reduction in VAT exemptions for the universities: 1.25 - Eliminate VAT refund to the elderly: 0.02 - (Subtotal for VAT measures implicit in table) ### Other tax measures (with revenue impact) - Personal Income Tax - Inclusion of the 13th and 14th salaries in PIT base: 0.65 - Modification to the PIT brackets to increase progressivity: 0.09 - VAT creditable against PIT: 0.14 - Eliminate the reduced CIT rate for productive assets: 0.40 - (Additional listed corporate income tax item under PIT context): 0.02 - Corporate Income Tax - Introduction of accelerated depreciation: 0.10 - Outflow tax creditable against the CIT: -0.20 - (Additional corporate tax measure): 0.30 - Others - Excise tax on gasoline: 0.39 - Expand base of the telecommunications tax: 0.04 - Introduction of an environmental tax on CO2 emissions: 0.10 - (Another environmental tax entry repeated): 0.25 ### Key aggregate figures - Total revenue increase: 2.52 - Source stated: Ministry of Finance and IMF staff calculations. ### Fiscal rebalancing and spending priorities - Rebalancing spending from fuel subsidies to social assistance: - The landmark subsidy reform with an automatic fuel pricing mechanism is expected to generate fiscal savings totaling almost $3 billion between 2020 and 2025 compared to a no-reform scenario under current oil price projections. - About 0.9 percent of GDP of those fiscal savings will finance higher priority public spending, including increased social spending as coverage of poor families improves under social programs. - Moderation in capital spending: - Prioritizing capital spending toward projects that generate more growth and create jobs is envisaged. - Such efforts would save about 2.1 ppt of GDP over 5 years, while protecting investment in the oil sector. ### Select fiscal projections (change from previous year, in percent of GDP) - Revenue (yearly changes): - 2020: -0.6 - 2021: 0.3 - 2022: 2.2 - 2023: 0.6 - 2024: 0.1 - 2025: 0.0 - 2020-2025: 2.6 - Planned tax reform (yearly changes): - 2020: 0.4 - 2021: 0.0 - 2022: 2.0 - 2023: 0.6 - 2024: 0.0 - 2025: 0.0 - 2020-2025: 3.0 - Macroeconomic effect on tax revenues: - 2020: -1.3 - 2021: 0.6 - 2022: 0.2 - 2023: 0.1 - 2024: 0.1 - 2025: 0.0 - 2020-2025: -0.4 - Change in the prepayment of the income tax: - 2020: 0.3 - 2021: -0.3 - 2022–2025: 0.0 - 2020-2025: 0.0 - Expenditure (the negative sign represents an increase in spending): - Total (yearly): - 2020: -1.9 - 2021: 3.0 - 2022: 0.8 - 2023: 0.8 - 2024: 0.2 - 2025: 0.0 - 2020-2025: 2.9 - Wages and salaries: - 2020: -0.7 - 2021: 0.5 - 2022: 0.3 - 2023: 0.2 - 2024: 0.1 - 2025: 0.1 - 2020-2025: 0.6 - Goods and services (excl. Covid-19 related spending): - 2020: -0.6 - 2021: 0.6 - 2022: 0.6 - 2023: 0.1 - 2024: 0.1 - 2025: 0.0 - 2020-2025: 0.7 - Goods and services - Covid-19 related health spending: - 2020: -0.5 - 2021: 0.5 - 2022–2025: 0.0 - 2020-2025: 0.0 - Other spending: - 2020: -0.9 - 2021: 0.2 - 2022–2025: 0.0 - 2020-2025: -0.7 - Capital spending: - 2020: 0.2 - 2021: 1.3 - 2022: 0.2 - 2023: 0.4 - 2024: 0.1 - 2025: 0.0 - 2020-2025: 2.1 - Fuel subsidies: - 2020: 1.1 - 2021: 0.1 - 2022: -0.1 - 2023–2025: 0.0 - 2020-2025: 1.1 - Social spending: - 2020: -0.5 - 2021: -0.3 - 2022: -0.2 - 2023: 0.1 - 2024–2025: 0.0 - 2020-2025: -0.9 - Total (summary): - 2020: -2.6 - 2021: 3.3 - 2022: 3.0 - 2023: 1.4 - 2024: 0.3 - 2025: 0.0 - 2020-2025: 5.5 ### Strengthening fiscal frameworks, governance, and transparency - Priorities and actions: - Operationalizing the organic budget code: regulation to report subsector NFPS data adopted (prior action); follow-up regulation to implement July 2020 amendments to COPLAFIP (structural benchmark for end-November, 2020). Recommendation: regulation should take form of an executive decree and strengthen capacity to review and analyze fiscal data, oversee NFPS operations, and identify and mitigate risks. - Improving cash and debt management: a financial plan was prepared and approved by the MEF Financial Committee for the budgetary central government for the remainder of the year (prior action); similar plan for 2021 to be prepared (structural benchmark for December 16, 2020); publish a medium-term debt management strategy including operations in 2021 and targeting debt service for at least 2022 (structural benchmark for end-February, 2021). - Evaluating the existing stock of domestic payment arrears and putting in place a framework to monitor and prevent further accumulation of arrears (structural benchmark for end-April, 2021). Authorities will finalize a plan to prioritize clearance of properly verified outstanding payments accumulated during the pandemic as financing becomes available. - Increasing efficiency of public spending via procurement reform with the World Bank: enact regulation mandating publication of all public procurement contracts and names of awarded entities and their beneficial owner(s) (prior action); revise the recent procurement decree for purchases in the health sector to improve transparency and effectiveness. - Assigning MEF staff to work with technical assistance missions and experts (LTX and STX) to build and retain technical capacity and coordinate with other agencies and the BCE. - Transparency in public debt: - Authorities have been publishing sovereign debt contracts as legally permissible and committed to continue promoting transparency in debt contracts, drawing on World Bank technical support. ### Central Bank institutional framework and financial stability - Central Bank reforms: - Lasting institutional reform of the central bank is needed to strengthen dollarization. - Issues left unresolved after failure to pass COMYF amendments include lack of independence and a clear mandate; weak governance; low coverage of financial sector deposits with liquid reserve assets; and no clearly defined role for the BCE in financial stability. - Authorities aim to have amendments to COMYF adopted by the National Assembly by end-January 2021 (structural benchmark). - Monetary Policy and Regulatory Board (JPRF) adopted a resolution on BCE external auditor selection and rotation policy (prior action) and established an audit committee (prior action). The audit committee will prepare a charter to align internal audit with best international practices (structural benchmark for end-November 2020). Authorities plan technical work on COMYF amendments with Fund technical assistance. - Safeguarding financial stability: - Measures to alleviate liquidity constraints should be rolled-back as the crisis subsides to preserve the integrity of the liquidity fund. - NPLs remain subdued and sufficiently covered with provisions, but a slow and uneven recovery could turn deferred credits into NPLs. - Stress tests suggest existing capital buffers would mitigate shocks but liquidity support, including medium term funding, could be needed. - Resolution tools are limited and need upgrading; contingent arrangements should be established given COVID-related uncertainties. - Fund is providing technical assistance for stress-testing capabilities; World Bank continues work on medium- to long-term financial intermediation issues. - Authorities plan to establish a financial sector coordination committee comprising JPRF, Central Bank, MEF, Superintendencies, and deposit insurance (MEFP ¶21). ### Competitiveness, SOEs, labor market, capital markets, and inclusion - SOE framework: - Authorities are revamping a law for state-owned enterprises (SOEs) with IADB assistance to improve efficiency, transparency, and governance; require SOEs to pay taxes at the same rate as private firms; comply with same labor regulations and accounting standards; allow SOEs to hire external auditors. - Business climate and rule of law: - Ecuador ranks 90th out of 141 countries in global competitiveness indicators. - Authorities amended AML/CFT regulations to conduct enhanced customer due diligence when transacting with senior officials and PEPs, in line with FATF standards. - Program envisages further governance and anticorruption reforms, including regulation to enhance online publication of asset declarations by high-level officials (structural benchmark for end-November 2020), adoption of previously submitted anticorruption legislation (structural benchmark for end-December 2020), and auditing COVID-related spending (structural benchmark for end-June 2021). - Labor market flexibility and minimum wage: - Humanitarian Law measures temporarily relaxed eligibility criteria for unemployment insurance, allowed mutually agreed contract changes, introduced shorter work weeks and more flexible shifts. - Ministry of Labor estimates 45,000 jobs were saved and an additional 100,000 new ones created since the law was enacted in late June. - Authorities are working with the World Bank to anchor the minimum wage to inflation and productivity; the minimum wage is higher in Ecuador than in regional peers and has outpaced labor productivity in the past 5 years. - Domestic capital markets and financial inclusion: - Plans to standardize government securities, develop a yield curve, and lengthen maturities of government short-term instruments. - Implement a medium-term debt management strategy and strengthen the debt management office and investor relations. - Financial inclusion strategy with the World Bank to reduce the number of regulated interest rate segments, with implementation to start by end-January 2021, and to leverage reduced reliance on cash to promote alternative payment modes. ### Program modalities, access, and conditionality - Access and phasing: - Proposed access level: $6.5 billion (SDR4,615 million) — Ecuador’s estimated residual financing needs in 2020–22. - Fund financing to be made available to the budget; access frontloaded in line with financing gaps. - Disbursement cadence: quarterly reviews in 2020, then triannual cycle in 2021 when the fiscal QPC shifts from central government to NFPS balance. - If additional financing becomes available, authorities would build deposits rather than raise the deficit. - Quantitative conditionality (QPCs and ITs): - QPCs include: - Floor on the overall balance of the central government until August 2021. - Floor on the overall balance of the NFPS from August 2021 onwards. - Floor on accumulation of NFPS deposits at the central bank. - Non-accumulation of external payments arrears (continuous). - No net credit to government from the central bank (continuous). - Indicative targets (ITs) include: - Floor on the non-oil primary balance of the NFPS (including fuel subsidies) (NOPBS). - Floor on the overall balance of the NFPS until August 2021. - Floor on net international reserves. - Floor on coverage of cash transfer programs for lower income households. - Rationale and implementation notes: - NFPS balance will be monitored initially as an IT and become a QPC starting August 2021 to allow data quality improvements with STX and Fund support. - A QPC on the central government perimeter balances data availability and early-warning features; accumulation of NFPS deposits at the BCE serves as an early warning signal. - NIR target retained as an IT to monitor the BCE balance sheet. - Social assistance indicative target: reach 80 percent of low-income households by end-2021; requires a monitoring framework supported by the World Bank and coordination across MEF, MIES, and the social registry. *Source: Ministry of Finance and IMF staff calculations; excerpts from IMF staff report.* ### 43. Capacity to repay. The proposed access level would result in peak Fund credit reaching $8.6 ### 43. Capacity to repay ### Capacity to repay — Key findings - The proposed access level would result in peak Fund credit reaching $8.6 billion (874 percent of quota) in 2022. - Gross financing needs (GFN, including Fund repayments) would range between 2.8 to 5 percent of GDP in the repayment period, lower than other exceptional access cases. - Peak Fund obligations would constitute 5.1 percent of exports and 3.3 percent of government revenues—at or below median compared to other exceptional access cases—but be highly elevated as a share of gross reserves, peaking at 20 percent. - Net international reserves are projected to remain deeply negative at program completion, making it critical to sustain access to financing and continuing creditor support. - Staff judge that Ecuador would have adequate capacity to repay the proposed access levels, contingent on program implementation and support from other creditors that enable Ecuador to rebuild liquidity buffers. - There is limited room for maneuver; partial or non-implementation of the program could severely strain the capacity to repay. ### Financing assurances - There are firm financing commitments for the first 12 months and good prospects for the remainder, including additional support from IFIs and official bilateral creditors. - Financing in post-program years is partly predicated on conservative assumptions concerning market access. - The authorities view asset monetization as an important source of financing in the latter part of the program, with upside potential if program implementation improves risk appetite for Ecuadorian assets; underlying technical work for some asset monetization programs is fairly well advanced. - Authorities agree that should there be shortfalls in the assumed financing, additional fiscal efforts may be needed, despite their impact on growth. ### Political assurances - Political assurances are deemed adequate; they have been received from a broad range of candidates, who are supportive of program objectives and its key policies. - One candidate expressed support for the program objectives and agreed to remain in close dialogue with Fund staff; one candidate was not yet ready to engage in discussions. ### Safeguards - The last assessment of the Central Bank of Ecuador was finalized in June 2019; therefore an updated safeguards assessment will not be required. - A fiscal safeguards review will be needed, given that disbursements involve exceptional access of Fund resources with more than 25 percent directed to budget support. - Staff will continue to monitor implementation of recommendations from the last safeguards assessment. Two prior actions, on the BCE external audit and audit committee, directly address recommendations from that assessment. Most remaining recommendations require enactment of the new central bank law. ### Statistical issues - Ecuador will continue to align government finance statistics to international best standards. - A dedicated STA short-term expert (STX) will work with authorities during peripatetic visits to: - compile the GFS time series for the NFPS and its subsectors (central government, local governments, social security funds and SOEs) for historical and current data; and - prepare and roll-out a compilation guide for public finance statistics, with involvement of different NFPS entities (both are end-May 2021 structural benchmarks). - Staff will continue collaboration with the authorities on debt statistics and a wide range of economic statistics. ### Lending into arrears - Ecuador maintains a residual amount of arrears to international private bond holders arising from outstanding claims on international bonds repudiated in 2008/2009. - US$52 million remain outstanding in the hands of individual creditors; the authorities have been unable to identify these creditors to settle the claims. - The authorities established a public procedure to follow if a holder of these bonds requests liquidation of the securities. - Staff judge that good faith efforts have been made to reach a collaborative agreement with remaining creditors and will continue to monitor relations, confirming at each review that requirements under the policy on lending into arrears have been met. - The authorities have indicated they have no outstanding arrears to bilateral or multilateral creditors. ### Article VIII / Capital Flow Management (CFM) - The authorities are committed to phase out the tax on transfers abroad once macroeconomic stability is restored and the reserves position is strengthened. - The tax constitutes both a capital flow management measure (CFM) under the Fund’s Institutional View on Liberalization and Management of Capital Flows, and an exchange restriction subject to Fund approval under Article VIII. - The authorities have requested temporary Fund approval for maintaining the exchange restriction arising from the tax on transfers abroad for balance of payments reasons (see LOI). - The SUCRE regional payments arrangement also gives rise to a discriminatory exchange restriction since the period for settlement under the bilateral payment arrangement exceeds three months; this restriction has not been approved. ### Box 1 — Assessment of Exceptional Access Criteria (summary) - Criterion 1: Ecuador is experiencing exceptional BOP pressures; estimated financing gap of $6.5 billion over 2020-22 even after restructuring and support. Since Ecuador currently has $2.3 billion (236 percent of quota) in credit outstanding to the Fund, access above $1.2 billion in 2020 and over $2 billion cumulatively would require exceptional access. - Criterion 2: Public debt projected to decline from a projected peak at end-2020 of 69 percent of GDP to 56½ percent by 2025 and 39.1 percent by 2030 after successful debt restructuring and creditor assurances in 2020-22; staff assess public debt to be sustainable with high probability under those conditions. Stress tests show sensitivity to shocks to the primary balance and growth. - Criterion 3: Historical evidence suggests Ecuador has regained market access within 24-36 months following a debt restructuring. Ecuador had long-term global bond issuances around $3-5 billion per year over the last four years prior to losing market access. The EMBI spread has declined below 1000 bp (from 6000 bp in the wake of the pandemic) following the debt exchange and staff-level agreement; S&P and Fitch upgraded Ecuador’s sovereign credit rating from default to B- in early September. - Criterion 4: The policy program provides a reasonably strong prospect of success; authorities are committed and have taken prior actions under the previous EFF and during the crisis (organic budget law, prohibition of monetary financing regulation, governance reforms, strengthening social safety nets, fuel subsidy reform, expenditure rationalization). Shortcomings in institutional capacity and fragmented politics pose risks; authorities have implemented corrective actions to address misreporting and committed to early structural benchmarks and prior actions to improve institutional capacity and transparency. ### Staff appraisal — Key recommendations and observations - The authorities’ swift and decisive policy responses prevented a deeper crisis, combining short-term measures and steps towards long-term fiscal sustainability. - Expanding coverage of social assistance programs is essential to limit the economic fallout and compensate vulnerable households for potential adverse impacts of fiscal consolidation. - An ambitious process to substantially strengthen public finances as the crisis subsides is critical to complement the debt exchange and ensure public debt sustainability; rollback of exceptional crisis-related measures next year and a comprehensive fiscal package of revenue and spending measures are recommended. - Operationalize newly legislated fiscal policy frameworks swiftly (including COPLAFIP-related regulations) to improve transparency and data collection; adopt robust and permanent cash management practices, including longer-horizon cash forecasting and overall financial planning. - Improve transparency in public procurement, strengthen the anticorruption framework, and continue promoting debt transparency; prepare a debt management strategy planned for February 2021 to address upcoming amortizations in 2022 and beyond. - Strengthen the institutional framework for the central bank to safeguard the dollarization regime, ensure operational autonomy of the BCE, and align its audit function to international standards; improve Treasury cash management to anticipate cash shortfalls. - Maintain financial stability by preserving liquidity fund assets, avoiding further reductions in bank contributions, continuing vigilance on credit risk accumulation, enhancing supervision agility, and strengthening coordination among oversight authorities through the planned Financial Coordination Committee; develop a more robust legal framework for the financial system and continuously assess the Reactivate Ecuador program to ensure appropriate support for viable firms. - Implement a longer-term comprehensive structural reform agenda to raise growth potential and competitiveness, including reforms in governance, anticorruption, AML/CFT, public enterprises, labor markets, and the business environment. *Source: IMF staff report excerpt on Ecuador (Capacity to repay and related assessments).* ### Annex V. ### Annex V. ### Data gaps and capacity building - Closing existing data gaps is critical for sound public finance management and will require deliberate efforts to build capacity. - Diligently pursuing efforts to improve data quality should remain a priority. - Close coordination between the Ministry of Economy and Finance and NFPS sub-sectors (central government, local governments, SOEs, and social security funds) are critical for the compilation of internally consistent fiscal statistics. - Sound cash forecast will guide forward-looking budget decisions and limit accumulating domestic payment arrears. - The authorities should seek to leverage the technical support provided by the Fund—including through short- and long-term experts—and other partners to build and retain technical capacity in-house, including in the areas of fiscal statistics, cash forecast, debt transparency and management and financial surveillance. ### Coordination, social dialogue, and ownership - Closer coordination across public sector agencies and far-reaching social dialogue is needed for a successful implementation of the Fund-supported program. - Coordination is critical both at the policy and technical levels. - The National Assembly’s recent passing of the statement on Ecuador’s high level policy objectives demonstrated the country’s commitment to reform. - Broad-based social dialogue around the policy tradeoffs faced by Ecuador against the backdrop of “lower for long” oil prices would strengthen domestic ownership and increase the chances of program success. ### Risks to program implementation - The program remains, however, subject to substantive risks. - Key risks identified: - Heightened uncertainties surrounding the global outlook. - Domestic factors that could make program implementation challenging in the short and medium term, including limited buffers. - The need to secure broad-based support for the program objectives and its key policies. - The political will of the next administration and legislators in the National Assembly. ### Capacity development as a core pillar - Capacity development (CD) should be a core pillar of Ecuador’s IMF-supported program. - Building human capital and knowledge to ensure a well-functioning and efficient public sector will deliver long-term gains for all Ecuadorians. - The Fund, together with other IFIs, would continue to provide CD to Ecuador, particularly in the areas of government financial statistics, public financial management, and financial programming. - Prioritizing CD needs by topic and timing will be important to ensure effectiveness and achieving lasting results. ### Staff recommendation and program appraisal - Staff supports the authorities’ request for a 27-month Extended Fund Facility with exceptional access. - Ecuador’s economic plan is characterized as: - Carefully calibrated to support the population through the crisis. - Intended to restore macroeconomic stability. - Aimed to ensure long-term fiscal sustainability. - Designed to fortify the institutional foundations for inclusive private sector led growth. - Early actions to strengthen institutions and policy frameworks will keep the country on stronger grounds through the transition to the next administration. *International Monetary Fund — Annex V.* ### 62. Staff also supports Board approval for the retention for a one-year period of the ### 1ecuea2020002 - 62. Staff also supports Board approval for the retention for a one-year period of the exchange restriction arising from the tax on transfers abroad for the making of payments and transfers on current international transactions ### Exchange restriction recommendation - Staff supports Board approval for retention for a one-year period of the exchange restriction arising from the tax on transfers abroad for the making of payments and transfers on current international transactions. - Rationale provided: it is maintained for BOP reasons, is temporary and non-discriminatory. ### Recent economic developments (key indicators and trends) - Real GDP: - 2018: 1.3 - 2019: 0.1 - 2020: -11.0 - 2021: 4.8 - 2022: 1.3 - 2023: 1.7 - 2024: 2.0 - 2025: 2.3 - Consumer price index (period average): - 2018: -0.2 - 2019: 0.3 - 2020: 0.0 - 2021: 1.0 - 2022: 2.3 - 2023: 1.4 - 2024: 1.0 - 2025: 1.0 - Current account balance (percent of GDP): - 2018: -1.2 - 2019: -0.1 - 2020: -2.0 - 2021: -0.1 - 2022: 0.3 - 2023: 0.6 - 2024: 0.8 - 2025: 0.6 - Gross international reserves (US$ millions): - 2018: 2,158 - 2019: 2,933 - 2020: 2,475 - 2021: 3,275 - 2022: 5,007 - 2023: 6,345 - 2024: 8,151 - 2025: 8,787 - Net international reserves (US$ millions): - 2018: -2,895 - 2019: -2,903 - 2020: -7,848 - 2021: -8,679 - 2022: -8,039 - 2023: -6,550 - 2024: -4,134 - 2025: -2,199 ### Fiscal developments and outlook (selected figures) - Revenue (US$ millions): - 2018: 37,996 - 2019: 35,914 - 2020: 28,006 - 2021: 31,396 - 2022: 35,562 - 2023: 37,278 - 2024: 38,923 - 2025: 40,337 - Expenditure (US$ millions): - 2018: 41,412 - 2019: 39,319 - 2020: 36,308 - 2021: 34,303 - 2022: 34,961 - 2023: 35,308 - 2024: 36,268 - 2025: 37,755 - Overall balance (deficit -) (US$ millions / percent of GDP): - Levels: - 2018: -3,415 - 2019: -3,405 - 2020: -8,302 - 2021: -2,907 - 2022: 601 - 2023: 1,970 - 2024: 2,655 - 2025: 2,583 - In percent of GDP: - 2018: -3.2 - 2019: -3.2 - 2020: -8.9 - 2021: -2.9 - 2022: 0.6 - 2023: 1.9 - 2024: 2.4 - 2025: 2.3 - Primary balance (US$ millions / percent of GDP): - US$ millions: - 2018: -752 - 2019: -491 - 2020: -5,434 - 2021: -1,342 - 2022: 2,411 - 2023: 3,914 - 2024: 4,765 - 2025: 5,104 - Percent of GDP: - 2018: -0.7 - 2019: -0.5 - 2020: -5.8 - 2021: -1.4 - 2022: 2.3 - 2023: 3.7 - 2024: 4.3 - 2025: 4.5 - Public debt (percent of GDP): - 2018: 46.1 - 2019: 51.8 - 2020: 68.9 - 2021: 67.4 - 2022: 65.8 - 2023: 62.3 - 2024: 60.0 - 2025: 56.1 ### Public sector financing and debt dynamics - Gross financing needs (US$ millions / percent of GDP): - US$ millions: - 2018: 11,284 - 2019: 11,028 - 2020: 14,954 - 2021: 8,069 - 2022: 4,331 - 2023: 4,278 - 2024: 3,487 - 2025: 5,206 - In percent of GDP: - 2018: 10.5 - 2019: 10.3 - 2020: 16.1 - 2021: 8.1 - 2022: 4.2 - 2023: 4.0 - 2024: 3.2 - 2025: 4.6 - Amortization (US$ millions / percent of GDP): - US$ millions: - 2018: 7,868 - 2019: 7,623 - 2020: 6,651 - 2021: 5,163 - 2022: 4,932 - 2023: 6,249 - 2024: 6,142 - 2025: 7,789 - In percent of GDP: - 2018: 7.3 - 2019: 7.1 - 2020: 7.1 - 2021: 5.2 - 2022: 4.8 - 2023: 5.9 - 2024: 5.6 - 2025: 6.9 - Public sector debt stock (US$ millions): - 2018: 49,629 - 2019: 55,678 - 2020: 64,151 - 2021: 66,908 - 2022: 67,599 - 2023: 66,024 - 2024: 65,687 - 2025: 63,702 ### External sector and balance of payments (selected figures) - Current account (US$ millions): - 2018: -1,335 - 2019: -112 - 2020: -1,864 - 2021: -144 - 2022: 322 - 2023: 675 - 2024: 825 - 2025: 690 - Exports, f.o.b. (US$ millions): - 2018: 22,133 - 2019: 22,774 - 2020: 18,119 - 2021: 19,228 - 2022: 20,114 - 2023: 21,006 - 2024: 21,972 - 2025: 22,938 - Oil exports (US$ millions): - 2018: 8,802 - 2019: 8,669 - 2020: 5,142 - 2021: 5,882 - 2022: 6,131 - 2023: 6,348 - 2024: 6,552 - 2025: 6,753 - Non-oil exports (US$ millions): - 2018: 13,331 - 2019: 14,105 - 2020: 12,977 - 2021: 13,346 - 2022: 13,983 - 2023: 14,658 - 2024: 15,420 - 2025: 16,185 - Imports, f.o.b. (US$ millions): - 2018: 22,359 - 2019: 21,749 - 2020: 17,648 - 2021: 18,607 - 2022: 19,187 - 2023: 19,662 - 2024: 20,265 - 2025: 20,960 - Services balance (US$ millions): - 2018: -689 - 2019: -763 - 2020: -968 - 2021: -982 - 2022: -954 - 2023: -907 - 2024: -878 - 2025: -860 - Workers' remittances, net (US$ millions): - 2018: 2,578 - 2019: 2,595 - 2020: 1,906 - 2021: 2,000 - 2022: 2,278 - 2023: 2,379 - 2024: 2,446 - 2025: 2,513 - Financial account — Other public sector flows (US$ millions): - 2018: -2,947 - 2019: -3,815 - 2020: -3,413 - 2021: -1,907 - 2022: 304 - 2023: 829 - 2024: 822 - 2025: 1,214 ### Monetary and financial sector (selected indicators) - Credit to the private sector (percent change, yoy): - 2018: 14.9 - 2019: 11.3 - 2020: -1.8 - 2021: 8.2 - 2022: 3.2 - 2023: 3.2 - 2024: 3.5 - 2025: 3.8 - Deposits of the private sector (percent change, yoy): - 2018: 5.0 - 2019: 8.6 - 2020: -2.3 - 2021: 6.6 - 2022: 2.1 - 2023: 1.9 - 2024: 1.5 - 2025: 1.6 - Broad money (M2) (percent change, yoy): - 2018: 5.7 - 2019: 8.0 - 2020: -5.5 - 2021: 6.6 - 2022: 2.5 - 2023: 2.2 - 2024: 2.0 - 2025: 2.2 - Financial soundness indicators (private banks and Banco del Pacifico; percent, end-of-period): - CAR (Regulatory capital to risk-weighted assets): - 2015: 14.4 - 2016: 13.9 - 2017: 13.7 - 2018: 13.4 - 2019: 13.5 - 2020 (Q2): 14.1 - Nonperforming loans to gross loans: - 2015: 3.7 - 2016: 3.5 - 2017: 3.0 - 2018: 2.6 - 2019: 2.7 - 2020 (Q2): 2.8 - Provisions to nonperforming loans (percent): - 2015: 187.1 - 2016: 189.5 - 2017: 234.4 - 2018: 247.7 - 2019: 225.6 - 2020 (Q2): 252.8 ### Fund support and program modalities (summary figures) - Indicators of Fund credit, stock and flows (SDR and US$ equivalents; percent of GDP and other ratios) — projections through 2030: - Disbursements (SDR million): - 2020: 3,310 - 2021: 1,065 - 2022: 710 - 2023–2030: 0 (each year) - Stock of existing and prospective Fund credit (SDR million): - 2020: 4,419 - 2021: 5,386 - 2022: 6,096 - 2023: 5,925 - 2024: 5,521 - 2025: 4,738 - 2026: 3,901 - 2027: 2,963 - 2028: 2,026 - 2029: 1,142 - 2030: 373 - Obligations (SDR million / components): - Total obligations example: - 2020: 57 - 2021: 214 - 2022: 147 - 2023: 334 - 2024: 568 - 2025: 959 - Principal and charges/interest components shown separately. - Proposed EFF access and phasing (SDR million and US$ million): - Board approval of EFF (September 30, 2020): SDR 1420.0 / US$ 2,000.0; Disbursement 203.5; Cumulative 203.5 - First Review (December 15, 2020): SDR 1420.0 / US$ 2,000.0; Disbursement 203.5; Cumulative 407.1 - Subsequent reviews and disbursements detailed through Seventh Review (December 1, 2022) with total SDR 4615.0 / US$ 6,500.0; Cumulative SDR 661.5 (note: table lists disbursement schedule and cumulative amounts) ### Key projections and risks highlighted by data - Deep contraction in 2020 real GDP: -11.0 - Large increase in gross public debt in 2020 to 68.9 percent of GDP, with gradual projected decline to 56.1 percent by 2025. - Gross international reserves projected to rise strongly from 2,475 (2020) to 8,787 (2025) US$ millions. - Net international reserves remain negative through 2025 though improving: -7,848 (2020) to -2,199 (2025) US$ millions. - Gross financing needs peak in 2020 at 14,954 US$ millions (16.1 percent of GDP) and fall thereafter but remain material in projections (e.g., 5,206 US$ millions in 2025). *Source: IMF staff calculations and estimates as presented in the provided content unit.* ### Annex I. The 2019 EFF Program: Key Objectives and Outcomes ### Annex I. The 2019 EFF Program: Key Objectives and Outcomes ### Program design — key objectives and pillars - The 2019 three-year EFF disbursed US$1.4 billion out of the 4.2 billion originally envisaged. - Program goals: restore growth; put debt on a downward path; build reserve buffers; restore international competitiveness; make substantive improvements to the social assistance system. - Four pillars: - I. Strengthening the institutional foundations of dollarization: - (a) restore prudence to fiscal policy by reducing the fiscal deficit and putting the public debt on a downward path; - (b) strengthen institutional framework for the Central Bank by prohibiting all direct and indirect central bank financing of the government and introducing a new legal framework which requires the central bank to cover all its liabilities vis-à-vis banks with international reserves; - (c) boost resilience of the financial system by improving financial oversight and crisis preparedness. - II. Boosting competitiveness and job creation: - labor market reform allowing for less-rigid labor contracts; - introduction of a framework for public private partnerships and concessions. - III. Promoting shared prosperity and protecting the poor and most vulnerable: - increase in social assistance spending of 0.6 percentage points of GDP (or by about 100 percent compared to the level of 2018); - extend coverage of, and increase nominal benefits under, the conditional cash transfer program and programs supporting the disabled and the elderly. - IV. Restoring transparency and good governance to public sector operations: - bring fiscal reporting in line with international standards; - increase transparency in the oil sector; - introduce measures to strengthen the effectiveness of the AML/CFT framework. ### Program outcomes and advances during the program - Fiscal and institutional progress: - consolidated the non-oil primary balance with subsidies by 1.3 percentage points of GDP in 2019; consolidation led by capital expenditure cuts and reductions in public employment; - submitted an organic budget law with fiscal rules and a debt anchor; implemented other reforms to strengthen fiscal rules and public financial management; - strengthened institutional foundations of the central bank, mainly through a regulation prohibiting monetary financing; - strengthened the social safety net by increasing social assistance spending, developing a social assistance action plan, and publishing updated eligibility thresholds for social assistance; - initiated reforms on transparency and governance, including by submitting anticorruption legislation. ### Implementation challenges, misreporting, and program cancellation - Implementation was mixed and complicated by a challenging political environment and shortcomings in institutional capacity. - Lack of a stable political majority caused long delays and shortfalls in implementing key commitments (e.g., deeper tax and central bank reforms). - A misreporting incident highlighted technical capacity constraints and limited inter-agency coordination; deficiencies in collection and compilation of fiscal statistics were underlying causes. - The misreporting incident resulted in the cancelation of the 2019-22 EFF in April 2020. ### Measures taken to address misreporting and statistical weaknesses - Reorganization and coordination: - reorganized the MEF to establish specific responsibilities for fiscal statistics and a system of checks and balances for consistency and programming purposes; - established and operate a working group to coordinate relevant information between the MEF and the central bank; - provide fiscal data in a new detailed format, consistent with TA recommendations; - revised and published aggregated and detailed fiscal data for 2019 onwards and established a calendar for historical revisions; - prepared and distributed brief guidelines for the compilers of fiscal statistics. ### Continued reforms outside a Fund-supported program - Despite the pandemic and absence of a Fund-supported program, authorities have continued reforms: - adopted amendments to the organic budget law to strengthen fiscal management practices, provide clear debt anchors, and clarify the fiscal rules framework; - implemented an ambitious fuel subsidy reform expected to generate significant savings over the medium term; - further rationalized expenditures to help meet fiscal consolidation targets. --- ### Annex II: Social Assistance — gaps and way forward ### Impact of COVID-19 and poverty projections - UNICEF estimates: - additional 1.8 million people (450,000 families) could be pushed into poverty in 2020; - poverty rate increasing from 27.2 percent to about 37.6 percent; - extreme poverty increasing from 10.7 percent to about 19.2 percent. - Effects are: (i) driven by the increase in the number of families below the poverty line; (ii) long lasting; and (iii) more pronounced in families with children. - Footnote findings on families with children: - poverty gap for these families will increase by 50 percent (from 8.1 percent to 12 percent); - multidimensional poverty among households with children will increase from 31.9 percent to 44 percent; - extreme multidimensional poverty will almost double (from 12.9 percent to 23.4 percent); - simulations show increases in non-attendance school rates (from 8.5 percent to 13.0 percent) and child labor (from 5.8 percent to 8.0 percent); - the COVID-19 shock is estimated to represent a loss of 12 years in the road to eradicate poverty; for households with children the loss would increase to 16.8 year. ### Temporary COVID-19 measures and coverage - Temporary cash transfer program announced in April: - “Bono de Protección Familiar por Emergencia” of $120 total, with monthly payments of $60 in May and June, for 400,000 vulnerable families in the social registry not enrolled in any social assistance program; - extended to an additional 550,000 vulnerable families in June (totaling 950,000 families). - Even with the extension, Ecuador’s COVID-19 related social assistance is below that of most Latin American countries in both share of population covered and spending on transfers. ### Structural gaps and policy direction - Observations: - Spending on cash transfer programs in Ecuador is above the average for Latin America, but coverage of the poor is relatively low due to benefit generosity and/or leakages to the non-poor. - Benefit generosity is adequate but leakages to the non-poor are high. - Eliminating leakages requires updated information on family characteristics because of recent changes in the composition of the poor. - Authorities’ commitment and targets: - Strategy developed with the World Bank to increase coverage of social assistance programs from the current 37 percent of families in the bottom three deciles of the income distribution to 80 percent by December 16, 2021; - Most of the increase planned to occur by April 2021; program includes an indicative target on the number of poor families covered. - Social Registry updates and monitoring: - Operationalized a committee composed of members of the Board of Directors of the Social Registry Unit (in the Presidential Secretariat), the General Secretariat of the Presidency, the Ministry of Economy and Finance, Secretariat “Plan Todo Una Vida”, and as a participant, the Ministry of Economy and Social Inclusion; - To date, around 386,000 new poor families have their registry updated and are eligible to receive benefits; - Ongoing interviews and household surveys expected to validate information for a much higher number of new poor families in the coming months. ### Social protection system overview (Box 1) - System focuses mostly on social assistance programs (cash transfers and social pensions) due to high labor market informality. - Three categories of social protection instruments: (i) social safety net (social assistance); (ii) social insurance; (iii) labor market programs. - Cash transfer programs target: - i) low‐income households with children under 18 years old (Bono de Desarrollo Humano, BDH); - ii) poor households with potential for productive activities (Crédito de Desarrollo Humano, CDH); - iii) low‐income seniors over 65 years old (Pensión Adulto Mayor and Pensión Mis Mejores Años); - iv) vulnerable people with disabilities (Pensión para personas con discapacidad, Pensión Toda Una Vida and Bono Joaquin Gallegos Lara). --- ### Annex III: Realism of planned fiscal adjustment ### Historical fiscal adjustment patterns — key findings - Ecuador has historically adjusted its primary balance more than other developing countries on average. - Measures used include: - unconditional cumulative change in primary balance over a 3-year rolling window; - consolidation episodes (3-year periods where primary balance improves between first and last year); - distinction between low/high growth episodes; - consolidations preceded by an increase in public debt by at least 3 ppts of GDP. - Median improvement in the primary balance during consolidation episodes in Ecuador: 2.3 ppts of GDP. - Comparable figures: 1.6 ppts of GDP improvement on average in developing countries over the past two decades; 1 ppt consolidation in the Latin America sub-sample. ### Fiscal reaction function estimates - Country-specific estimates: Ecuador’s primary balance increases on average by 0.13 ppt of GDP in response to a one ppt increase in the public debt-to-GDP ratio (second only to Peru at 0.25 ppts of GDP). - Using the non-oil primary balance yields an estimated coefficient of 0.18. - Notes: - Estimates are from a Bohn-style equation: pb_t = α + ρ d_{t−1} + β ygap_t + ε_t, where pb is primary balance percent of GDP, d is debt-to-GDP, and ygap is output gap. - Results robust to changes in consolidation definition and debt increase threshold. - Fiscal policy in the sample generally has not been counter-cyclical, with the exception of Chile and Peru. ### Program scenario realism and historical analogues - Program baseline cumulative adjustment: 5 ppts of GDP over 6 years and 2.9 ppts of GDP over the first 3 years after restructuring. - This adjustment would be broadly in line with adjustments observed in other restructuring cases in the past 20 years. - Historical oil shock evidence: - After the 2014 global oil over-supply shock, public debt increased by 7 percentage points followed by an improvement in the non-oil primary balance by 3.4 percentage points of GDP in 2015 (elasticity of 0.5); gains were later eroded by the 2016 earthquake. - Given oil futures for 2025 remain more than 20 percent below spot oil prices pre-shock, the current oil price shock likely embeds a permanent component, suggesting a large fiscal correction in Ecuador is warranted. --- *Prepared by IMF staff based on Annex I, Annex II, and Annex III of the source document.* ### Annex IV. Debt Sustainability Analysis ### Annex IV. Debt Sustainability Analysis ### Summary Assessment - Under baseline projections, Ecuador’s public debt is assessed to be sustainable with high probability. - Key drivers of sustainability: - Successfully concluded bond exchange. - Specific and credible financing assurances on financing/debt relief from official bilateral creditors. - Other committed financing and good prospects for additional contributions from international financial institutions (IFIs). - Envisaged fiscal consolidation. - Public debt path: - Public debt is expected to peak at 68.9 percent of GDP in 2020 and decline to 56.1 percent of GDP in 2025. - Gross financing needs: - Gross financing needs are about 16.1 percent of GDP in 2020, forecasted to retreat to 4.6 percent of GDP by 2025, largely on the back of the debt restructuring operation. - Vulnerabilities: - Despite improvements, the declining debt path is vulnerable to a growth and primary balance shocks. ### Definition and Debt Profile - Public-sector debt definition: - Includes obligations of the non-financial public sector (general government and non-financial sector state-owned enterprises). - Historical change: - Under this measure, public debt more than doubled between 2012 and 2019 (from 17.5 to 51.8 percent of GDP). ### Macroeconomic and Fiscal Assumptions - Macroeconomic projections: - Growth in 2020 is forecasted at -11 percent. - CPI inflation is expected to hover around zero in 2020 and converge to 1 percent by 2025. - Growth is expected to recover and reach 2.5 percent by 2025. - Fiscal projections: - Fiscal position projected to improve gradually to reach a primary surplus of about 4.5 percent of GDP by 2025. - Conditional on continuous policy efforts resulting in an improvement of the non-oil primary balance with subsidies of 5.5 percent of GDP between 2019 and 2025. - Financing assumptions: - Budget support from IFIs of US$3.6 billion in 2020, US$3.2 billion in 2021, and US$1.8 billion in 2022, excluding the EFF financing from the IMF. - Financing from China of US$1.7 billion in 2020 and $0.7 billion in 2021. - Market access of US$0.5-2 billion from 2022 onwards. - Included debt operations and effects: - Debt restructuring operation of external private bonds concluded on August 31, which lowered interest payments by about US$5.7 billion over 2020-25 and amortizations by US$5.6 billion over 2022-25. - Reprofiling of credit lines with CDB concluded on August 5. - Reprofiling of credit lines with Eximbank on September 16. - The latter two generate cumulative cash flow relief of about US$815 million in 2020-21. ### Baseline Scenario Findings - Debt trajectory: - Public debt projected to decline from its projected peak at end-2020 of 68.9 percent of GDP to 56.1 percent by 2025. - This implies the public debt-to-GDP ratio will remain below the critical threshold for emerging economies of 70 percent of GDP. - Conditions: - Projection conditional on the success of the bond exchange offer and timely implementation of the envisaged fiscal consolidation package. - Gross financing needs: - Projected to fall from 16.1 percent of GDP in 2020 to 4.6 percent of GDP by 2025. - Gross financing needs do not breach the low-risk threshold of 15 percent of GDP in the baseline scenario after 2020 (the heatmap reflects the 2020 projection of 16.1 percent, which is not affected by the restructuring). - Realism analysis: - Projected fiscal adjustment is in the top quartile when compared to experience of other countries. - The cyclically-adjusted primary fiscal adjustment over any of the three years during the projection horizon is above the threshold of 3 percent of GDP. - The average of the cyclically-adjusted primary balance for any consecutive 3-year period during the projection horizon is greater than the threshold of 3.5 percent of GDP. ### Stress Tests and Scenario Analysis - Effects of restructuring and consolidation: - Debt restructuring operation and fiscal consolidation path would reduce significantly debt and gross financing risks in the short- and medium-term. - Vulnerabilities under shocks: - Growth shock: - Would bring the debt-to-GDP ratio to 74.3 percent in 2022 before declining below the critical threshold for emerging economies of 70 percent of GDP and reaching 65 percent in 2025. - Real interest rate shock and RER shock: - Under current assumptions, public debt does not appear vulnerable to a real interest shock or RER shock; the critical threshold is not crossed under these shocks. - Gross financing needs under stress: - Gross financing needs do not breach the low-risk threshold of 15 percent of GDP under any of the stress test scenarios. ### Risks and Vulnerabilities - Overall risk tilt: - Risks are tilted on the downside, enhanced by global economic and financial uncertainty. - Key near-term risks: - Stronger-than-envisaged impact of the COVID pandemic and/or a more protracted recovery at the domestic or global level, leading to lower fiscal revenues and higher fiscal costs. - Lags in mobilizing revenues, and containing and rationalizing spending could result in higher financing needs. - A delay in market access, and/or lower support from bilateral and/or multilateral creditors could present substantive challenges and potentially open financing gaps. - DSA risk assessment highlights: - Ratio of public debt held by non-residents identified as a high risk for Ecuador. - Widening of the spreads has increased market perception risk to high. - Non-residents’ holdings of Ecuador’s public debt are about 73 percent of the total debt; however, about half of external debt is owed to official creditors, which reduces this as a source of vulnerability. *Prepared by Matteo Ghilardi, with inputs from Leandro Medina.* ### 6. External Sustainability Analysis. The external debt-to-GDP is expected to increase to 51.7 ### 6. External Sustainability Analysis. The external debt-to-GDP is expected to increase to 51.7 ### Outlook and key projections - External debt-to-GDP is expected to increase to 51.7 by end-2020, primarily due to the effects of the current crisis on the current account balance and growth. - In the medium-term, external debt is projected to decrease to 44.1 percent of GDP by 2025, supported by an improvement in the external position under program policies, especially under: - consolidation of the fiscal stance, and - efforts to raise competitiveness by increasing productivity and reducing labor costs. - The non-interest current account is expected to improve to a surplus of 3.4 percent of GDP by 2025, from a surplus of 1.2 in 2020 (well in excess of the 0.3 percent of GDP deficit needed to stabilize external debt). ### Sensitivities and stress risks - The external debt trajectory is most sensitive to the non-interest current account shock (e.g., terms of trade shock). - A large real exchange rate depreciation would create unstable debt dynamics, but such a scenario is rated as highly improbable in Ecuador’s dollarized system. - Stress test scenarios reported (high-level): - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Oil Shock — each scenario produces distinct paths for Real GDP growth, Inflation, Primary balance, and Effective interest rate over 2020–2025 (detailed scenario tables provided in the source). ### External sector assessment and current account details - The country’s external position is assessed to be weaker than the level consistent with medium-term fundamentals and desirable policies; the real effective exchange rate is assessed to be about 30 percent overvalued. - To realign the current account and the real exchange rate with medium-term fundamentals, fiscal adjustment and structural reforms will be undertaken during the program period. - Current account developments: - 2019 current account: -0.1 percent of GDP (close to balance), compared to -1.2 in 2018. - Improvement in 2019 driven by trade: trade balance surplus of over $1 billion, assisted by an increase in non-oil exports of almost 6 percent (mainly traditional exports, such as banana and particularly shrimp) and a compression in oil and non-oil imports due to lower public and private sector demand. - Remittances and the service and primary income accounts remained stable in 2019. - 2020 outlook: current account expected to deteriorate to roughly -2 percent of GDP, due to: - the collapse in oil prices, - domestic disruptions in oil production from pipeline damages, - lower tourism-related income, - subdued remittances inflows amid the pandemic; - the decline in goods and services exports is projected to be partly offset by a sharp import compression on the back of weak domestic demand. ### Selected DSA and external debt framework indicators (reported) - Non-interest current account needed to stabilize external debt: debt-stabilizing non-interest current account = -0.3 (percent of GDP). - Table 2 (External Debt Sustainability Framework, 2015–2025) baseline external debt (in percent of GDP) by year: - 2015: 30.0 - 2016: 36.6 - 2017: 41.1 - 2018: 42.5 - 2019: 48.2 - 2020: 60.2 - 2021: 57.9 - 2022: 57.0 - 2023: 58.0 - 2024: 57.4 - 2025: 54.5 - Change in external debt (percent of GDP) recorded/projection: - 2015: 4.8 - 2016: 6.6 - 2017: 4.5 - 2018: 1.4 - 2019: 5.6 - 2020: 12.0 - 2021: -2.2 - 2022: -0.9 - 2023: 1.0 - 2024: -0.6 - 2025: -2.9 - Identified external debt-creating flows (percent of GDP): - 2020: 7.5 - 2021: -3.2 - 2022: -1.9 - 2023: -2.5 - 2024: -2.8 - 2025: -3.0 - Current account deficit, excluding interest payments (percent of GDP) projected: - 2020: -1.2 - 2021: -1.6 - 2022: -2.6 - 2023: -3.0 - 2024: -3.3 - 2025: -3.4 - Exports (percent of GDP) projections: - 2020: 22.1 - 2021: 22.0 - 2022: 22.3 - 2023: 22.6 - 2024: 22.8 - 2025: 23.0 - Gross external financing need (in billions of US dollars) projections: - 2020: 10.3 - 2021: 6.8 - 2022: 6.9 - 2023: 7.2 - 2024: 7.7 - 2025: 8.1 - Gross external financing need (in percent of GDP) and other DSA components are provided in the source tables and figures. *Source: IMF staff calculations (as presented in the provided chapter).* ### 2. Ecuador’s external position is weaker than the level consistent with medium-term ### 2. Ecuador’s external position is weaker than the level consistent with medium-term ### Current account assessment and gaps - The consumption-based allocation rules model: - CA Norm: 3.4 - Underlying CA: -0.1 - CA GAP: -3.5 - Elasticity: -12% - REER GAP: 29 - The EBA-lite Current Account model (commodity-exporter specification): - CA Norm: 0.4 - Underlying CA: -0.8 - CA GAP: -1.2 - Elasticity: -12% - REER GAP: 10 - The EBA-lite REER (ELRER) estimate: - Underlying CA: -1.2 - Elasticity: -12% - REER GAP: 9.8 - The EBA-lite consumption model suggests a current account surplus norm of 3.4 percent of GDP, implying a current account gap of about -3.5 percent of GDP. - A key consideration noted is the ongoing debt restructuring, which would lower external liabilities, keeping all else constant. - For the EBA-lite model, deviations of current policies from the desirable policies consistent with program objectives imply a policy gap of -0.6; mainly due to economic policies linked to private credit levels, growth, and fiscal policies, including public health expenditure policy. - Export and import elasticities used in estimating the CA responsiveness to REER changes: - Export elasticity: -0.23 - Import elasticity: 0.3 - The relatively low export elasticity (-0.23 vs -0.44 for other EMs) reflects structural characteristics (inflexible labor markets, high unit labor cost relative to labor productivity and low economic diversification) and is in line with estimates for oil-producing economies. ### Real exchange rate and competitiveness - REER movements and currency strength: - The REER depreciated by roughly 1 percent in 2019 (driven by inflation below trading partners and a slight depreciation in the US dollar). - In the first 5 months of 2020, the currency appreciated roughly 5 percent, mostly due to low inflation and an appreciation of the US dollar of 5 percent. - Comparative currency movements (first 5 months of 2020): - Brazil depreciated by 25 percent. - Colombia depreciated by 7 percent. - Mexico depreciated by 15 percent. - Labor market and wages: - Ecuador’s minimum wage is one of the highest in Latin America. - Average wages are broadly in line with peers and seem to match the level of labor productivity. - Recent relatively lower inflation compared to trading partners has helped Ecuador regain competitiveness in real wages. - The negative output gap closes by 2027; continued low inflation and further increases in labor productivity are expected to help restore competitiveness over time. - Business environment: - Survey-based indicators point to weaknesses in product and labor market regulation. - Ecuador ranks 90th of 141 countries in the Global Competitiveness Report, behind the average of LA6 countries. - Dollar appreciation effects: - US dollar appreciation has weakened competitiveness despite internal devaluation efforts. - Avoiding real appreciation in a dollarized economy is hard unless inflation is consistently low; internal devaluation periods were impaired by US dollar appreciation versus emerging market currencies. ### Reserve adequacy, external financing, and NIIP - Gross international reserves (GIR): - End-2019 GIR: US$2.93 billion (representing about 1.4 months of imports or 14.6 percent of the Fund’s ARA metric). - End-July 2020 GIR: US$3.04 billion. - The current stock of reserves is assessed as insufficient to mitigate potential shocks and to support dollarization. - External financing needs and flows: - External financing requirements in 2019: about US$9.1 billion, or 8.5 percent of GDP. - More than half of 2019 external financing requirements stemmed from public sector debt service (almost US$5 billion). - Private sector financing declined markedly in 2019 compared to 2018, a trend that could continue in 2020. - Net International Investment Position (NIIP): - NIIP in 2019: -25.9 percent of GDP. - NIIP is forecasted to improve during 2020. - Official IIP statistics show large increases in debt liabilities in recent years (likely primarily driven by government borrowing) mostly offset by accumulation of foreign assets by the private sector. ### Policy implications and recommended adjustments - To close the current account gap and realign the REER with medium-term fundamentals, the report highlights: - A significant adjustment in the fiscal deficit. - Efforts to raise competitiveness by increasing productivity and reducing labor costs. - Structural reforms and measures expected to restore international competitiveness include: - Creating a more efficient tax system. - Restraining public wages. - Eliminating rigidities in wages and prices. - Improving the reliability and efficiency of the energy sector and capital markets. - Tackling corruption. - Medium-term projection: - Over the medium term the current account is expected to reach a surplus of 0.7 of GDP. *Source: IMF staff calculations and Ecuador: External Sector Assessments for 2019 (excerpt).* ### 3. The following sections of this memorandum outline in detail our policy plans under ### 3. The following sections of this memorandum outline in detail our policy plans under ### A. Expanding Our Social Safety Nets - Immediate priority: support population, notably the most vulnerable, in response to the COVID-19 pandemic. - Objective: ensure all poor households are covered by social programs by upgrading the social registry and expanding coverage with World Bank assistance. - Governance: activate Interinstitutional Committee of the Social Registry Unit (in the Presidential Secretariat) composed of the General Secretariat of the Presidency, the Ministry of Economy and Finance, Secretariat “Plan Todo Una Vida”, and as a participant, the Ministry of Economy and Social Inclusion. - Committee cadence: meet monthly to review Social Registry surveys, including coverage of the population and social spending. - Coverage targets (Structural Benchmark): - Increase low-income beneficiaries coverage from 37 percent to 80 percent by December 16, 2021. - Increase number of families receiving social support by 225,000 by December 16, 2020 and by 159,000 by April 2021, implemented gradually but rapidly. ### B. Restoring Fiscal Sustainability While Supporting Our Population Findings and context: - Crisis trade-off: measures to protect lives and livelihoods accompanied by fiscal savings actions (reducing public wage bill, reforming fuel subsidies, cutting non-essential spending). - Despite savings, fiscal deficit expected to grow in 2020 due to lower oil prices, weaker economic activity, and increased public health spending for COVID-19. - Public debt expected to increase. Debt restructuring and financing actions: - International bond restructuring: - Bonds restructured: $17.4 billion of international bonds. - Bondholder consent: more than 98 percent. - Terms: extend maturities by 10 years (no principal payment until 2026) and lower coupons to about 5¼ percent (from 9¼ percent). - Agreement with China Development Bank (CDB): rescheduling $417 million of upcoming obligations in 2020-21 to 2022-24. - Objective: attain debt target of 40 percent by 2032 as enshrined in COPLAFIP. Planned fiscal consolidation and composition: - 2021 measures: - Roll back $800 million in COVID-related spending once crisis subsides. - Cut capital expenditure by about $700 million to make room for higher social spending. - Combined with other rationalization and revenue increases expected to improve overall balance by $5.4 billion from the previous year (6 ppt of GDP). - Consolidation target: non-oil primary balance including fuel subsidies consolidation of 5.5 percentage point of GDP over 2019-2025, reflected in an improvement of 5.5 percent of GDP in the overall NFPS balance. Elements of the fiscal package: - Tax reform (Structural Benchmark): - Rationale: small tax base, high personal allowances, complexity; low income and value added tax revenues; total tax expenses in 2018 were $5.8 billion, 5.3 percent of GDP and 41 percent of tax collected by SRI. - Proposal: submit tax reform elaborated with Fund staff; approval by National Assembly and enactment by September 2021. - Components: growth-friendly VAT reform; progressive PIT reform focused on the higher end of the income distribution; CIT reform geared to base-broadening. - Expected yield: 2½ percentage points of GDP. - Revenue gains begin to accrue in 2022. - Complementary: enhance Large Taxpayers Office (LTO) and reinforce audit functions to reduce compliance risk. - Public sector wage-bill adjustment: - Temporary reduction in working hours for public sector employees (excluding strategic sectors such as health, army and police and vulnerability conditions); measure extended until May 2021 to generate savings for social safety net. - Strategy: realign wage bill through prudent renewal of occasional contracts and new hiring; adjust wages of newly hired public employees to align more closely with private sector. - Procurement reform: - Decree to create Unified System for the Purchase of Medicines and Strategic Goods for the Health Sector (May). - Objectives: increase transparency; fight price surcharges; lower prices via consolidated purchases; ensure transparency rules under public procurement law apply; publish public procurement contracts and conduct independent audit of COVID-19-related spending (as specified in related prior action and structural benchmark). - Envisaged procurement changes: more competitive bidding, improved planning, demand consolidation, outsource inventory management with logistics operator. - Incorporate identified efficiency gains and fiscal savings into the 2022 budget. - Impact: reduce out-of-pocket health expenditure; ensure traceability of medicines and medical devices acquired by the State. - Fuel subsidy reform: - Implemented: automatic fuel pricing mechanism aligning domestic fuel prices with international prices. - Benefits: long-lasting fiscal savings, efficient energy use, reduced resource depletion, environmental benefits, reduced smuggling. - Pricing mechanism: limits monthly increase in prices, making adjustments gradual. - Planned decree: modify pricing formula to establish link between domestic retail prices and import prices using a benchmark reference price; regulator sets specific reference prices. - Commitment: limit discretion in management of pricing formula, make reform permanent, and implement a communications strategy with World Bank assistance. - Moderation in capital spending: - Prioritize capital expenditure projects and improve efficiency. - Plan to undertake a Public Investment Management Assessment (PIMA) supported by IMF technical assistance to improve public investment management cycle and increase transparency and efficiency. Monitoring and safeguards: - Monitor NFPS balance with quantitative conditionality in Table 1; initially through an indicative target with plan to upgrade to a quantitative performance criterion for end-August 2021. - Improve data timeliness and reliability from subsectors before elevating targets; implement electronic data submission systems; require subsectors to screen data of individual entities before submitting. - Data submission based on actual execution rather than budgeted amounts. - Commitment: refrain from new government international borrowing arrangements based on repurchase agreements or pledging Central Bank assets. ### C. Strengthening Fiscal Frameworks, Governance, and Transparency Transparency and fiscal management improvements: - Publish sovereign debt contracts as legally permissible; adopt regulation requiring publication of audited financial statements by all public enterprises. - Request for IMF support: one long-term expert (LTX) on public financial management (PFM) and one short-term expert (STX) on government finance statistics (GFS) to enhance fiscal and debt transparency, build capacity on cash management and financial planning, and manage fiscal risks related to NFPS subsectors. Committed measures: - Operationalize COPLAFIP: - Amendments to COPLAFIP adopted July 2020. - Prior Action: adopt regulation on data reporting by subsectors of the NFPS. - Structural Benchmark: adopt remaining regulations to fully operationalize amendments to the law by end-November. - Reorganize Ministry of Economy and Finance with IADB support and establish a fiscal risk unit. - Enhance transparency in public procurement: - Prior Action: enact regulation mandating publication of all public procurement contracts with key information (names of awarded entities and their beneficial owner(s)), and ex-post validation of delivery on a dedicated government website. - Complementary measures: update registro único de proveedores and company registry data to incorporate beneficial ownership identification requirements. - Avoid accumulation of arrears: - Evaluate existing stock of domestic payment arrears of the central government and selected relevant NFPS entities accumulated in 2020 by April 2021. - Put in place a strategy to clear, monitor and prevent further accumulation, in line with IMF technical assistance recommendations (Structural Benchmark). - Implement a new monitoring system. - Improve cash and debt management: - Prepare a financial plan for the budgetary central government for the remainder of the year to ensure an adequate cash balance of the social security (Prior Action). - Prepare a similar plan for 2021 to be approved by the MEF Financial Committee by December 16, 2020 (Structural Benchmark). - Prepare and publish a Medium-term Debt Management Strategy (MTDS) by end-February 2021 (Structural Benchmark) with IMF TA support to assess cost and risk trade-offs of funding sources and establish a policy agenda; MTDS to support domestic debt development goals. ### Fiscal Policy Inter-Agency Coordination - Need for close coordination across agencies given dollarization regime and limited policy levers. - NFPS coordination: - Timely and accurate data submission by NFPS subsectors to enable MEF to compile fiscal statistics and conduct consistency checks. - Track progress towards intra-annual fiscal targets and medium- and long-term debt targets. - Central bank balance sheet considerations: - Net international reserves co-move positively with public sector deposits at the BCE and decline with short-term gold-collateralized foreign operations. - Legacy financial linkages with public banks reflect past BCE quasi-fiscal activities and affect central bank balance sheet health. - Implementation platform: - Set up a platform bringing together implementing agencies frequently to foster synergy and track progress vis-à-vis complementary commitments under the new reform plan. - MEF reorganization (with IADB support): - Create a dedicated statistics unit in the Vice Ministry of Finance responsible for collecting, processing and compiling fiscal statistics with sub-units for NFPS subsectors. - Establish a unit in the Vice Ministry of Economy to cross-check fiscal statistics and undertake financial programming. - Establish a fiscal risk unit for evaluation, mitigation and management of public finance risks. - Further structural changes to ensure adequate coverage of debt management activities, including front office (market interaction), middle-office (MTDS) and back-office (recording), coordinating with Subsecretaria de Asuntos Monetarios y Financieros. *Source: Ecuador — Memorandum of Economic and Financial Policies (excerpt).* ### 15. The dollarization regime protects the purchasing power of all Ecuadorian families and ### 15. The dollarization regime protects the purchasing power of all Ecuadorian families and the financial value of their homes and other assets, allowing access to credit and better planning ### Strengthening BCE institutional foundations and legal framework - Objective: Strengthen institutional foundations of the BCE, including sound governance and a fortified clear legal framework, to support the dollarization regime. - Actions committed: - Submit to the National Assembly the amendments to the monetary and financial code (COMYF), elaborated in consultation with Fund staff and as committed under the 2019 EFF, including the 2019 safeguards assessment and technical assistance, and enact this law approved by the National Assembly in the exercise of its powers by end-January 2021 (Structural Benchmark). - Consolidate safeguards and other amendments of the existing legal framework into a single piece of legislation. - Set the BCE on a path of gradually building up international reserves to fully back both the deposits of private and public financial institutions held at the Central Bank and coins in circulation. - Key reform elements to be included in the COMYF amendments: - Clearly define the objectives of the BCE and focus its functions on supporting the dollarization regime. - Strengthen the operational autonomy of the BCE, including by establishing an independent Board that has fiduciary responsibilities to the Central Bank. - Unwind past transactions that resulted in the Central Bank holding either directly or indirectly government debt, revert the transfer of equity in public banks to the Central Bank’s balance sheet, and provide closure to the legacy bad bank from the 1999 crisis. - Set the BCE on a path of gradually building up international reserves in order to fully back both the deposits of private and public financial institutions held at the Central Bank and coins in circulation. ### BCE balance sheet weaknesses and protections - Sources of weakness in the BCE balance sheet: - Legacy assets from the 1999 financial crisis. - Expansion of credit to the public sector earlier in the last decade. - A significant payment-in-kind of government debt in 2017. - A large amount of public sector securities held, which increased as a result of unwinding a gold swap operation of 2017. - Current protections: - Ley de Fomento Productivo passed in 2018 and other supplementary regulations protect the Central Bank from key risks derived from direct and indirect budgetary financing. - Regulatory requirements implemented under the previous EFF preclude new central bank financing to the government. - Remaining unsolved issues due to failure to pass COMYF amendments in late 2019: - Lack of independence. - Weak governance. - Low coverage of financial sector deposits with liquid reserves assets. - Lack of a clearly defined objective for the BCE and its role in systematic financial stability. ### Audit, governance, and prior actions - Commitments to transparency and governance: - Strengthen the external audit of the BCE and establish an audit committee (Prior Actions). - Prepare an audit committee charter for approval by the Junta de Política y Regulación Monetaria y Financiera by end-November 2020 to align the BCE’s internal audit with international standards, making the audits independent and expanding coverage to all BCE operations (Structural Benchmark). ### Boosting financial system resilience - System starting point: Financial system entered the crisis "strong, liquid, and well-capitalized." - Early measures implemented: - Injecting liquidity into the system by lowering banks’ contributions to the liquidity fund. - Allowing loan payment deferrals. - Supervisory and regulatory measures going forward: - Ensure greater supervisory scrutiny, particularly of cooperatives which have grown rapidly, with Fund technical assistance in stress testing. - Ensure that loan portfolios subject to payment deferrals are reported and recorded transparently. - Upgrade resolution tools at the disposal of the Superintendency of Banks. - Fine tune the design of the Reactivate Ecuador credit facility for microenterprises and SMEs, consider appropriate rates and longer tenors. - Roll back crisis measures once conditions permit. ### Domestic debt, supplier payments, and market safeguards - Ad-hoc issuance for supplier claims: - Issuance to pay certain supplier claims reached $224 million to date. - Suppliers can liquidate these securities in the secondary market with no intervention, albeit at a discount. - Authorities decided to cap the stock of issuance for this purpose at $500 million. - Work with the IMF on a time-bound implementation plan to avoid potential disruption in the domestic debt and money markets. ### Financial framework modernization and coordination - Preparatory work: - Start preparatory work to modernize the financial framework with Fund technical support to strengthen supervision functions of the superintendencies and align with international best practices, including upgrading the available resolution toolkit. - Financial inclusion strategy: - In collaboration with the World Bank, a strategy to promote more financial inclusion by reducing the number of regulated interest rate segments; plan to start implementation by end of January 2021. - Financial coordination committee: - Make official the formation of a financial coordination committee to prevent financial instability, foster information sharing, communication and joint analysis among the Monetary Board, Central Bank, Ministry of Economy and Finance, Superintendencies, and the deposit insurance agency, without overlapping legal competencies. - Committee will support post-emergency policy making and design of a medium-term strategy for financial deepening. ### Liquidity fund and market vigilance - Role of the liquidity fund: - Key safeguard and emergency lending tool for the financial system in Ecuador’s dollarized economy. - Goal: ensure it acts as a risk pooling tool, is well resourced, and provides support where needed. - Planned actions: - In coordination with the IMF, re-examine the liquidity fund’s lending options to optimize lending to solvent but illiquid entities. - Coordinate with the IMF prior to taking any decision related to the fund if necessity arises. ### Payments, digitalization, and dollarization support - COVID-driven changes: - Pandemic increased health concerns about cash use and sped up technological absorption by individuals and businesses. - Opportunities and commitments: - Promote alternative forms of payments (credit cards, online transfers, online payment in e-commerce) to reduce use of cash. - Revise sources of red tape and disincentives in the use of these technologies to allow further adoption. - Note: To the extent new options for payment remain fully backed by deposits, they will strengthen dollarization. - Expected benefits: - Operational efficiency to the BCE, increased financial inclusion, reduced potential sources of COVID contagion, and facilitation of cash transfers for social policy. ### Strengthening competitiveness and private sector-led growth - Overarching goal: Restore international competitiveness and catalyze private sector-led growth to boost employment and reduce informality. - Governance, anticorruption, AML/CFT commitments: - Enact the anticorruption law, currently before the National Assembly, following its adoption by the National Assembly in the exercise of its powers, by end-December 2020 to ensure that acts of corruption are criminalized in line with Articles 15 to 30 of the United Nations Convention (Structural Benchmark). - Publish additional information online, including itemized information on incomes, assets and liabilities, and ensure easy, searchable, and timely access to declarations of high-level officials and/or politically exposed persons (PEPs) based on regulations adopted by the General Comptroller, at the request of the government, to enhance online publication of asset declarations by end-November 2020 (Structural Benchmark). - Require enhanced customer due diligence when transacting with senior officials and PEPs in line with FATF Recommendation 12; conduct a broader review of the AML/CFT legal framework with Fund technical support. - Conduct an independent audit of COVID-related spending by end-June 2021 by the Office of the Comptroller General (Structural Benchmark). - State-owned enterprises and PPPs: - Complete merger of PetroAmazonas and PetroEcuador and eliminate seven state-owned enterprises (SOEs). - Revamp SOE law with IADB support to improve transparency and governance, align SOE standards with private companies. - Develop a PPP framework with IADB support; establish a fiscal risk unit in the MEF to evaluate PPP viability and quantify risks to the public sector’s balance sheet; present such risks in a fiscal risk statement starting with the 2022 budget. - Domestic capital markets: - Develop domestic capital markets with technical assistance from the United States Treasury. - Standardize government securities, replace voluntarily non-standardized short-term securities (including those held by the BIESS) with standardized, longer-term ones, develop a yield curve, and lengthen maturities of short-term instruments. ### Structural reform agenda (short, medium, long term) - Tax reform: - Ambitious tax reform including a growth-friendly VAT reform, PIT reform focused on the higher end of the income distribution, and CIT reform geared towards reducing tax expenses and base-broadening with revenue gains starting to accrue in 2022. - Government service provision and digitalization: - Accelerate use of technology to digitize government services, reduce red tape, reduce time and costs of doing business, increase transparency and help reduce the size of government. - Ministry of Telecommunications’ Ecuador Digital objective: have all government processes online by 2022, and 80 percent by the end of the current administration. - Labor market modernization: - Improve and modernize the labor market to allow new forms of labor contracts to support increased female labor force participation and youth employment. - Since June 22 (Humanitarian Law in effect), more than 100,000 jobs have been created and 45,000 jobs have been saved through emergency hour reduction. - Social security sustainability: - Structural changes needed for IESS sustainability and optimization of resources; BIESS modernization to generate wealth for pension holders. - Economic integration: - Continue trade integration, commit to join the Pacific Alliance in the near future, analyze tariff schedule with multilateral support to simplify import requirements and reduce import costs of production inputs and capital. ### Capacity development and government financial statistics (GFS) - Capacity development engagements: - Over the last two years, benefited from over 25 technical assistance missions from the Fund, mostly directed to the MEF, the BCE and national customs services. - Continue capacity development under the new Fund-supported program, focusing on government financial statistics, public financial management, and financial programming. - GFS modernization commitments and STX support: - Leverage a Fund-provided STX in GFS, identify and assign dedicated staff to work closely with the expert, and follow up on the expert’s recommendations. - Ensure responsibility for compilation of GFS and Public Debt Statistics Compilation Guide (PSDS) across MOF, Central Bank, and public entities. - Identify one senior official (deputy director or director) from each statistical agency involved and one senior official of Petroecuador and Petroamazonas as designated counterparts to the experts. - Undersecretary of the Ministry of Finance responsible for timely completion of remedial actions under the misreporting agreement and achieving outputs and indicators agreed with experts and the IMF. - STX will work through May 2021 to: - Compile and publish the corrected GFS and PSDS time series for the period of 2012 to 2019, above and below the line, disaggregated by subsectors, as committed under the corrective actions under the misreporting case, by end-May 2021 (Structural Benchmark). - Compile and prepare a GFS and PSDS compilation guide for the NFPS to assist source data suppliers and users of fiscal data, and disseminate it to relevant agencies by end-May 2021 (Structural Benchmark). - (1) Construct a timely set of preliminary fiscal data to be used as an early warning system to monitor targets under the program, in line with IMF recommendations; (2) check data consistency; and (3) analyze the reasons of possible differences between these preliminary data and the final data. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ecuea2020002.pdf* ### 33. We are also fully committed to improving our cash and debt management. In this ### 1ecuea2020002 - 33. We are also fully committed to improving our cash and debt management. In this ### Cash and debt management support and activities (paragraphs 33–35) - IMF-funded LTX in public financial management (PFM) to start in October; MEF staff will work closely with the LTX to improve functional capacity for core PFM functions, with emphasis on cash projections and production of a financing plan. - Institutionalization measures: - Assign dedicated staff to the LTX project. - Document practices learned to retain knowledge in-house and hedge against staff turnover. - Coordinate LTX work with STX in GFS and the Resident Representative through periodical meetings. - LTX methodological and training support to MEF staff will cover: - Cash and financing planning, monitoring of budget execution, updating plans, fiscal reporting; - Fiscal risks identification and management related to NFPS subsectors; - Arrears strategy and monitoring on prevention, clearance, and reporting; - Budget processes, including expenditure commitments control, cash and accruals basis of reporting, extended use of FMIS in NFPS entities, procurement and enhanced transparency; - Coordination in collecting and analyzing required data and information from entities to develop the above tasks. - Support to strengthen financial oversight and banking legal framework: - Short-term support to the superintendency of banks to improve stress testing capacity; a short-term expert to improve policy response during post-emergency transition. - Additional TA to align banking law with international standards of supervision, regulation, and banking resolution will be needed during the program. - Financial Programming and Policies (FPP) course customization: - MEF and BCE staff have received virtual training on FPP. - Core mission to deliver a customized macro-framework scheduled for delivery in October. - FPP training will enable staff across agencies to study inter-linkages among sectors and run internally consistent policy scenarios; it will also illustrate inter-agency coordination. ### Communications and program monitoring (paragraphs 36–37) - Communications strategy: - A far-reaching communications strategy was developed and started implementation at end-August 2020 to articulate program benefits and build social consensus. - Program reviews and monitoring: - Program will be monitored based on conditionality set out in Tables 1 and 2 and definitions in the Technical Memorandum of Understanding. - First review expected on or after December 15. - Second review expected on or after April 15. ### Quantitative performance criteria and indicative targets (Table highlights) - Quantitative performance criteria (Millions of U.S. dollars, unless otherwise indicated): - 1. Overall balance of the budgetary central government and CFDD (floor) (cumulative change) - End-Sept. 2020: -2,894 - End-Dec. 2020: -5,095 - End-Apr. 2021: -1,146 - End-Aug. 2021: -3,223 - 2. Accumulation of NFPS deposits at the central bank (floor) - End-Sept. 2020: 0 - End-Dec. 2020: 589 - End-Apr. 2021: 232 - End-Aug. 2021: 97 - 3. Non-accumulation of external payments arrears (continuous PC) - End-Sept. 2020: 0 - End-Dec. 2020: 0 - End-Apr. 2021: 0 - End-Aug. 2021: 0 - 4. (No new) Gross credit to government from the central bank (continuous PC) - End-Sept. 2020: 0 - End-Dec. 2020: 0 - End-Apr. 2021: 0 - End-Aug. 2021: 0 - Indicative targets: - 6. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) - End-Sept. 2020: -2,539 - End-Dec. 2020: -6,825 - End-Apr. 2021: -628 - End-Aug. 2021: -1,934 - 7. Overall balance of the NFPS (floor) - End-Sept. 2020: -2,706 - End-Dec. 2020: -6,662 - End-Apr. 2021: -234 - End-Aug. 2021: -804 - 8. Change in the stock of NIR - program definition (floor) - End-Sept. 2020: -2,200 - End-Dec. 2020: -3,939 - End-Apr. 2021: -300 - End-Aug. 2021: -1,100 - 9. Coverage of the cash transfer programs for lower income households - number of families (floor) - End-Sept. 2020: 62,240 - End-Dec. 2020: 225,557 - End-Apr. 2021: 158,964 - End-Aug. 2021: 278,187 - Note: For 2020 targets, cumulative change from July 1, 2020. For 2021 targets, cumulative change from January 1, 2021. ### Prior actions and structural benchmarks (Table 2 highlights) - Prior Actions (selected): - Fiscal framework: Adopt regulation to implement July 2020 amendments to COPLAFIP requiring reporting of fiscal data from public sector entities to the Ministry of Economy and Finance (objective: strengthen budget execution and program monitoring beyond the central government; Improve institutional capacity). (PA) - Transparency and governance: Enact/amend regulation to mandate publication on a government website of all public procurement contracts and related information (objective: Improve expenditure control and governance). (PA) - Cash management: Deliver to IMF staff a PGE financial plan, prepared with IMF TA and approved by the MEF Financial Committee, with detailed monthly forecast for rest of 2020 (objective: Improve institutional capacity and identify early warning signs of impending liquidity constraints). (PA) - BCE audit improvements: Pass JPRF resolutions to adopt external auditor selection and rotation policy and to create an audit committee (objective: Improve the BCE’s audit mechanisms). (PA) - Structural Benchmarks (selected with due dates): - Adopt regulation to implement July 2020 amendments to COPLAFIP covering public debt, MTFF, budget preparation, expenditure ceilings, fiscal strategy publication, budget execution, cash management and arrears, fiscal risk management framework, corrective measures regime, and fiscal rules framework. (End-Nov. 2020) - BCE internal audit charter approved by JPRF aligned with international standards. (End-Nov. 2020) - Enhance online publication of asset declarations for high-level public officials/PEPs per General Comptroller regulations. (End-Nov. 2020) - Deliver to IMF staff a PGE financial plan for the year 2021 approved by the Financial Committee. (Dec. 16, 2020) - Enactment of anticorruption legislation approved by the National Assembly criminalizing acts of corruption in line with Articles 15 to 30 of the United Nations Convention Against Corruption. (End-Dec. 2020) - Enactment of amendments to the Central Bank’s legal framework (COMYF reform) as committed under the 2019 EFF. (End-Jan. 2021) - Publish a Medium-Term Debt Management Strategy (MTDS) prepared with IMF TA. (End-Feb. 2021) - Share updated arrears’ clearance strategy with IMF staff with updated stock of arrears as of end 2020. (End-Apr. 2021) - Correct and publish historical NFPS data back to 2012. (End-May 2021) - Prepare a compilation guide in consultation with IMF TA and disseminate to data providers across the NFPS through a workshop. (End-May 2021) - Independent audit of COVID-19-related spending by the Office of the Comptroller General and publish results on a government website. (End-Jun. 2021) - Enact a tax reform elaborated with Fund staff to generate revenue and improve tax system efficiency. (End-Sep. 2021) - Upgrade the social registry and expand social assistance coverage to at least 80 percent of families in the bottom three deciles of the income distribution. (Dec. 16, 2021) ### Technical Memorandum of Understanding (TMU) key definitions and modalities (Attachment II highlights) - TMU purpose: Defines monitoring definitions for PCs and ITs under the Extended Fund Facility and describes program assessment methods and information requirements. - Reference to Fund statistical methodology (e.g., Government Finance Statistics) for variables not explicitly defined in TMU. - Program exchange rates (as of July 31, 2020; Source: Bloomberg, as of July 31, 2020): - US Dollar to Euro 0.85 - US Dollar to Renminbi 6.98 - US Dollar to Yen 105.83 - US Dollar to SDR 0.71 - US Dollar to British Pound 0.76 - US Dollar to South Korean Won 1,191.03 - US Dollar to Swiss Franc 0.91 - US Dollar to Canadian Dollar 1.34 - US Dollar to Danish Krone 6.32 - US Dollar to Swedish Krone 8.78 - US Dollar to Norwegian Krone 9.10 - US Dollar to Australian Dollar 1.40 - US Dollar to Mexican Peso 22.28 - US Dollar to Colombian Peso 3,732.71 - Gold prices (US$/ounce) 1,975.86 - Definitions for the floor on the overall balance of the budgetary central government and CFDD: - CG and CFDD consist of the budgetary central government (PGE, including universities) and the account of financing oil derivatives (CFDD). - Overall balance = total revenues of CG and CFDD minus their total spending. - Total revenues recorded on cash basis; revenues explicitly included: revenues from oil exports; revenues from the domestic sales of oil derivatives; interest revenues; tax revenues (ingresos tributarios); other revenues (otros ingresos); proceeds from asset monetization (leasing of assets owned by CG and CFDD). - Total spending recorded on an accrual basis and comprises wages and salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios), interest expenditure (interés), other current spending, capital expenditures (including capital transfers and other investment outlays). Other current spending includes the cost of imports and local purchases of petroleum derivatives (Cuenta de Financiamento de Derivados Deficitarios). - Treatment of public-private partnerships, divestment costs, and Account 99 expenditures are specified (recorded above-the-line on an accrual basis as obligations accrue). - Monitoring and reporting: - All fiscal data needed for program monitoring provided to the Fund within 45 days from the end of each test date shown in Table 2. - Preliminary monthly data provided with a lag of no more than 30 days after the end of each month. - Adjustor on oil prices: - Floor on the overall balance of CG and CFDD will be adjusted upward/downward by US$23.85 million at corresponding test dates for each US$1 per barrel the average Ecuador mix crude oil price is above/below the program assumption defined in Table 3. - This adjustor is capped at US$119.33 million at corresponding test dates. - The average Ecuador mix oil price calculated as total value of crude oil exports divided by total volume of oil exports over the period since the prior test date. *Source: Ecuador — Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding (excerpts) contained in the provided PDF content.* ### 14. The Non-Financial Public Sector (NFPS, Sector Público No-Financiero) for the purposes ### 14. The Non-Financial Public Sector (NFPS, Sector Público No-Financiero) ### Definition and scope - The NFPS for program purposes consists of: - the CG and CFDD (as defined in the chapter), - Decentralized Autonomous Governments (including municipal governments, provincial governments and parish boards), - Social Security Funds (including IESS, ISSFA, ISSPOL and BIESS), - Non-Financial State Owned Enterprises (SOEs, detailed in Table 4), - Development Bank of Ecuador (BDE), - accounts related to the payments to private operators of oil concessions (Ministerio de Energia y Recursos Naturales no Renovables). - The Central Bank of Ecuador falls outside of the NFPS perimeter. - Table 4 (SOEs covered under NFPS) lists: - Empresa Pública de Exploración y Explotación de Hidrocarburos Petroamazonas - PAM - Empresa Pública de Hidrocarburos del Ecuador Petroecuador - PEC - Empresa Pública Flota Petrolera Ecuatoriana-EP FLOPEC - Empresa Nacional de Ferrocarriles del Ecuador – ENFE (*) - Empresa Pública Línea Aérea del Ecuador TAME (*) - Empresas Públicas Menores (Empresas de Agua Potable) - (*) SOEs in liquidation process, which will be in fiscal data until the liquidation process finishes. ### Deposits at the Central Bank and monitoring - Deposits of the NFPS at the Central Bank of Ecuador (BCE) include all depository liabilities (time and on-call deposits) at the BCE of the NFPS. - Monitoring: - The accumulation of NFPS deposits at the BCE at each test date is measured as the change in the stock of deposits between the first and last day of the corresponding test dates as shown in Table 2. - NFPS deposits at the BCE data will be provided to the Fund at weekly frequency within 5 business days following the end of the week. ### Adjustors to NFPS deposit floor - Adjustor on external borrowing: - The floor on accumulation of NFPS deposits will be adjusted upward/downward by the amount of NFPS borrowing from non-residents above/below that envisioned under the program, as reported in Table 5 and net of liability-management issuances that have no net impact on the outstanding stock of NFPS debt. - International borrowing comprises issuance of international bonds. - Adjustor on disbursements from multilateral institutions and China: - The floor will be adjusted upward/downward by the amount of the excess/shortfall in program loan disbursements from the IMF, other multilateral institutions (the IADB, World Bank, CAF, and FLAR), China, and grants, relative to the baseline projection reported in Table 6. - Program loan disbursements are defined as external loan disbursements (excluding project financing disbursements) from official creditors that are freely usable for NFPS budget operations. - Adjustor on oil prices: - The floor will be adjusted upward/downward by US$23.85 million at corresponding test dates for each US$1 per barrel that the average Ecuador mix crude oil price is above/below the program assumption defined in Table 3. - This adjustor is capped at US$119.33 million at corresponding test dates. - The average Ecuador mix oil price will be calculated as the total value of crude oil exports divided by the total volume of oil exports over the period since the prior test date. - Displayed oil-price line (as presented): - Ecuador mix crude oil price (US$ per barrel)27.036.438.139.239.9 - Source line included in the text: "Source: Ministry of Finance and IMF staff estimates" ### Ceiling on external payment arrears by the NFPS - Definitions: - External debt is determined according to the residency criterion except for debt securities where criterion is place of issuance. - "Debt" is defined as a current, i.e., not contingent, liability created under a contractual arrangement requiring future payments in assets or services; primary forms include: - (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits), repurchase agreements and official swap arrangements; - (ii) suppliers’ credits; - (iii) leases (debt equals the present value at lease inception of all lease payments expected to be made, excluding payments for operation, repair or maintenance). - Arrears, penalties and judicially awarded damages arising from failure to make debt payments are debt; failure to make payments not considered debt under this definition will not give rise to debt. - External payment arrears for program monitoring: - Defined as (i) external debt obligations (principal and interest) falling due after September 30, 2020 that have not been paid within 90 days of the due date, considering contractual grace periods, and (ii) payment arrears on goods delivered or services rendered by external entities. - Coverage exclusions: - This performance criterion does not cover (i) arrears on short-term trade credit or letters of credit, (ii) arrears on debt subject to renegotiation or restructuring, and (iii) arrears resulting from nonpayment of commercial claims subject to litigation initiated prior to September 30, 2020. - Monitoring: - This performance criterion (PC) will be monitored on a continuous basis. ### Ceiling on new gross central bank direct and indirect financing to the NFPS - Definitions: - BCE direct financing and indirect financing through public banks include overdraft transfers from the BCE to NFPS entities, advance distribution of unrealized BCE profits, BCE acquisition of government debt on the primary market or by purchase from public institutions, and BCE lending to public banks for purpose of acquisition of government debt on the primary market or by purchase from public institutions. - Footnote: Any restructuring of debt originally owed by the Ministry of Economy and Finance to Goldman Sachs that was subsequently transferred to the BCE will not be considered as financing to the NFPS for the purpose of this target. - Monitoring: - This PC will be monitored on a continuous basis. - Monthly data on amortizations and disbursements of credit to NFPS and to publicly-owned banks for the purpose of financing the NFPS will be provided within five business days to the Fund. ### Indicative target: Floor on the non-oil primary balance of the NFPS - Definitions: - NFPS defined as above. - The non-oil primary balance of the NFPS, including fuel subsidies, is defined as the non-oil primary balance of the NFPS minus spending on subsidies on petroleum products. - Non-Oil Primary Balance of the NFPS = total non-oil revenues (ingresos no petroleros) minus primary non-oil spending (gastos primarios no petroleros). - Primary non-oil revenues are recorded on a cash basis. - Revenues explicitly included: - Tax revenues (ingresos tributarios), but excluding corporate income tax paid by state-owned oil companies; - Social security contributions (contribuciones sociales); - Other revenues (otros ingresos); - Proceeds from asset monetization (i.e. revenues from the leasing of assets owned by the non-financial public sector). - Revenues explicitly excluded: - Interest income (recorded on cash basis); - Proceeds from the sale of financial assets; - Revenues from the privatization of government-owned entities; - Revenues from oil exports; - Revenues from the domestic sales of oil derivatives; - The operating surplus of state-owned oil companies (PetroAmazonas and PetroEcuador). - Primary non-oil spending: - Recorded on accrual basis and comprises spending on wages and salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios), social security benefits (prestaciones sociales), other current spending, capital expenditures not related to oil investment. - Other current spending excludes cost of imports of petroleum derivatives (Cuenta de Financiamento de Derivados Deficitarios) and payments to private operators of oil concessions (Ministerio de Energia y Recursos Naturales no Renovables). - Petroleum product subsidies: - Include subsidies for gasoline, diesel, jet fuel, av gas, fuel oil and liquefied petroleum gas. - Subsidies defined as difference between distributor sale price and cost of product. Cost is a weighted average between cost of imported petroleum derivative products and domestically produced petroleum products, cost of transportation, storage, and commercialization. - For domestically produced products, cost uses export price of eastern crude (opportunity cost) as raw material plus cost of refining. Import cost includes FOB price plus freight and insurance. - Treatment of PPPs and divestment costs: - Government-funded public-private partnerships treated as traditional public procurements; accrued NFPS obligations recorded transparently in budget data and measured as part of NFPS government deficit as they accrue; accrued but not settled obligations recorded as public debt or contingent liabilities depending on nature. - Costs associated with divestment operations or liquidation of public entities (e.g., cancellation of contracts, severance) will be recorded as spending. - All expenditures recorded as a credit in “Account 99” will be recorded as spending above-the-line on an accrual basis as obligations accrue. - Monitoring: - All fiscal data needed for program monitoring will be provided to the Fund within 60 days from the end of each test date as shown in Table 2. - Preliminary monthly data will be provided with a lag of no more than 45 days after the end of each month. ### Indicative target: Floor on the overall balance of the NFPS - Definitions: - Overall balance of NFPS = non-oil primary balance of NFPS + oil balance of NFPS + interest revenues of NFPS − interest expenditures of NFPS. - Oil balance of NFPS = (i) revenues from oil exports + (ii) revenues from domestic sales of oil derivatives + (iii) operating surplus of state oil companies (PetroAmazonas and PetroEcuador) − [(i) expenditures on investment in the oil sector + (ii) expenditures on imports of petroleum derivatives (de Financiamento de Derivados Deficitarios) + (iii) payments to private oil companies (Ministerio de Energia y Recursos Naturales no Renovables)]. - NFPS interest expenditures measured on cash basis; all other expenditures measured on accrual basis. - Monitoring: - All fiscal data needed for program monitoring will be provided to the Fund with a lag of no more than 60 days after the end of each test date as shown in Table 2 and preliminary data with a lag of no more than 45 days after the end of each month. - Adjustor on oil prices: - Same oil-price adjustor as for NFPS deposit floor: US$23.85 million per US$1 per barrel deviation, capped at US$119.33 million per test date; average price calculated as total value of crude oil exports divided by total volume of oil exports since prior test date. ### Floor on change in the stock of Net International Reserves (NIR) - Definitions: - NIR computed as US dollar value of usable gross international reserve assets of the BCE minus (i) gross reserve-related liabilities to nonresidents of the BCE, and (ii) reserve holdings of domestic banks and deposits of other financial institutions held at the BCE. - Non-U.S. dollar denominated foreign assets and liabilities converted into U.S. dollar at program exchange rates. - Usable gross international reserve assets include (consistent with BPM6): - (i) currency and deposits; (ii) monetary gold; (iii) holdings of SDRs; (iv) reserve position in the IMF; (v) securities (including debt and equity securities); (vi) financial derivatives; (vii) other claims (loans and other financial instruments). - Specifically excluded from gross international reserves: - Any precious metals or metal deposits, other than monetary gold, held by the BCE; - Assets in nonconvertible currencies and illiquid assets; - Claims on residents; - Any reserve assets that are pledged, collateralized or otherwise encumbered (unless 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 original maturity of one year or less; - Short-term liabilities of the central government with maturity of less than 30 days; - The stock of IMF credit outstanding; - The nominal value of all derivative positions (including swaps, options, forwards, and futures) of the BCE implying sale of foreign currency or other reserve assets. - Reserve holdings of domestic banks at the BCE: - All liabilities of the BCE to other depository institutions (otras sociedades de depósitos, as defined in the BCE’s Metodología: Información Estadística Mensual, 4th Edition of May 2017). - Deposits of other financial institutions at the BCE: - All liabilities of the BCE to other financial institutions (otras sociedades financieras, as defined in the BCE’s Metodología: Información Estadística Mensual, 4th Edition of May 2017), with the exception of deposits of the BIESS, including those held in trust funds (“fideicomisos BIESS y fideicomisos IESS). - Adjustors to the NIR floor: - Adjustor on external borrowing: NIR floor adjusted upward/downward by amount of borrowing from non-residents above/below program assumptions (Table 5), net of liability-management issuances with no net impact on outstanding NFPS debt. - Adjustor on multilateral and bilateral disbursements: NIR floor adjusted downward/upward by shortfall/excess in loan disbursements by multilateral institutions (IADB, World Bank, CAF, FLAR), bilateral partners (e.g., China) and grants relative to baseline (Table 6). Program loan disbursements defined as external loan disbursements (excluding project financing) freely usable for NFPS budget operations. - Adjustor on oil prices: same US$23.85 million per US$1 per barrel with cap US$119.33 million; average Ecuador mix price calculated as total value of crude oil exports divided by total volume of oil exports since prior test date. - Monitoring: - Change in NIR measured as cumulative change in stock of NIR at each test date relative to stock on June 30, 2020 (which stood at US$ -4,807 billion for the end-September and end-December 2020 test dates) and relative to the stock of NIR on December 31 of the preceding year for subsequent test dates. - Foreign exchange asset and liability data will be provided to the Fund at weekly frequency within 5 business days following the end of the week. ### Selected numerical program lines and timing (as presented) - Total market issuance consistent with program targets (cumulative) 1/: 0 0 0 0 - 1/ For 2020: cumulative from July 1 - Expected disbursements of program loans by multilaterals 1/: 2075 4725 600 1150 - Expected disbursements from China 1/: 0 1700 700 0 - 1/ For 2020, cumulative from July 1. For 2021, cumulative from January 1, 2021. *Source: Ministry of Finance and IMF staff estimates (as presented in the content unit).* ### 50. Social assistance coverage of poor families for the purpose of the program is ### 1ecuea2020002 - 50. Social assistance coverage of poor families for the purpose of the program is ### Definition of social assistance coverage (Paragraph 50) - Coverage is computed as the sum of all active beneficiary families in the three bottom deciles of the income distribution that benefit from at least one social assistance program. - Poor beneficiary families are defined according to information in the RS2018. - Coverage expansion programs listed: - Bono de Desarrollo Humano (BDH) - Bono de Desarrollo Humano Variable (BDH-V) - Personas con discapacidad - Pensión para Adultos Mayores - Mis mejores años - Pensión Toda Una Vida - Constraint on benefit levels: - The level (size) of benefits of any of the cash transfer programs in the bottom three deciles of the income distribution should not be reduced (with respect to their level on September 30, 2020). ### Monitoring requirements for social assistance (Paragraph 51) - Monthly data to be provided to the Fund with a lag of no more than 30 days after the end of each month: - Number of poor families with at least one active beneficiary in any of the social assistance programs. - Monthly data on numbers of registries with information updated and validated following SR2018 by income decile. ### NFPS debt definition and treatment (Paragraphs 52–56) - GFSM 2014 definition: total gross debt covers all liabilities that are debt instruments. Debt instruments include: - Special drawing rights (SDRs); - Currency and deposits; - Debt securities; - Loans; - Insurance, pension, and standardized guarantee schemes; and - Other accounts payable. - Exclusions from debt (Paragraph 53): - Equity and investment fund shares are not debt instruments. - Financial derivatives and employee stock options are not considered debt liabilities. - For the program, Ecuador’s NFPS debt includes (Paragraph 54): - Debt Securities including short term liquidity instruments (held by nonresidents, and by residents not included in the Non-Financial Public-Sector entities) - Loans - Other Accounts Payables - Consolidation rule (Paragraph 55): - Liabilities issued by entities of the NFPS and held as an asset by another NFPS entity should be netted out. - Central bank lending to the government is included in the stock of NFPS debt due to consolidation at the NFPS level. ### Monitoring requirements for NFPS debt and related data (Paragraphs 56–67) - Monthly NFPS debt stock: - Data on NFPS stock of debt in US$ will be provided to the Fund monthly with a lag of no more than 60 days after the end of each month. - Submission will include cross-holdings among NFPS entities. (Paragraph 56) - Daily reporting (Paragraph 57): - Daily monetary and financial data in the template agreed with Fund staff, no later than 1 business days after the end of the day. Template will at least include: - Movements of international reserves by inflows and outflows. - Main balance sheet accounts of financial institutions, broken down by private banks, cooperatives and mutual banks. - Daily oil production. - Weekly reporting (Paragraphs 58–61): - Consolidated balance sheets of the banking system, by main accounts, including deposits in the banking system, available funds, credit to the private sector, and credit to the government. - BCE balance sheet; Financial indicators: deposits of banks at the BCE. - Weekly monetary data in the template agreed with Fund staff, no later than 5 business days after the end of the week. - Weekly data on international reserves and foreign currency liquidity, in line with SDDS requirements, no later than 5 business days after the end of the week. - Monthly reporting (Paragraphs 62–66): - Data on stocks and flows (above- and below the line), disaggregated by each subsector of the NFPS using previously agreed templates, with detailed revenue and expenditure breakdowns and consolidations. (Paragraph 62) - NFPS financing data compiled from detailed information on financial assets and liabilities including deposits, loans, securities, equities, other accounts payable including oil related, and their amortizations, disbursements and arrears accumulation. (Paragraph 63) - NFPS cash flow data from the beginning to the end of the current fiscal year, with a lag of no more than 60 days after the closing of each month. This will include expected monthly amortizations and repayments on NFPS debt as defined above. (Paragraph 64) - Provision of detailed information on collateralized debt and debt with similar arrangements within 2 weeks of signing new contracts, including all related contracts, escrow accounts overseas that serve as collateral, and detailed creditor-level stock and terms. (Paragraph 65) - Export price of Ecuador mix crude oil, with a lag of no more than 20 days after the closing of each month. (Paragraph 66) - Quarterly reporting (Paragraph 67): - Detailed balance of payments data, no later 90 days after the end of the quarter. ### Staff Representative statement — key updated information (Statement dated September 30, 2020) - National Accounts (Paragraph 2): - Preliminary National Accounts data indicate economic activity declined by 12.4 percent (y-o-y) in 2020:Q2 (compare to a 2.3 percent decline in 2020:Q1). - The Q2 contraction was milder than staff’s forecast of 18.4 percent (y-o-y). - High-frequency indicators show improvement in 2020:Q3, with a y-o-y decline in economic activity index at 12½ percent in July against 15½ in June. - ISSPOL investigation (Paragraph 3): - About $532 million (about 0.6 percent of GDP) of ISSPOL’s assets could be compromised due to transactions that occurred during 2014-2017. - Preliminary cash flow analysis indicates the fund would be able to continue to meet payment obligations in the coming months with no urgent need for a cash injection. - Uncertainty remains on whether, when, and by how much emerging pension liabilities will need to be absorbed by the central government; potential additional costs could be up to a maximum corresponding to the estimated fraudulent amount of $532 million. - COPLAFIP regulation (Paragraph 4): - The authorities have passed the COPLAFIP regulation on data provision, meeting the last of the five prior actions of the new program. - The remaining amendments (structural benchmark for November 2020) will be adopted by an executive decree encompassing the ministerial agreement on data provision. - World Bank disbursements update (Paragraph 5 and table): - Program profile (World Bank projected disbursements, in millions of US dollars): - 2020: 1,428 - 2021: 1,076 - 2022: 100 - Cumulative: 2,604 - Updated profile: - 2020: 1,481 - 2021: 935 - 2022: 130 - Cumulative: 2,546 - Net change: slightly lower disbursements by a cumulative $58 million over 2020–22; these will be reflected in projections in the next review. ### Executive summary — risks to the Fund and liquidity impact (Key Issues and Findings) - Proposed arrangement and access: - Request: 27-month arrangement under the Extended Fund Facility with proposed access of SDR 4.6 billion (661 percent of quota). - Frontloading: frontloading of the first two purchases. - Outstanding credit to the Fund prior to this request: SDR 1.6 billion (236 percent of quota). - Principal findings: - Ecuador’s capacity to repay is adequate under the baseline, but subject to significant risks and contingent on full program implementation and financing from other creditors. - The proposed EFF arrangement will have a moderate impact on liquidity: upon approval, the Fund’s Forward Commitment Capacity would decline by about 3 percent. - Ecuador will become the sixth-largest borrower after first-year drawings, and Fund exposure to Ecuador would peak at 38 percent of the current level of the Fund’s precautionary balances. - Risks to the program and to the Fund are elevated, including from the frontloading of access ahead of key reform measures requiring legislative approval. - Strong early actions and support from a broad range of political candidates for the objectives of the program are critical to mitigate risks. ### Introduction and background on exceptional access (Paragraphs 1–6) - Purpose of arrangement (Paragraph 1): - To help alleviate exceptional balance-of-payments pressures, restore macroeconomic stability, and support structural reforms. - Exceptional access justification: - Frontloaded and cumulative access exceeds annual and cumulative access limits under the GRA, requiring exceptional access. - Recent Fund interactions and prior credit (Paragraph 2): - Outstanding credit of SDR 1.6 billion (236 percent of quota) from a partially drawn EFF arrangement in 2019, and RFI purchases in 2016 and 2020. - Ecuador purchased SDR 469.7 million (67 percent of quota) in May 2020. - Previous EFF approved March 11, 2019 for SDR 3.0 billion (435 percent of quota); 145 percent of quota drawn before cancellation in April 2020. - Ecuador purchased SDR 261.6 million under the RFI in 2016; SDR 163.5 million remains outstanding (pending repurchases through August 2021). - Historical context (Paragraph 3): - Long history of borrowing from the Fund; multiple SBAs in past decades. - Ecuador has never incurred arrears to the Fund. - Ecuador’s debt became unsustainable earlier in the year, requiring a debt operation. - Debt and financing vulnerabilities (Paragraphs 4–6): - Public external debt projected to reach 52 percent of GDP at end-2020. - Total public debt projected to peak at 68.9 percent of GDP at end-2020 (up from 20 percent of GDP at end-2013). - Public gross financing needs projected to reach 16.1 percent of GDP at end-2020 (compared with around 7 percent at end-2013). - Impact of shocks on GFN relative to exports (82.5 percent) and government revenue (53.4 percent) at end-2020. - Debt restructuring: bond exchange covering US$17.4 billion of outstanding global bonds reduced interest payments by US$5.7 billion over 2020–25 and amortizations by US$5.6 billion over 2022–25. - Reprofiling of bilateral obligations to Chinese creditors expected to yield around US$815 million in savings in 2020–21; bilateral assurances provided up to 2022. - Residual financing needs estimated at some US$6.5 billion over 2020–22, before Fund support. - External debt service at end-2020 projected at 7 percent of GDP (or 32 percent of exports); external debt service projected around 15–20 percent of exports in 2021–23, rising to a peak of 28 percent in 2026–27—below the median of exceptional access cases of nearly 40 percent of exports. - Gross financing needs projected at around 5 percent of GDP by 2025, conditional on fiscal consolidation and materialization of bilateral and multilateral financing and market access under normal conditions. *Source: Statement by the Staff Representative on Ecuador, September 30, 2020 (excerpts).* ### 7. Access under the proposed EFF arrangement would exceed both annual and ### 1ecuea2020002 - 7. Access under the proposed EFF arrangement would exceed both annual and ### Access requested and immediate exposure - Proposed access: SDR 4.6 billion (661 percent of quota). - Remaining estimated financing gaps: some US$6.5 billion in 2020–22 (after accounting for contributions from a successful restructuring of external bonds, reprofiling of external debt, financing from IFIs and official bilateral creditors, and fiscal consolidation). - Current credit outstanding to the Fund: SDR 1.6 billion (236 percent of quota). - Annual limit (current): 245 percent of quota. - Cumulative limit (current): 435 percent of quota. - After scheduled purchases at approval and first review (both in 2020), credit outstanding will rise to SDR 4.4 billion. - If Ecuador makes all purchases as scheduled, peak Fund exposure would reach 874 percent of quota in 2022 (compared with the median of exceptional access cases at 845 percent of quota). - Ecuador would become the sixth-largest borrower in absolute terms and the fourth-largest under a full drawing scenario compared with current exposures for other members. ### Peak exposure metrics and relation to reserves, GDP, and revenues - Peak Fund credit outstanding relative to total external debt: 16.3 percent. - Peak Fund credit outstanding relative to GDP: 8.4 percent. - Peak Fund credit outstanding relative to government revenue: 25 percent. - Relative to gross international reserves (GIR), Fund credit peaks at 252 percent in 2020 (highest among comparators). - Fund credit projected to remain at 77 percent of GIR in 2025 (when EFF repurchases begin). - Fund credit projected to average 41 percent over 2025–30. - Debt service to the Fund: around SDR 1 billion annually during 2025–29 (stretched out in line with EFF terms). - Debt service to the Fund would peak at 16 percent of GIR in 2027 (in the baseline). - Net international reserves projected to remain deeply negative at program completion. ### Capacity to repay: baseline, downside, and stress scenarios - Baseline: Capacity to repay is adequate under program’s baseline assumptions but contingent on full program implementation and financing from other creditors. - Key baseline underpinnings: sustained recovery, significantly improved liquidity, resumption of market access, and support from official creditors. - Risks to capacity to repay include non-implementation of program commitments (some requiring legislative approval, e.g., the central bank law and tax reforms) and Ecuador’s fully dollarized economy constraints. - Downside scenario (program not implemented beyond first review): access to Fund resources and other IFIs could be cut off, leading to reemergence of large financing gaps if Ecuador does not regain market access. - Historical/stress scenario (macroeconomic conditions do not improve): - Fund credit could peak at 347 percent of GIR in 2022. - Fund credit could average 144 percent over 2025–30. - Ratio of Fund obligations falling due to GIR would peak at 60 percent in 2027. ### Enterprise, implementation, and mitigation measures - Enterprise risks: elevated, due to COVID-19 pandemic, uncertain economic outlook, weaknesses in institutional capacity, a fragmented political landscape, and forthcoming elections. - Key mitigation measures: - Conditionality under the program, including quantitative targets for course correction. - Calibrated pace of fiscal consolidation mindful of growth. - Early actions to strengthen institutional capacity and address pressing issues (building on recent approval of amendments to the organic budget code). - Demonstration of political capacity to implement policies ahead of program approval. - Robust communication strategy to secure broad buy-in for program objectives. - Residual risks must be weighed against reputational risk of not supporting a member facing enormous challenges. ### Income, liquidity position, and credit concentration impacts - Precautionary balances at end-FY2020: around SDR 16 billion (about 3.5 times the proposed access). - GRA charges based on proposed drawings projected to total around SDR 1 billion (152 percent of quota) through 2034. - GRA charges represent 12.7 percent of projected lending income through FY 2026 (based on existing arrangements under the GRA). - GRA charges for Ecuador: SDR 115.4 million in 2021; peak at SDR 176.3 million by 2025. - Residual burden-sharing capacity would be insufficient to cover arrears after drawings under the proposed EFF arrangement. - Forward Commitment Capacity (FCC) as of September 18, 2020: SDR 160.4 billion; FCC will fall by about 3 percent following approval of this arrangement. - Ecuador will become the sixth-largest borrower by December 2020 (following purchases at approval and at completion of the first review, combined with the RFI purchase in May 2020). - If Ecuador makes full drawings under the arrangement it would account for 7 percent of total credit outstanding under the GRA (higher than Pakistan and Greece, currently the fourth and fifth largest borrowers). - GRA exposure to Ecuador would amount to over one quarter of the Fund’s precautionary balance after first year drawings, rising to 38.2 percent by 2022 (when the exposure peaks, assuming current level of precautionary balances at end-FY20). - Credit concentration to top five borrowers would rise from 73.0 percent to 74.4 percent, considering Ecuador’s first year drawings. - Ecuador’s share of repurchases in total current repurchases projected to increase from 0.3 percent in 2023 to 66.7 percent by 2028 (based on current arrangements), though this ratio is expected to moderate as new arrangements are approved. ### Assessment and policy implications - Purpose of the proposed EFF arrangement: restore macroeconomic stability, support lives and livelihoods, advance reforms to strengthen domestic institutions and foundations for dollarization, and anchor strong, durable and inclusive private sector-led growth beyond the crisis. - Exceptional access is needed under the proposed EFF arrangement to help close financing gaps, with proposed access exceeding both annual and cumulative limits. - Main near-term risks: a more severe and protracted global pandemic, persistently low oil prices, and reemergence of social tensions. - Political and institutional constraints: constrained institutional capacity, a fragmented political landscape, forthcoming elections, and frontloading of access combined with backloading of critical reforms increase risk. - Successful implementation conditions: - Full implementation of program policies as envisaged, building on the recent successful debt exchange and support from official creditors. - Program implementation ahead of May 2021 elections will require substantial recourse to executive powers; after the elections it will hinge on legislative support. - Strong early actions, prior actions, and early structural benchmarks to strengthen institutions and policy frameworks. - Broad support from presidential candidates for program objectives. - Consequences of partial or non-implementation: delayed capital market re-access, delayed rebuilding of liquidity buffers, reemergence of pressures that led to the crisis, and severe strain on Ecuador’s capacity to repay the Fund. *Source: IMF staff report excerpt.* ### 17. The proposed access under the EFF will have a moderate impact on Fund’s liquidity ### 17. The proposed access under the EFF will have a moderate impact on Fund’s liquidity ### Impact on Fund liquidity and exposure - On approval of the arrangement, the proposed access would reduce Fund’s liquidity by about 3 percent. - Ecuador will become the sixth-largest borrower after the first-year drawings, after Greece. - Credit concentration to the top five borrowers would rise from 73.0 percent to 74.4 percent. - GRA exposure to Ecuador would amount to 38 percent of the Fund’s precautionary balances (assuming the current level at end-FY2020) if all purchases are made as scheduled. - As of 09/18/2020: - Current one-year Forward Commitment Capacity (FCC): 160,400.0 (millions of SDR) - Impact of the approval of the EFF arrangement on the FCC: -4,615 (in percent of current one-year FCC): -2.9 - Fund GRA credit outstanding to Ecuador (projected at time of approval): 3,032 (millions of SDR) - In percent of current precautionary balances: 19.0 - In percent of total GRA credit outstanding: 3.4 - Fund GRA credit outstanding to top five borrowers: 62,090 (millions of SDR) - In percent of total GRA credit outstanding: 73.0 - In percent of total GRA credit outstanding including Ecuador's first year drawings under the EFF: 74.4 - Ecuador's annual GRA charges in percent of Fund's residual burden sharing capacity for 2020/21: 639 - Fund's precautionary balances (end-FY2020): 16,000 (millions of SDR) - Fund's residual burden-sharing capacity: 16.6 ### Program financing and drawings - Program financing of $6.5 billion is equivalent to the estimated financing gap for 2020-2022. - Proposed purchases and drawings (selected from Tables/Projections): - GRA credit to Ecuador (SDR millions) by year: - 2020: 4,419.5 - 2021: 5,386.4 - 2022: 6,096.4 - 2023: 5,924.7 - 2024: 5,521.3 - 2025: 4,738.2 - 2026: 3,901.1 - 2027: 2,963.3 - 2028: 2,025.5 - 2029: 1,141.9 - 2030: 372.8 - GRA credit to Ecuador (in percent of quota) by year: - 2020: 633.4 - 2021: 772.0 - 2022: 873.8 - 2023: 849.2 - 2024: 791.4 - 2025: 679.1 - 2026: 559.1 - 2027: 424.7 - 2028: 290.3 - 2029: 163.7 - 2030: 53.4 ### Capacity to repay and debt service implications - Charges due on GRA credit (SDR millions) by year: - 2020: 42.3 - 2021: 24.6 - 2022: 115.4 - 2023: 146.7 - 2024: 162.2 - 2025: 164.8 - 2026: 176.3 - 2027: 145.9 - 2028: 110.4 - 2029: 72.3 - 2030: 34.2 - Repurchases under the EFF (SDR millions) by year: - 2023: 54.2 - 2024: 168.6 - 2025: 665.6 - 2026: 837.2 - 2027: 937.8 - 2028: 937.8 - 2029: 883.6 - 2030: 769.2 - Repurchases under RFI (SDR millions) by year: - 2020: 32.7 - 2021: 98.1 - 2023: 117.4 - 2024: 234.9 - 2025: 117.4 - Debt service due on GRA credit (SDR millions) by year: - 2020: 173.1 - 2021: 213.5 - 2022: 146.7 - 2023: 333.8 - 2024: 568.2 - 2025: 959.3 - 2026: 983.1 - 2027: 1,048.2 - 2028: 1,010.1 - 2029: 917.7 - 2030: 779.8 ### Debt and macroeconomic indicators (selected) - Real GDP (percentage change): - 2019: 0.1 - 2020: -11.0 - 2021: 4.8 - 2022: 1.3 - 2023: 1.7 - 2024: 2.0 - 2025: 2.3 - Inflation (percent, period average): - 2019: 0.3 - 2020: 0.0 - 2021: 1.0 - 2022: 2.3 - 2023: 1.4 - 2024: 1.0 - 2025: 1.0 - Fiscal balance (percent of GDP): - 2019: -3.2 - 2020: -8.9 - 2021: -2.9 - 2022: 0.6 - 2023: 1.8 - 2024: 2.4 - 2025: 2.3 - Current account balance (percent of GDP): - 2019: -0.1 - 2020: -2.0 - 2021: -0.1 - 2022: 0.3 - 2023: 0.6 - 2024: 0.8 - 2025: 0.6 - Gross financing needs (percent of GDP): - 2019: 10.3 - 2020: 16.1 - 2021: 8.1 - 2022: 4.2 - 2023: 4.1 - 2024: 3.2 - 2025: 4.7 - External public debt (percent of GDP): - 2019: 37.9 - 2020: 51.7 - 2021: 52.0 - 2022: 50.9 - 2023: 48.5 - 2024: 46.2 - 2025: 43.5 - Total public debt (percent of GDP): - 2019: 51.8 - 2020: 68.9 - 2021: 67.4 - 2022: 65.8 - 2023: 62.3 - 2024: 60.0 - 2025: 56.1 - Memorandum items: - Nominal GDP (US$ million): - 2019: 107,436 - 2020: 93,078 - 2021: 99,247 - 2022: 102,803 - 2023: 106,026 - 2024: 109,550 - 2025: 113,470 - Gross international reserves (US$ million): - 2019: 2,933 - 2020: 2,475 - 2021: 3,303 - 2022: 5,042 - 2023: 6,341 - 2024: 8,108 - 2025: 8,644 ### Policy actions, reforms, and program design - The authorities emphasized commitment to sound macroeconomic and financial policies and preservation of the dollarization regime. - Key reform and policy measures highlighted: - Approval of the Organic Code of Planning and Public Finances (COPLAFIP) to establish a clear fiscal anchor and strengthen public financial management. - Institutional restructuring of the Ministry of Economy and Finance and enhancements in data exchange among public sector entities. - Introduction of a fuel pricing band mechanism to reform inefficient fuel subsidies. - Reprioritization of spending in 2020, including reviewing capital expenditure and reducing the wage bill through lower working hours and employment reductions and closure of several public entities and enterprises. - Agreement with bondholders with an approval rate of 98 percent; operation entails significant interest savings during the 5-year grace period and extends average maturity of external bonds by 10 years with substantial reduction in coupons. - Plans to strengthen the social safety net, including more than doubling the coverage of cash transfer programs in 2021 with World Bank assistance. - Anti-corruption, transparency, and governance measures: increased transparency in public procurement, strengthened anti-corruption framework, enhanced transparency in public debt and budget spending, improved anti-money laundering regime, asset declaration enhancements, criminalization of acts of corruption, and implementation of the Extractive Industries Transparency Initiative (EITI). - Promotion of the Organic Monetary and Financial Code (COMYF) and strengthening the autonomy of the Central Bank of Ecuador (BCE); improvements in BCE auditing implemented as prior actions to the EFF. - Structural reforms agenda: modernizing the business environment, restructuring the oil sector, and reforming the Public-Private Partnerships (PPP) framework. - Fiscal consolidation commitment: - Planned adjustment amounts to 5.5 percent of GDP for the overall nonfinancial public sector over a five-year period, with measures roughly distributed on the revenue and expenditure sides. ### Program rationale and final remarks - The EFF with exceptional access is intended to help Ecuador overcome the humanitarian and economic crisis, clear arrears quickly, and provide expansionary stimulus. - The authorities highlighted high degree of ownership and political assurances, including presidential commitment and broad political support. - The authorities view the EFF as crucial to avoid disruption that could threaten the monetary regime, democratic representation, and social stability. *Source: IMF staff report excerpts and tables contained in "The proposed access under the EFF will have a moderate impact on Fund’s liquidity" (1ecuea2020002).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ecuea2020002.pdf_