## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2022/english/1ecuea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1ecuea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1ecuea2022001.pdf.json) --- ### Context - Economy rebounded by 4.2 percent in 2021 following a well-executed vaccination campaign enabling reopening. - Recovery expected to continue in 2022 at 2.9 percent. - Inflationary pressures expected to rise, driven mostly by higher commodity prices. - Government remains committed to the EFF of SDR 4,615 million (661 percent of quota, about $6.5 billion) approved on September 30, 2020. - Upon completion of the combined Fourth and Fifth Reviews under the EFF, an additional SDR 710 million would be made available. - First year of administration: economic stabilization, vaccination campaign, tax bill enactment, expanded social protection, progress on trade/investment/financing agreements; domestic challenges include rising security concerns and a divided National Assembly. - Discussions held in Quito and Washington, DC and via videoconferences during March 7–May 9, 2022. ### Recent economic developments and outlook — findings - Real GDP: - 2021: Expanded by 4.2 percent (1.4 ppts higher than previous review). - 2022: Projected to grow 2.9 percent (0.6 ppts lower than previous review). - Converge to potential of 2 ¾ percent by 2024. - Inflation: - 2021 average: 0.1 percent. - April 2022: 2.9 percent (yoy). - 2022 average projected at 3.2 percent. - Expected to recede below 2 percent over the medium term. - External sector and reserves: - Current account surplus: 2.9 percent of GDP in 2021. - Gross international reserves: $7,898 million in 2021; GIR $9.2 billion as of March 2022 (selected table). - CA expected to moderate to 2.4 percent of GDP in 2022. - Financial sector: - Credit to private sector: about 16 percent yoy in March 2022 (about 14 percent in 2021; 3 percent in 2020). - Deposits: about 14 percent yoy in March 2022 (vs. 12 percent per year during 2020–21). - Liquidity in financial system: about 27 percent as of March 2022. - NPLs: 2 percent in banking, 4 percent in cooperative sectors; NPL relief measures extended for banks until end June and for cooperatives until end 2022. - Labor market: - Formal private sector employment recovered through 2021 and early 2022, but unemployment and inadequate employment remain above pre-pandemic levels. - Fiscal outcomes: - NFPS overall balance came in $843 million better than expected for end-2021. - PGE+CFDD 2021 OB came $112 million lower than expected at last review, mainly due to historical PGE→IESS transfer corrections of about $562 million. - NOPBS of NFPS was $1,402 million lower than projected due to statistical corrections and exclusion of interest income. - Delays in external financing increased PGE accounts payable; planned IMF and World Bank disbursements ($700 million each) were delayed. - NFPS oil surplus cleared $500 million in oil-related arrears. - Debt-to-GDP revised up to 62.2 percent to include $2.4 billion transfer in public bank shares and net SDR holdings. ### Program implementation — performance and structural agenda - QPCs and ITs: - All but one QPC and all but one IT for this review were met. - On structural measures, only two SBs met outright; several implemented with short delays. - Enacted tax bill larger than expected. - Structural agenda enhanced to mitigate delays and improve fiscal data quality, social safety nets, governance, and public resource management efficiency. - Exceptional access criteria continue to be met. ### Impact of the War in Ukraine (Box 1) — selected impacts and estimates - General: - War slows global growth and accelerates inflation via surging commodity prices. - As an oil exporter, Ecuador benefits from higher oil prices near term but faces agricultural export disruptions, higher input costs (including fertilizers), and higher cost-push inflation. - External trade effects: - Terms of trade improve short run; CA surplus improves by 0.3 ppts in 2022 versus pre-conflict baseline. - 2021 exports to Russia: almost $1 billion, 5.3 percent of total non-oil exports; $700 million were banana exports. - Oil exports: one third of total exports in 2021. WTI averaged $107.1 $/barrel Mar–end-May vs. $87.0 $/barrel in first two months of year. - Oil windfall: $760 million or 0.7 percent of GDP in 2022 expected. - Growth: - War estimated to lower growth by 0.1 ppts in 2022. - Inflation: - Commodity price surge estimated to add 1.2 ppts to average inflation in 2022. - Dollarization and fixed fuel prices expected to partially shield Ecuador. ### Risks to the outlook - Downside risks: - Further COVID-19 waves; weaker global growth; prolonged war; supply chain disruptions; USD appreciation; difficulty finding alternative markets for non-oil exports; higher input costs (fertilizers); loss of confidence if reforms not implemented; abrupt global financial tightening; higher pass-through from international prices adding to inflation; worsened oil price outlook reducing buffers. - Upside possibilities: - Higher oil prices raising liquidity and reserves. - Successful reprofiling with Chinese creditors. - More ambitious structural reforms improving growth potential, lowering sovereign credit risk, and facilitating market access. ### Key quantitative program figures (selected exact figures preserved) - EFF: SDR 4,615 million (661.5 percent of quota). - Additional on completion: SDR 710 million. - Planned IMF and World Bank disbursements delayed: $700 million each. - Oil windfall estimate: $760 million (0.7 percent of GDP) in 2022. - NFPS overall balance set to turn a surplus in 2022 at $1 billion (0.9 percent of GDP). - PGE+CFDD deficit expected to decline to $2.3 billion (2 percent of GDP). - Public debt revised to 62.2 percent of GDP in 2021. - Tax reform yields (In percent of GDP): - Total: 2022 — 1.0; 2023 — 1.3; 2024 — 0.9. - Tax policy: 2022 — 0.1; 2023 — 0.7; 2024 — 0.7. - Temporary measures: 2022 — 0.8; 2023 — 0.4; 2024 — 0.0. - Administrative: 2022 — 0.1; 2023 — 0.2; 2024 — 0.3. - Select balances — change from previous year (Non-Oil Primary Revenues and Expenditures, Total NOPBS with subsidies): Total (NOPBS with subsidies): -0.4 / 0.2 / 1.5 / 1.5 / 0.8 / 0.8 / 4.5 (2020–2025). *IMF staff report: EXECUTIVE SUMMARY (1ecuea2022001).* ### Program monitoring and QPC/IT outcomes (selected exact outturns) - End-Sep. 2021 — Overall balance of PGE+CFDD: Prog. -2,301 / Adj. -2,253 / Actual -1,675 — Status: Met. - End-Dec. 2021 — Overall balance of PGE+CFDD: Prog. -4,188 / Adj. -4,071 / Actual -4,300 — Status: Not Met (missed by $229 million). - Accumulation of NFPS deposits at central bank (floor): End-Sep. Prog. 899 / Adj. -161 / Actual 1,095 — Met; End-Dec. Prog. 1,527 / Adj. 223 / Actual 1,357 — Met. - NOPBS (including subsidies) (floor): End-Sep. Prog. -3,368 / Adj. -3,475 / Actual -4,068 — Not Met; End-Dec. Prog. -6,030 / Adj. -6,218 / Actual -7,432 — Not Met. - Coverage of cash transfer programs — families: End-Sep. Prog. 453,700 / Actual 452,799 — Not Met; End-Dec. Prog. 514,000 / Actual 549,819 — Met. ### Data corrections and corrective actions - STA TA found PGE expenditure under-recorded by $130-370 million per year over 2019-21 due to pension transfers to IESS recorded on budgeted rather than accrual basis and healthcare transfer obligations recorded after audits. - Authorities recorded conservative estimates for past healthcare obligations and will budget accordingly; corrections consolidate within NFPS and do not affect NFPS public debt on which debt rules are set. - STA TA recommended corrections to IESS expenditures to account for distribution of investment income to three special IESS funds’ beneficiaries. - Exclusion of interest income from NOPBS calculations increased nonobservance margins for some past targets but did not change overall assessments. - Social assistance registry update with World Bank TA helped exceed end-December target by almost 36,000 families. ### Structural benchmarks — status snapshot (of 11 SBs due) - Met outright: publication of procurement contracts with ultimate beneficiary information (where available); TORs for public banks’ AQR agreed. - Partially implemented: National Control Subsystem (SNC) established and operational but interoperability pending. - Implemented with slight delay: tax reform enacted in November; NFCC established in December; methodology/templates for domestic arrears reporting published January 2022; social assistance programs expanded to 80 percent of low-income families in May 2022. - Not yet implemented: procurement guidelines SB (upgraded to presidential decree prior action); AML/CFT legislation SB (draft law finalized; to be submitted to National Assembly); independent audits of Petroecuador and Petroamazonas financial statements initiation set as prior action; TOR and timeline agreed and work under way. ### Policy directions and reforms — improving fiscal sustainability with equity (selected policy elements) - Recalibrated fiscal strategy to build buffers and improve medium-term debt sustainability while allowing gradual, growth-friendly improvement of NOPBS. - Planned consolidation for 2022: 1.5 ppts of GDP (lower than prior plan of 3 ppts). - Presidential decree (Oct. 2021) fixed domestic diesel and gas prices after one-time increase, suspending fuel subsidy reform; surge in oil prices estimated to raise subsidy bill to $3 billion (2.6 percent of GDP) in 2022. - Plan: higher non-oil non-subsidy expenditure consolidation via permanent measures; allow higher nominal capital expenditure and expand social assistance. - Save significant portion of oil windfall to build public sector deposits and advance reserves targets under COMYF. ### Planned revenue and expenditure measures (2022–25) - Revenue: - Enacted tax bill (Oct. 2021 SB, implemented with delay) generates more revenue than planned: permanent 0.7 ppt and temporary measures 0.8 ppt in 2022 and 0.4 ppt in 2023 above MEFP commitment by 0.3 and 0.4 ppt respectively. - Expenditure savings: - Unwind one-off COVID-related expenditure from 2021. - Contain wages and salaries. - Efficiency gains in procurement for goods and services. - Rationalize capital expenditure. - Public sector wage bill containment target: save 1.8 ppts of GDP over 2020-25 via partial replacement of retiring staff and reduced use of temporary contracts. - Procurement reforms (Decree 155 and presidential bylaws) estimated to yield 1.5 percent of GDP in cumulative savings over next four years. - Capital expenditure: reclassification and prioritization; PIMA planned in 2022. ### Social spending and safety nets — commitments and programs - Expanded social spending programs to reach an additional 625,600 families (mid-April 2022 SB, implemented with delay), corresponding to 80 percent of households in the lowest three income deciles. - 2022 coverage targets: - Reach 65 percent of the lowest income decile nationwide and 70 percent of the lowest three deciles in each province (end-November 2022 SB). - “1000 Días” program for 0–3 years old: - Expected coverage: about 30–50 thousand low-income beneficiaries. - Benefit: about $60 per month. - Estimated fiscal cost: $22–36 million per year. ### Financial sector and central bank safeguards - Crisis measures lengthening loan classification and lowering provisioning set to expire for banks by end-June and for cooperatives by end-December 2022. - Plan to unwind crisis measures with supervisor able to grant additional time institution-by-institution under conditions. - Regulatory alignment between banks and cooperatives planned to gradually close gaps; some gaps constitutionally mandated. - AQRs for four public banks on track to be completed (June 2022 SB); TORs and timeline agreed (Nov. 2021 SB met). - Liquidity framework streamlined: liquidity requirements reduced for banks from about 19 percent of deposits to about 13.5 percent. - Contribution to Liquidity Fund lowered from 8 percent to 5 percent at onset of crisis in 2020; authorities assessing plans to restore contributions. - BCE to adopt IFRS and publish audited financial statements (expected 2022); FSAP with World Bank preparations under way. ### Debt dynamics, financing, and DSA conclusions - Public debt increased by 2.2 ppt of GDP due to public bank shares transfer and by 1.3 ppt due to SDR conversion. - Public debt projected to decline below COPLAFIP 2025 target of 57 percent of GDP by 2023; projected 45.1 percent of GDP by end-2027. - Financing strategy: - Maximize multilateral borrowing. - Pursue reprofiling $5 billion debt to Chinese creditors. - Re-access bond markets leveraging $400 million IDB guarantee. - Deepen domestic debt market. - DSA baseline: debt remains sustainable with high probability; gross financing needs average around 3-4.5 percent of GDP medium term. - Stress tests: - Growth shock: debt-to-GDP 66.5 percent in 2024, 57.1 percent in 2027. - Contingent liability shock ($6.5 billion in 2023): debt-to-GDP 67 percent before 61 percent in 2027. - Oil shock: debt-to-GDP 69.4 percent. - Under shocks, debt remains below 70 percent emerging market threshold but would breach COPLAFIP 57 percent by 2025. ### Program access, reviews, and requests - Staff proposes rephasing EFF to combine Sixth and Seventh Reviews and make end-August 2022 QPCs last quantitative target. - Proposed access for Sixth and final review: SDR 497 million (about $700 million). - Authorities request waiver for missed end-Dec 2021 QPC on OB of PGE+CFDD and corrective actions undertaken. - Financing assurances obtained from creditors; upside financing possibilities include Chinese reprofiling, AfD/EIB/JICA disbursements ($100 million, $100 million, and $180 million respectively), DFC debt-for-nature discussions, and $400 million IDB guarantee. ### Policy recommendations (selected, exact wording preserved) - Contain public expenditure growth as primary medium-term fiscal effort, building on tax bill. - Unwind one-off COVID-related expenditures from 2021. - Lower growth of public wage bill. - Further expand social safety net. - Improve procurement practices to generate efficiency gains. - Reprioritize capital expenditure to growth-enhancing infrastructure. - Continue progress on improving fiscal data quality, including: - Account for all transfer obligations in future budgets and MTFF. - Proactively identify other potential claims on central government and plan to clear them once verified. - Advance audits of IESS financial statements. - Improve public finance management and debt transparency. - Continue efforts to fight corruption and improve governance, transparency, and accountability: - Enhance asset declarations of politically exposed people including incomes and interest. - Strengthen AML/CFT framework in line with FATF standards. - Conduct audits of tax expenditures. - Ensure full compliance to collect and publish ultimate beneficiary ownership for procurement contracts. - Accelerate financial audits of state-owned oil companies. - Maintain vigilance as crisis measures in financial sector are rolled back; monitor liquidity closely and ensure Liquidity Fund adequacy. ### Selected recent economic indicators and projections (exact table figures) - Current account surplus: 2.9 percent of GDP in 2021Q4. - GIR: $9.2 billion as of March 2022. - Real GDP (percent change) (selected series): 2020 -7.8; 2021 2.8; 2022 4.2; 2023 3.5; 2024 2.9; 2025 2.7; 2026 2.8; 2027 2.8; 2028 2.8. - CPI period average (percent) (selected): 2020 -0.3; 2021 0.0; 2022 1.0; 2023 2.1; 2024 3.2. - Exports, f.o.b. (US$ millions) (selected): 2020 20,591; 2021 23,993; 2022 27,236; 2023 25,410; 2024 31,064. - Oil exports (millions of barrels) (selected): 2020 146.4; 2021 133.2; 2022 133.7. - NFPS Revenue (percent of GDP) (selected): 2020 29.4; 2021 33.2; 2022 34.0. - NFPS Expenditure (percent of GDP) (selected): 2020 36.5; 2021 35.5; 2022 35.5. - Overall NFPS balance (deficit, percent of GDP) (selected): 2020 -7.1; 2021 -2.3; 2022 -1.5; 2023 0.1; 2024 0.9. - Public debt (percent of GDP, NFPS gross debt consolidated): 2020 60.9; 2021 61.0; 2022 62.2; 2023 59.9; 2024 58.9; 2025 56.2. - Gross Financing Needs (percent of GDP) (selected): 2020 14.2; 2021 7.0; 2022 6.7; 2023 4.3. - Net international reserves (program definition, US$ millions) (selected): 2020 -7,161; 2021 -6,239; 2022 -5,747; 2023 -5,013. - IMF exceptional financing under the EFF (US$ millions) (selected): 2020 4,007; 2021 1,500; 2022 802; 2023 1,000. *IMF staff compilation from document text and accompanying tables and figures (content unit: 1ecuea2022001).* --- *Source: IMF staff report excerpts and technical memorandum of understanding (1ecuea2022001).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The economy rebounded more strongly than expected in 2021 at 4.2 percent, bolstered by a well-executed vaccination campaign that allowed for a steady reopening of the economy. - The recovery will continue in 2022, but at a more moderate pace of 2.9 percent. - Inflationary pressures, mostly due to higher commodity prices, are expected to rise. - The government remains committed to the Fund-supported program under the Extended Fund Facility (EFF) of SDR 4,615 million (661 percent of quota, about $6.5 billion) approved by the IMF Executive Board on September 30, 2020. - Upon completion of the combined Fourth and Fifth Reviews under the EFF, an additional SDR 710 million would be made available. - The first year of the administration featured economic stabilization, a successful vaccination campaign, enactment of a tax bill, expanded social protection, and progress on trade, investment, and financing agreements. Domestic challenges include rising security concerns and a divided National Assembly. - Discussions for this assessment were held in Quito and Washington, DC and via videoconferences during March 7–May 9, 2022. ### Recent economic developments and outlook - Real GDP: - Expanded by 4.2 percent in 2021, 1.4 ppts higher than expected in the previous review. - Projected to grow 2.9 percent in 2022 (0.6 ppts lower than expected at the last review). - Growth is expected to converge to potential of 2 ¾ percent by 2024. - Inflation: - Averaged 0.1 percent in 2021. - Reached 2.9 percent (yoy) in April 2022. - Average inflation projected at 3.2 percent in 2022. - Inflation expected to recede below 2 percent over the medium term. - External sector and reserves: - Current account (CA) surplus rose to 2.9 percent of GDP in 2021, supported by higher oil and non-oil exports and strong remittances. - Gross international reserves reached $7,898 million in 2021. - CA expected to moderate to 2.4 percent of GDP in 2022 (text indicates moderation—see Box 1 for war impact). - Financial sector: - Credit to the private sector increased by about 16 percent yoy in March 2022 (about 14 percent in 2021; 3 percent in 2020). - Deposits grew by about 14 percent yoy in March 2022 (vs. 12 percent per year during 2020–21). - Liquidity in the financial system about 27 percent as of March 2022. - Non-performing loans (NPLs) at 2 percent in banking and 4 percent in cooperative sectors, noting crisis measures that alter NPL classification windows. - NPL relief measures extended for banks until end June and for cooperatives until end 2022. - Labor market: - Formal private sector employment recovered through 2021 and early 2022, but unemployment and inadequate employment remain above pre-pandemic levels. - Fiscal outcomes: - Overall balance (OB) of the nonfinancial public sector (NFPS) came in $843 million better than expected for end-2021, driven by a higher oil balance and current expenditure restraint. - The 2021 OB of the budgetary central government (PGE) and oil derivatives financing account (CFDD) came $112 million lower than expected at the last review, largely due to historical data corrections to PGE transfers to IESS of some $562 million. - The non-oil primary balance including subsidies (NOPBS) of the NFPS was $1,402 million lower than projected, mainly due to statistical corrections to IESS expenditure data and exclusion of interest income from the NOPBS definition. - Delays in external financing increased PGE’s accounts payable at end-2021; planned IMF and World Bank disbursements ($700 million each) were delayed. - At the NFPS level, an oil surplus allowed clearing $500 million in oil-related arrears to suppliers and carry-forward oil contracts. - Debt-to-GDP was revised up to 62.2 percent to include: i) the transfer in public bank shares of $2.4 billion (part of the COMYF reform), and ii) net SDR holdings. - Medium-term external outlook: - CA surplus expected to moderate in the medium term to its norm of around 2 percent as oil prices decrease. ### Program implementation - Performance against program targets: - All but one quantitative performance criteria (QPCs) and all but one indicative targets (ITs) for this review were met. - On structural measures, only two structural benchmarks (SBs) were met; several others were implemented with short delays. - The enacted tax bill was larger than expected. - Structural agenda: - Enhanced for this review to mitigate significant delays on some SBs and to achieve further gains on improving fiscal data quality, strengthening social safety nets, and enhancing governance and efficiency in public resource management. - Exceptional access: - The exceptional access criteria continue to be met (see Box 2 referenced in the document). ### Impact of the War in Ukraine (Box 1) - General: - The war is slowing global growth and accelerating inflation via surging commodity prices. - As an oil exporter, Ecuador benefits from higher oil prices in the near term, but faces disruptions in agricultural exports, higher input costs (including fertilizers), and higher cost-push inflation. - External trade effects: - Terms of trade expected to improve in the short run; CA surplus would improve by 0.3 ppts in 2022 compared to the pre-conflict baseline despite lower export volumes to Russia and Ukraine. - Exports to Russia and Ukraine in 2021: exports to Russia almost $1 billion, accounting for 5.3 percent of total non-oil exports; $700 million were banana exports. - Banana sector is expected to take the largest hit in 2022, with almost all banana production for Russian and Ukrainian markets expected to be lost. - Oil: oil exports represented one third of total exports in 2021. Between March and end-May, oil prices (WTI) averaged 107.1 $/barrel, compared to 87.0 $/barrel during the first two months of the year. - The rise in oil prices expected to generate a net oil windfall of $760 million or 0.7 percent of GDP in 2022. - Direct exposure to imports from Russia and Ukraine is limited, but higher commodity and food prices and reduced fertilizer availability will reduce the CA balance and can affect agricultural output. - Growth: - Weaker global and regional growth and near-term export disruptions expected to lower growth in 2022 compared to pre-war expectations. - Staff estimates the negative economic impact of the war on growth at 0.1 ppts in 2022. - Inflation: - The surge in global commodity prices estimated to add 1.2 ppts to average inflation in 2022. - Dollarization and fixed fuel prices expected to shield Ecuador from the full surge relative to peers. ### Risks to the outlook - Downside risks: - Subsequent COVID-19 waves could cause further closures and slow activity. - Weaker-than-anticipated global growth, prolonged war in Ukraine, supply chain disruptions, USD appreciation, difficulty finding alternative markets for non-oil exports, and higher input costs (e.g., fertilizers). - Loss of confidence if the government cannot implement reforms, combat crime, or maintain macroeconomic management. - Abrupt tightening in global financing conditions could dampen financing prospects. - Higher pass-through from international prices could add to inflation and erode real incomes. - A worsened oil price outlook would reduce fiscal and external buffer build-up absent policy adjustments, or could stifle the recovery if policies adjust abruptly. - Upside possibilities: - Higher oil prices would raise liquidity buffers and reserves. - Successful discussions with Chinese creditors to reprofile debt obligations would ease financing pressures. - More ambitious structural reforms to improve competitiveness, governance, anticorruption and AML/CFT, and reduce barriers to trade and investment could raise potential growth, lower sovereign credit risk, and facilitate earlier or better access to international capital markets. *IMF staff report: EXECUTIVE SUMMARY (1ecuea2022001).* ### Box 1. Impact of the War in Ukraine on Ecuador (concluded) ### Box 1. Impact of the War in Ukraine on Ecuador (concluded) ### Impact of the War and Financial Risks - Oil balance is set to improve to $4.7 billion or 4.1 percent of GDP in 2022. - Financial sector exposure to Russia or Ukraine is low; risks via financial channels appear limited. - Deterioration of risk appetite for emerging markets and further tightening of U.S. monetary policy could raise spreads and adversely affect Ecuador’s planned reentrance to international bond markets. - Baseline forecast assumptions: the war remains limited to Ukraine and sanctions on Russia (and European plans to become independent of Russian energy) do not tighten beyond those announced by March 31 and remain in place over the forecast horizon. International spillovers operate via global commodity prices, trade and financial linkages, labor supply, and humanitarian impacts. ### Program Implementation — Quantitative Performance Criteria (QPCs) and Indicative Targets (ITs) - All QPCs controlling for the combined fourth and fifth reviews were met except for the end-December target on the overall balance (OB) of PGE+CFDD. - OB of PGE+CFDD: end-December deficit was $4,300 million, missing the target by $229 million over the adjusted QPC of $4,071 million, mostly due to historical data corrections to account for accrued spending obligations from PGE to IESS. - Accumulation of NFPS deposits at the central bank: end-December outturn was an accumulation of $1,357 million, $1,133 million above the adjusted target of $223 million. - Continuous performance criteria: QPCs on no new gross credit to government from the central bank and on the non-accumulation of external payment arrears were both met. - End-September 2021 outcomes: - OB of PGE+CFDD deficit was $1,675 million; $579 million lower than the adjusted QPC of $2,253 million. - NFPS deposits accumulation: $1,095 million; $1,257 million above the adjusted target of a decumulation of $161 million. Main reason: SDR allocation not fully spent as programmed. - ITs on NFPS OB in September and December were met; NOPBS targets were missed: - NFPS OB outperformed adjusted targets by $891 million (September) and $793 million (December). - NOPBS missed adjusted targets by $593 million (September) and $1,213 million (December), due to statistical data corrections and the exclusion of interest income from the calculation. - ITs on change in the stock of NIR were comfortably met: - September adjusted target was a decumulation of $222 million; NIR accumulation reached $1,704 million (i.e., met by a margin of $1.9 billion). - December adjusted target was also met by a significant margin of $1.2 billion. ### Selected Exact QPC/IT Figures (as reported) - End-Sep. 2021 — Overall balance of the budgetary central government and CFDD (floor): Prog. -2,301 / Adj. -2,253 / Actual -1,675 — Status: Met. - End-Dec. 2021 — Overall balance of the budgetary central government and CFDD (floor): Prog. -4,188 / Adj. -4,071 / Actual -4,300 — Status: Not Met. - Accumulation of NFPS deposits at the central bank (floor): End-Sep. Prog. 899 / Adj. -161 / Actual 1,095 — Met; End-Dec. Prog. 1,527 / Adj. 223 / Actual 1,357 — Met. - Non-oil primary balance of the NFPS (including fuel subsidies) (floor): End-Sep. Prog. -3,368 / Adj. -3,475 / Actual -4,068 — Not Met; End-Dec. Prog. -6,030 / Adj. -6,218 / Actual -7,432 — Not Met. - Coverage of cash transfer programs — number of families (floor): End-Sep. Prog. 453,700 / Actual 452,799 — Not Met; End-Dec. Prog. 514,000 / Actual 549,819 — Met. ### Data Corrections, Revisions, and Effects on Targets - PGE balances: STA TA mission (Dec 2021–Mar 2022) found PGE expenditure had been under-recorded by $130-370 million per year over 2019-21 because pension transfers to IESS were recorded on a budgeted rather than accrual basis, and healthcare transfer obligations to IESS were recorded after medical audits were complete. Authorities recorded a conservative estimate for past healthcare obligations and will budget accordingly going forward. - These corrections led to a downward shift in PGE OB and changed the assessment of the end-April 2021 QPC on the PGE+CFDD OB from met to unmet, resulting in misreporting. Corrections are consolidations within NFPS and do not affect NFPS public debt on which debt rules are set. - NFPS balances: STA TA recommended corrections to IESS expenditures to account for distribution of investment income to three special IESS funds’ beneficiaries. - Exclusion of interest income from NOPBS calculations (data available later in 2021) increased nonobservance margins for certain past targets but did not change overall assessments. - Social assistance coverage: September target missed by 901 families (0.2 percent of target) due to registry-update challenges; with World Bank TA registry was updated and end-December target of 514,000 families was exceeded by almost 36,000 families. ### Structural Benchmarks (SBs) — Progress and Status - Of 11 SBs due for this review: - Met outright: publication of procurement contracts with ultimate beneficiary information (where available); TORs for public banks’ asset quality review agreed. - Partially implemented: National Control Subsystem (SNC) established and operational but interoperability requires further technical work. - Implemented with slight delay: tax reform enacted in November; National Fiscal Coordination Committee (NFCC) established in December; methodology and templates for domestic arrears reporting published in January 2022; social assistance programs expanded to 80 percent of low-income families in May 2022. - Not yet implemented: procurement guidelines SB (revised and upgraded to a presidential decree to be enacted as a prior action); enactment of AML/CFT legislation SB (draft law finalized and to be submitted to the National Assembly); initiating and completing independent audits of Petroecuador and Petroamazonas financial statements (initiation set as a prior action; TOR and timeline agreed and work under way). ### Policy Discussions — Improving Fiscal Sustainability with Equity - Recalibrated fiscal strategy aims to build stronger buffers and improve medium-term debt sustainability while allowing a more gradual, growth-friendly improvement of the nonoil primary balance including subsidies (mainly due to a higher subsidy bill). - Good fiscal management in 2021 allows lower adjustment of NOPBS over 2022-25 and a lower NOPBS in 2025 by 0.9 ppt than envisaged in the last review, while still achieving 4.5 ppts of GDP in fiscal consolidation per program commitments. - Year-to-year NOPBS change in percent of GDP in 2021 improved by 0.2 ppt rather than the programmed relaxation of 0.8 ppt, supporting a more gradual consolidation path. - Planned consolidation for 2022 is 1.5 ppts of GDP (lower than the 3 ppt planned in the last review), reflecting the above and a higher fuel subsidy bill. - Presidential decree (October 2021) fixed domestic diesel and gas prices after a one-time increase, effectively suspending ongoing fuel subsidy reform; surge in oil prices due to the war in Ukraine is estimated to raise the subsidy bill to $3 billion (2.6 percent of GDP) in 2022. - To partially compensate, plan envisages higher non-oil non-subsidy expenditure consolidation underpinned by permanent measures, while accommodating higher nominal capital expenditure and expansion of social assistance programs to meet ITs. - Higher oil prices (by $24.2/barrel in 2022 and around $13.5/barrel over the medium term relative to the last review) imply better overall balances and higher deposit accumulation. - Overall NFPS balance is set to turn a surplus in 2022 for the first time in a decade at $1 billion (0.9 percent of GDP). - PGE+CFDD deficit expected to decline to $2.3 billion (2 percent of GDP), progressing toward administration’s goal of reaching a balance by 2025. - Public debt is set to decline to the 2025 COPLAFIP target of 57 percent of GDP in 2023, with net public debt 10 ppt lower, leaving buffers to absorb contingent liabilities and negative oil price shocks that could increase public debt to the emerging market risk threshold of 70 percent. - Plan to save a significant portion of the oil windfall would build public sector deposits and advance reserves targets under the COMYF. ### Planned Revenue and Expenditure Measures (2022–25) - Revenue side: - Enacted tax bill (October 2021 SB, implemented with delay) will generate more revenue than planned. - Tax bill includes 0.7 ppt in permanent measures, temporary measures of 0.8 ppt in 2022 and 0.4 ppt in 2023, above MEFP commitment by 0.3 and 0.4 ppt respectively. Bill also includes additional administrative measures posing upside risk to projections. - Expenditure side — savings to compensate partially for higher fuel subsidy bill come from: - Unwinding one-off COVID-related expenditure from 2021. - Containing wages and salaries. - Efficiency gains in procurement for goods and services. - Rationalizing capital expenditure. - Public sector wage bill and efficiency: - Authorities plan to contain wage bill growth, saving 1.8 ppts of GDP over 2020-25 via partial replacement of retiring staff and temporary contracts. - Guidelines on public sector workforce to be provided to all levels of the public sector, jointly defined with the Labor Ministry. - IDB TA to support review of central government agencies for stronger budgetary oversight and human resource planning, including potential mergers and institutional role reviews. - Procurement: - Decree 155: Office of the Comptroller General conducting market studies before public procurement to ensure ex-ante cost review. - Authorities will issue bylaws to the procurement law via presidential decree (Reglamento General de Compras Públicas) as a Prior Action; SERCOP will issue resolutions to operationalize bylaws, prioritizing efficiency gains and collection of ultimate beneficiary ownership information. - Measures estimated to potentially yield 1.5 percent of GDP in cumulative savings over the next four years, more than covering the 1 ppt of GDP planned consolidation in goods & services and non-oil capital expenditure. - Capital expenditure: - Reclassification to improve transparency in line with best practices. - Authorities plan to prioritize capital projects and promote PPPs with attention to contingent liabilities and fiscal risks. - Public Investment Management Assessment (PIMA) planned in 2022. ### Tax Reform as Enacted (In percent of GDP) - Total: 2022 — 1.0; 2023 — 1.3; 2024 — 0.9. - Tax policy: 2022 — 0.1; 2023 — 0.7; 2024 — 0.7. - PIT: 2022 — 0.1; 2023 — 0.5; 2024 — 0.5. - CIT: 2022 — 0.1; 2023 — 0.3; 2024 — 0.2. - Other 1/: 2022 — 0.0; 2023 — -0.1; 2024 — -0.1. - Temporary measures: 2022 — 0.8; 2023 — 0.4; 2024 — 0.0. - Personal wealth: 2022 — 0.2; 2023 — 0.0; 2024 — 0.0. - Corporate net asset: 2022 — 0.4; 2023 — 0.4; 2024 — 0.0. - Foreign capital: 2022 — 0.1; 2023 — 0.0; 2024 — 0.0. - Administrative 2/: 2022 — 0.1; 2023 — 0.2; 2024 — 0.3. - o/w Legislative: 2022 — 1.0; 2023 — 1.2; 2024 — 0.7. - Memorandum item (2nd & 3rd Reviews): Tax policy 2022 — 0.1; 2023 — 0.7; 2024 — 0.7. Temporary 2022 — 0.5; 2023 — 0.0; 2024 — 0.0. Administrative 2022 — 0.1; 2023 — 0.2; 2024 — 0.3. ### Select Balances — Change from Previous Year (in percent of GDP) - Non-Oil Primary Revenues: 2020 -1.1; 2021 0.2; 2022 0.3; 2023 0.6; 2024 -0.1; 2025 0.2; 2020-2025 0.2. - o/w Tax policy: 0.4 / 0.0 / 0.0 / 0.1 / 0.6 / 0.0 / 1.1 (by year 2020–2025 as shown). - o/w Temporary tax measures: 0.0 / 0.0 / 0.8 / -0.4 / -0.5 / 0.0 / 0.0. - o/w Administrative measures: 0.0 / 0.0 / 0.2 / 0.0 / 0.1 / 0.0 / 0.3. - Non-oil Primary Expenditures including Subsidies: 0.7 / -0.1 / 1.2 / 0.9 / 1.0 / 0.6 / 4.3 (2020–2025). - Wages and salaries: -0.7 / 1.0 / 0.9 / 0.3 / 0.2 / 0.2 / 1.8. - Goods and services: 0.5 / 0.1 / 0.3 / 0.1 / 0.1 / 0.0 / 1.1. - Social assistance: -0.4 / -0.1 / 0.0 / 0.0 / 0.0 / 0.0 / -0.5. - Other spending 3/: -0.8 / 0.2 / 0.3 / 0.0 / 0.1 / -0.1 / -0.3. - Capital spending: 0.9 / -0.3 / 0.3 / 0.0 / 0.0 / 0.1 / 1.1. - Fuel subsidies: 1.1 / -1.0 / -0.5 / 0.5 / 0.5 / 0.5 / 1.0. - Total (NOPBS with subsidies): -0.4 / 0.2 / 1.5 / 1.5 / 0.8 / 0.8 / 4.5. *Source: IMF staff summary of "Box 1. Impact of the War in Ukraine on Ecuador (concluded)" from the cited IMF chapter.* ### 19. The authorities plan to ground their expenditure rationalization efforts by i) adopting a ### 19. The authorities plan to ground their expenditure rationalization efforts by i) adopting a presidential decree for controlling public expenditures, including the wage bill (prior action); ii) publishing the medium-term fiscal framework (MTFF), as well as the fiscal targets including expenditure ceilings, in line with program commitments, approved by the MEF and the NFCC in accordance with the COPLAFIP (prior action), which had been established last year (Nov. 2021 SB, implemented with delay) and iii) sign an inter-ministerial memorandum of understanding to ensure that the central government agencies follow the strategy to deliver the expected results. To anchor the savings in the next year’s budget, they also plan to submit the 2023 Budget to the National Assembly in line with the program and MTFF commitments (proposed October 2022 SB). ### Expenditure rationalization and fiscal framework - Prior actions and near-term commitments: - Adopt a presidential decree for controlling public expenditures, including the wage bill (prior action). - Publish the medium-term fiscal framework (MTFF) and fiscal targets including expenditure ceilings, approved by MEF and NFCC in accordance with COPLAFIP (prior action; Nov. 2021 SB, implemented with delay). - Sign an inter-ministerial memorandum of understanding to ensure central government agencies follow the strategy to deliver expected results. - Submit the 2023 Budget to the National Assembly in line with the program and MTFF commitments (proposed October 2022 SB). ### Social spending and safety nets - Expansion over 2020-22: - Social spending programs expanded to reach an additional 625,600 families (mid-April 2022 SB, implemented with delay), corresponding to 80 percent of households in the lowest three income deciles. - 2022 coverage targets and new programs: - Aim to reach 65 percent of the lowest income decile nationwide and 70 percent of the lowest three deciles in each province (end-November 2022 SB). - Introduce “1000 Días” (“Thousand Days”) program for 0–3 years old: - Expected coverage: about 30–50 thousand low-income beneficiaries. - Benefit: about $60 per month. - Estimated fiscal cost: $22–36 million per year. ### Debt dynamics and fiscal consolidation - Projections and drivers: - Public debt increased by 2.2 ppt of GDP last year due to public bank shares transferred from the central bank to the government (as required under COMYF). - Public debt increased by 1.3 ppt of GDP due to the conversion of the SDR allocation. - Public debt is projected to decline to below the 2025 target of 57 percent of GDP in COPLAFIP by 2023. - Policy measures to improve debt profile: - Maximize borrowing from multilaterals as part of financing strategy. - Pursue reprofiling the $5 billion debt to Chinese creditors. - Re-access international bond markets by leveraging the recently approved $400 million IDB guarantee. - Deepen the domestic debt market to reduce vulnerabilities to external financing shocks. - Expected outcomes: - Growth-friendly fiscal consolidation and financing strategy generate positive debt dynamics and lower gross financing needs. - Create space to build buffers, including to clear arrears. ### Improving fiscal frameworks, governance, transparency, and accountability - Anti-corruption and procurement transparency: - Established SNC presided by SERCOP (October 2021 SB, partially implemented); integrating participating agencies’ databases will require more technical work. - SERCOP made all procurement contracts awarded since September 2020 available to the public in a directly and freely accessible and user-friendly manner (end-November 2021 SB, met). - Backfill missing UBO information for companies awarded the 100 largest procurement contracts between October 2020 through December 2021 and publish on a government website (proposed June 2022 SB). - SRI to conduct audits on tax expenditures of companies awarded the largest 100 public procurement contracts over 2020-21 (end-September SB, proposed reset to end-October). - Fiscal Transparency Evaluation and statistics improvements: - Plan to undertake a Fiscal Transparency Evaluation (FTE) in 2023. - Committed corrective actions to improve fiscal data quality and consistency: - (i) Publish corrected NFPS and PGE fiscal historical series back to 2013 with explanations for revisions (proposed September 2022 SB). - (ii) Establish a dedicated statistics unit at the MEF, headed by a new chief statistician with expertise in government finance statistics (GFS). - (iii) Update training curriculum in GFS compilation and ensure ongoing staff training, in collaboration with STA. - (iv) Estimate the stock of potential claims on PGE, including with IESS, local governments (GADs), private sector or others by nature of expenditure, year, and beneficiary (proposed June 2022 SB). - (v) Include in the central government 2023 budget and MTFF the accrued pension and healthcare obligations to IESS. - Requested a long-term expert (LTX) from STA to support fiscal data quality improvements. ### Healthcare audits, legal framework, and arrears management - Healthcare claims and audits: - Completed audits for claims over 2013-16 and reflected arrears to IESS in the PGE expenditure and debt statistics. - Incorporated conservatively estimated potential obligations for 2017-22, to be replaced by actual obligations once audits are completed. - IESS to procure medical audit firms based on an agreement between MEF and IESS; signing the agreement is a prior action. - Commit to complete and share results of 2020 and 2021 healthcare audits by end-October (proposed October SB). - Legal reform and corrective actions: - President established a commission to develop proposals for comprehensive reform of the social security system. - Develop a time-bound action plan/strategy to undertake legal reform and administrative actions to strengthen the legal framework for State obligations on healthcare expenditure and related audits starting in 2023 (corrective action for end-October). - If far-reaching healthcare expenditure reform not achieved by end-2022, undertake medical audits of 2022 healthcare expenditure by mid-2023 for timely verification and recording. - Arrears monitoring and clearance strategy: - Implement new monitoring system for central government and selected NFPS entities’ domestic payment arrears with FAD LTX assistance. - Published methodology to estimate stock of arrears and reporting templates (November 2021 SB, implemented with delay). - Next step: prepare monthly arrears report per COPLAFIP, including estimates of past arrears with GADs and social security institutions not yet recognized as arrears or debt. - Design policy to gather monthly arrears information from other NFPS entities and adopt a strategy with a detailed calendar for settling past potential PGE obligations once confirmed. ### Debt transparency and AML/CFT - Debt disclosure: - New Debt Bulletin developed and released monthly on MEF website with detailed information on internal debt, arrears, accounts payable and previously unregistered budgetary obligations, public external and internal debt profile, and amortization profile by source and operation. - Detailed database supporting the bulletin is accessible on MEF website. - AML/CFT reforms: - Decrees issued to amend specific areas of AML/CFT framework prior to on-site GAFILAT visit in April 2022. - Plan to submit a comprehensive AML/CFT draft law to the Assembly was delayed; enactment was an SB for Mar. 2022, proposed reset to October 2022. - Continue enhancing AML/CFT framework next year following recommendations from the GAFILAT Mutual Evaluation Report expected in early 2023. ### Strengthening the Central Bank and safeguarding financial stability - Crisis measures and provisioning: - Crisis measures that lengthen loan classification and lower provisioning are set to expire for banks by end-June and for cooperatives by end-December. - Staff advised preparing a plan to unwind crisis measures; supervisory authority could grant additional time on an institution-by-institution basis under conditions (clear financial plan, dividend restrictions, closer supervisory scrutiny). - Regulatory alignment between banks and cooperatives: - Authorities plan to gradually close regulatory differences on NPL classification and provisioning between banks and at least large cooperatives; some gaps are constitutionally mandated. - Already begun closing the gap on reserve requirements. - Public banks and asset quality reviews (AQR): - Agreed TORs and timeline for AQRs (November 2021 SB, met); on track to complete AQRs of the four public banks (June 2022 SB). - Decree promulgated to merge CFN and BanEcuador; AQRs to inform necessary capitalization or balance sheet operations before merger. - Liquidity framework and Liquidity Fund: - Liquidity framework streamlined in early 2022: - Liquidity requirements effectively reduced for banks from about 19 percent of deposits to about 13.5 percent. - Banks hold high excess reserves at BCE due to official dollarization. - Contribution to Liquidity Fund lowered from 8 percent of deposits to 5 percent at onset of crisis in 2020; authorities assessing plans to restore contributions to rebuild fund. - BCE safeguards and FSAP: - BCE implemented most safeguards recommendations; outstanding recommendations: adopt International Financial Reporting Standards and publish audited financial statements (expected 2022). - Preparations under way for a joint FSAP with the World Bank to assess resilience of financial system and provide recommendations. ### Restoring competitiveness, labor market reform, and private sector development - Labor market challenges: - Pandemic compounded pre-existing labor market weaknesses; large minimum wage hike last year could further increase labor costs and encourage informality. - Authorities working on modernizing labor market to foster new forms of labor contracts to support female labor force participation and youth employment. - Private sector and investment measures: - Presidential decrees to encourage domestic and foreign investment: - Lowering tariffs on many inputs for the industrial sector. - Allowing private sector participation in oil extraction and the import of fuel. - Gradually reducing the tax on transfers abroad (ISD) from 5 to 4 percent over 2022. ### Transparency of oil companies - Audit delays and timeline: - Planned audits of Petroecuador and Petroamazonas financial statements for 2019-21 were significantly delayed; agreeing TOR and timeline was an SB for November 2021 (not met). - Agreeing on TOR and timeline for audits will be a prior action for this review. - Given delays and need to convert statements to IFRS: - 2019 audits of both oil companies can only be done by end-November, 2022 (part of end-April structural benchmark, not met, reset for end-November 2022). - 2020 audits of individual companies, and the 2021 audit of the merged entity will only be done by April 2023, after the EFF arrangement expires. - Authorities working with IDB to secure financing to procure an independent third-party auditor and remain committed to incorporating audit findings into policy plans. *Source: 1ecuea2022001 - 19. The authorities plan to ground their expenditure rationalization efforts by i) adopting a presidential decree for controlling public expenditures, including the wage bill (source PDF content).* ### 38. The authorities are pursuing policies to reduce the reliance on oil and strengthen ### 38. The authorities are pursuing policies to reduce the reliance on oil and strengthen ### Climate policy and resilience - The authorities aim to boost reliance on hydropower for electricity generation, reduce CO2 emissions, and are promote the transition to electric vehicles through the installation of electric recharging stations. - Expanded several protected areas, including the Galapagos marine reserve, and are working with international partners to generate long term financing for its protection. - With IDB support they plan to establish a climate finance unit within MEF. ### Program monitoring, access, and fiscal quantitative conditionality - Delays caused by suspension of the fuel subsidy reform and revisions to fiscal data effectively postponed the Fourth EFF Review and brought the review into the timeframe for assessing the end-December targets of the Fifth Review and setting end-August QPCs. - Staff propose to rephase the EFF arrangement to combine the Sixth and Seventh Reviews and make end-August 2022 QPCs the last quantitative target for the program. - Staff propose to set the fiscal balance QPC targets on OB of PGE+CFDD for that test date, given ongoing data issues at the NFPS level and lags in compiling the data, while continuing to monitor NFPS balances with the existing two ITs and anchoring fiscal consolidation on the NFPS NOPBS. - Commensurate with the rephasing, access for the Sixth and final review is proposed at SDR 497 million (about $700 million). ### Waiver request and corrective actions - The authorities request a waiver of nonobservance for the missed end-December 2021 QPC on the OB of PGE+CFDD, citing corrective actions already taken and further remedial measures they are committed to take (¶15). ### Financing assurances and upside risks - Staff has obtained assurances from all creditors and ensured that the program is fully financed, with firm commitments for the remainder of the program (Table 3). - Upside risks (not in the baseline) include: - Authorities working with the Chinese creditors to reprofile their $4.4 billion debt, including $1.7 billion coming due during 2022:H2-23. - AfD, EIB, and JICA are planning new disbursements of $100 million, $100 million, and $180 million of budget support, respectively. - Discussions ongoing with the U.S. Development Finance Corporation (DFC) for a debt-for-nature deal. - The $400 million IDB bond guarantee approved last year will make the planned market reaccess this year more favorable. - Financing post-program is partly predicated on reasonable assumptions of market access, reflecting the improving sovereign risk profile of Ecuador. ### Exceptional access and capacity to repay (CtR) - Staff judge that the exceptional access criteria continue to be met (Box 2). - Ecuador’s capacity to repay the Fund remains adequate and has improved markedly since the last Review, owing mainly to better overall fiscal balances, which are in turn due to higher-than-expected oil prices. - Possible debt reprofiling operations with Chinese creditors pose upside risks to CtR. - A worse oil price outlook or new contingent liabilities materializing could put pressures on building buffers if policies or financing do not adjust commensurately, potentially straining CtR. - CtR remains contingent on steadfast program implementation; the program is designed to mitigate these risks by incorporating conservative assumptions and building policy buffers. ### Lending into arrears - Ecuador maintains a residual amount of arrears to international private bond holders arising from outstanding claims on those international bonds that the authorities repudiated in 2008/2009. - US$52 million remain outstanding in the hands of individual creditors and the authorities have been unable to identify these creditors in order to settle the claims. - Authorities established a public procedure to follow if a holder of these bonds requests the liquidation of the securities. - Staff judges that good faith efforts have been made and the requirements under the policy on lending into arrears have been met. - Authorities indicated they have no outstanding arrears to bilateral or multilateral creditors. ### Staff appraisal — macroeconomic performance and outlook - A well-executed vaccination campaign, higher oil prices, and good macroeconomic management are supporting the recovery. - Economic activity expanded by 4.2 percent in 2021, reflecting stronger than expected recovery in private consumption and non-oil exports. - Macroeconomic and financial stability was maintained amid domestic and external shocks, helped by higher oil prices and a prudent policy mix. - Credit to the economy continued flowing and international reserves as well as public sector deposits reached historic highs. ### Staff appraisal — fiscal policy, reforms, and risks - The enactment of the progressive tax bill is an important milestone for reducing dependency on oil, ensuring that the better-off are paying their share, and providing fiscal space for investment in physical and human capital. - Fiscal policy is increasingly supportive of low-income families, with social assistance reaching more vulnerable households, even in remote areas. - Fiscal balances are steadily improving. - Challenges ahead include: - Vaccine-resistant variants potentially undoing gains. - Spillovers from the war in Ukraine harming some export sectors and making alternative markets difficult to find. - Rising inflationary pressures (among the lowest in the region but still rising) affecting the poor and vulnerable while labor markets are still recovering. - Domestic security concerns and a challenging domestic political climate creating headwinds for reforms. - Higher oil prices: - Improve Ecuador’s external and fiscal balances, helping to rebuild buffers and bolster resilience. - Raise the fuel subsidy bill and create pressure for spending. - Fiscal plans are calibrated to allow additional spending on priorities such as infrastructure and social assistance while making progress on debt reduction and building buffers. ### Policy recommendations for fiscal consolidation and governance - Contain public expenditure growth as the primary medium-term fiscal effort, building on the tax bill. - Unwind one-off COVID-related expenditures from 2021. - Lower the growth of the public wage bill. - Further expand the social safety net. - Improve procurement practices to generate efficiency gains. - Reprioritize capital expenditure to growth-enhancing infrastructure. - Concerted outreach is needed to garner broad societal and political support for the policy plans. - Continue progress on improving fiscal data quality, including: - Account for all transfer obligations in future budgets and medium-term fiscal frameworks. - Proactively identify other potential claims on the central government and plan to clear them once verified. - Advance audits of the financial statements of IESS. - Continue to improve public finance management practices and enhance debt transparency. - Continue efforts to fight corruption and improve governance, transparency, and accountability: - Enhance asset declarations of politically exposed people including incomes and interest. - Strengthen the AML/CFT framework in line with FATF standards. - Conduct audits of tax expenditures. - Ensure full compliance with the legal framework to collect and publish ultimate beneficiary ownership for all procurement contracts. - Accelerate financial audits of state-owned oil companies; delays imply completion will now fall outside the current program. - Maintain vigilance as crisis measures in the financial sector are rolled back: - Monitor liquidity closely in light of the new regulatory framework. - Continue closing regulatory gaps between banks and large cooperatives. - Ensure the liquidity fund has adequate resources to serve as lender of last resort in a fully-dollarized economy. - Ongoing AQRs for public banks and the upcoming FSAP will aid in assessing financial sector soundness and reforms. ### Support for program requests - Staff supports the request for a waiver of nonobservance of the end-December 2021 OB of PGE+CFDD QPC and completion by the Executive Board of the combined Fourth and Fifth Reviews under the EFF arrangement. - Support is based on corrective actions already undertaken and further remedial measures authorities are committed to take. - Staff also supports the request for changes to the structural conditionality. ### Box 2 — Assessment of Exceptional Access Criteria (summary) - Criterion 1: Ecuador continues to experience exceptional BOP pressures. The residual financing gap proposed to be provided by the Fund is estimated at $1,700 billion over 2022, after factoring in fiscal consolidation and IFI support. - Criterion 2: Public debt was assessed sustainable with high probability at program approval. Prudent fiscal management and higher oil prices have reduced deficits and debt levels relative to projections; public debt is projected to reach its 2025 target in 2023. Gross financing needs remain around 3-4.5 percent of GDP over the medium term. Stress tests show sensitivity to contingent liabilities and growth shocks. - Criterion 3: Historical evidence shows Ecuador regained market access within 24-36 months after past restructurings. Spreads have remained stable around 800 bps since post-election declines. Staff assumptions on market re-access starting in 2022 at US$1 billion are broadly unchanged. The $400 million IDB bond guarantee would enable more favorable market tapping. - Criterion 4: Authorities provide a reasonably strong prospect of success, having implemented key prior actions and structural reforms (including anticorruption reform of COIP, reform of COMYF, and tax reform). Data quality issues have recurred but are being addressed; fiscal data quality is already improving due to corrective actions and capacity development support. *IMF staff appraisal and program documentation as provided in the source content.* ### Box 2. Assessment of Exceptional Access Criteria (concluded) ### Box 2. Assessment of Exceptional Access Criteria (concluded) ### Data corrections and corrective actions - Authorities have implemented corrections in recent months and committed to continue steps to improve processes to avoid large historical revisions, especially from underreporting of accrued spending commitments. - Corrective actions include: - (i) publishing revised historical series for PGE and NFPS with explanations for revisions; - (ii) signing an agreement between MEF and IESS to promptly procure firms to conduct healthcare audits for 2017-21 medical expenditure; and completing the audits of 2020 and 2021 claims by end-October; - (iii) identifying the existing stock of PGE potential obligations to IESS, GADs, private sector and others; - (iv) inclusion in the 2023 budget and MTFF properly estimated pension and healthcare transfers to IESS; - (v) establishing a dedicated statistics unit at the MEF headed by a senior Chief Statistician, and upgrading the training curriculum in data compilation, reconciliation, and verification; - (vi) developing a time-bound plan to undertake legal reform aimed at strengthening the legal framework for State healthcare obligations and related audits; - (vii) completing the financial audit of IESS statements from 2019-21 by an independent third party. ### Institutional support and capacity building - The authorities are working closely with STA, as well as with the Fund LTX in cash management to improve financial planning and advance the arrears clearance strategy. - Authorities have sought further technical assistance support from the Fund and other IFIs to keep improving technical and institutional capacity. ### Macroeconomic assessment and program prospects - The report finds strong macroeconomic policy management to date and commitment to advance on the structural agenda. - Numerous steps to improve data quality and technical capacity provide a reasonably strong prospect of success for the Fund-supported program. - The assessment underscores that ultimately successful implementation hinges on the continued political will of the executive. ### Selected recent economic indicators and projections (key figures preserved exactly as in source) - Current account surplus: 2.9 percent of GDP in 2021Q4. - Gross International Reserves (GIR): $9.2 billion as of March 2022. - Real GDP (percent change): 2020 -7.8; 2021 2.8; 2022 4.2; 2023 3.5; 2024 2.9; 2025 2.7; 2026 2.8; 2027 2.8; 2028 2.8. - Consumer price index, period average (percent): 2020 -0.3; 2021 0.0; 2022 1.0; 2023 2.1; 2024 3.2; 2025 2.4; 2026 1.5; 2027 1.3; 2028 1.0; 2029 1.0. - Exports, f.o.b. (US$ millions): 2020 20,591; 2021 23,993; 2022 27,236; 2023 25,410; 2024 31,064; 2025 31,470; 2026 31,869; 2027 32,278; 2028 32,856; 2029 33,425. - Oil exports (millions of barrels): 2020 146.4; 2021 133.2; 2022 133.7; 2023 135.9; 2024 134.1; 2025 141.4; 2026 144.7; 2027 147.8; 2028 150.2; 2029 150.2. - NFPS Revenue (percent of GDP): 2020 29.4; 2021 33.2; 2022 34.0; 2023 33.8; 2024 36.1; 2025 36.2; 2026 35.2; 2027 34.7; 2028 34.2; 2029 33.5. - NFPS Expenditure (percent of GDP): 2020 36.5; 2021 35.5; 2022 35.5; 2023 33.8; 2024 35.2; 2025 34.3; 2026 33.4; 2027 32.9; 2028 32.2; 2029 32.1. - Overall NFPS balance (deficit, percent of GDP): 2020 -7.1; 2021 -2.3; 2022 -1.5; 2023 0.1; 2024 0.9; 2025 1.9; 2026 1.8; 2027 1.9; 2028 2.0; 2029 1.4. - Public debt (percent of GDP, NFPS gross debt consolidated): 2020 60.9; 2021 61.0; 2022 62.2; 2023 59.9; 2024 58.9; 2025 56.2; 2026 54.5; 2027 51.4; 2028 47.7; 2029 45.1. - Gross Financing Needs (percent of GDP): 2020 14.2; 2021 7.0; 2022 6.7; 2023 4.3; 2024 4.9; 2025 3.5; 2026 3.3; 2027 4.2; 2028 4.6; 2029 4.1. - Net international reserves (program definition, US$ millions): 2020 -7,161; 2021 -6,239; 2022 -5,747; 2023 -5,013; 2024 -4,729; 2025 -1,753; 2026 1,926; 2027 4,227; 2028 5,691; 2029 6,766. - IMF exceptional financing under the EFF (US$ millions): 2020 4,007; 2021 1,500; 2022 802; 2023 1,000; 2024 1,700; 2025 -77; 2026 -241; 2027 -923; 2028 -1,144; 2029 -1,348. *Source: IMF staff compilation from document text and accompanying tables and figures.* ### 1. Overall balance of the budgetary central government and CFDD (floor) 1/-1,600 ### 1. Overall balance of the budgetary central government and CFDD (floor) 1/-1,600 ### Program quantitative and indicative targets - Continuous/periodic performance criteria and floors/targets (cumulative change from January 1, 2022 noted in 1/): - 1. Overall balance of the budgetary central government and CFDD (floor) 1/-1,600 - 2. Accumulation of NFPS deposits at the central bank (floor) 1/1,200 - 3. Non-accumulation of external payments arrears (continuous PC)0 - 4. (No new) Net credit to government from the central bank (continuous PC)0 - Indicative targets: - 5. Non-oil primary balance of the NFPS (including fuel subsidies, floor) 1/ 2/-4,350 - 6. Overall balance of the NFPS (floor) 1/410 - 7. Change in the stock of NIR - program definition (floor ) 1/675 ### Social protection coverage (program floors) - National coverage targets (cumulative from January 1, 2022): - 8. Number of families in the first income decile nationwide covered by cash transfer programs (floor)280,716 - Provincial coverage targets — Number of families in the lowest three income deciles by province covered by cash transfer programs (floor): - AZUAY39,97443,049 - BOLIVAR24,25026,116 - CAÑAR18,91020,364 - CARCHI10,41611,217 - CHIMBORAZO44,46447,884 - COTOPAXI41,59244,791 - EL ORO26,33828,364 - ESMERALDAS56,26660,594 - GALAPAGOS145157 - GUAYAS198,818214,112 - IMBABURA25,24427,186 - LOJA42,53645,808 - LOS RIOS84,75191,271 - MANABI139,151149,855 - MORONA SANTIAGO19,01420,477 - NAPO11,21412,076 - ORELLANA16,27517,527 - PASTAZA7,5118,089 - PICHINCHA36,17838,960 - SANTA ELENA21,85723,538 - SANTO DOMINGO DE LOS TSACHILAS25,92027,913 - SUCUMBIOS16,33017,586 - TUNGURAHUA30,32232,654 - ZAMORA CHINCHIPE10,23711,025 - ZONA EN ESTUDIO4,2804,609 ### Notes on numerical definitions - Source: IMF staff calculations. - 1/ Cumulative change from January 1, 2022. - 2/ Excludes interest receipts and oil-related arbitration awards. ### Schedule of review and purchases (original and proposed) - Total proposed availability under schedules: Total4,615.0661.5 - Key availability dates and amounts (Millions of SDRs / Percent of Quota): - September 30, 20201,420.0203.5 — Approval of arrangement - December 15, 20201,420.0203.5 — First review and end-September 2020 performance/ continuous criteria - April 15, 2021284.040.7 — Second review and end-December 2020 performance/continuous criteria - August 15, 2021284.040.7 — Third review and end-April 2021 performance/continuous criteria - December 15, 2021497.071.2 — Fourth review and end-September 2021 performance/continuous criteria - April 15, 2022213.030.5 — Fifth review and end-December 2021 performance/continuous criteria - August 15, 2022213.030.5 — Sixth review and end-April 2022 performance/continuous criteria - December 1, 2022284.040.7 — Seventh review and end-August 2022 performance/continuous criteria - Footnotes and schedule clarifications: - 1/ Ecuador's quota is SRD 697.7 million - 2/ Date at which resources become available - 3/ Second and Third reviews were combined (April 15, 2021 and August 15, 2021). - 4/ Fourth and fifth reviews are combined (December 15, 2021 and April 15, 2022). ### Prior actions and structural benchmarks — selected objectives and status highlights - Transparency, Fiscal Strategy: - Adopt a presidential decree (Reglamento General de Compras Públicas) to mandate public framework agreements and publish ultimate beneficiary ownership information in public procurement contracts — Improve expenditure control and transparency — (Prior action) Implemented (timing not explicitly restated here). - Adopt presidential decree establishing optimization of public expenditure, including the wage bill, in line with the MTFF and fiscal targets — Improve expenditure control — Prior action status noted. - Publish the MTFF, and fiscal targets approved by the NFCC, in line with program commitments — Improve expenditure control — Prior action status noted. - SOE, Audits: - Initiate independent audits of the 2019 and 2020 financial statements of Petroecuador and Petroamazonas by agreeing on terms of reference and timeline — Strengthen SOEs — Not met / converted to a PA (end-Nov. 2021 context) or split into later commitments (end-Apr. 2022 context). - BCE internal audit charter: - JPRF to approve an internal audit charter aligned with international standards (mandate, coverage, risk-based approach, quality assessment program, reporting) — Improve the BCE’s audit mechanisms — End-Nov. 2020 — Met - Cash management: - Deliver to IMF staff a PGE financial plan for the year 2021 approved by the Financial Committee — Improve institutional capacity and identify early warning signs of impending liquidity constraints — Dec. 16, 2020 — Met - Anti-corruption, transparency, AML/CFT: - Enhance online publication of asset declarations for high-level public officials and PEPs — Strengthen anticorruption and AML/CFT — End-Nov. 2020 — Partially implemented; reformulated as a new SB for Aug. 2022 - Enactment of anticorruption legislation to criminalize acts of corruption in line with Articles 15 to 30 of UNCAC — Strengthen anticorruption and protect public finances — End-Dec. 2020 — Met - Fiscal statistics and arrears: - Publish revised historical NFPS data, both above- and below-the-line, back to 2013 — Improve quality of fiscal statistics — End-May 2021 — Not met; implemented with delay in Aug. 2021 - Prepare a compilation guide, in consultation with IMF TA, and disseminate to data providers across the NFPS through a workshop — Improve quality of fiscal statistics — End-May 2021 — Met - Share with IMF staff an updated arrears’ clearance strategy with updated information on the stock of arrears as of end 2020 — Strengthen monitoring and reduce accumulation of payment arrears — End-Apr. 2021 — Not met; converted to new SB for Nov. 2021 - Tax reform: - Enactment of a tax reform, elaborated in consultation with Fund staff, aimed at generating revenue and improving the overall efficiency of the tax system — Improve the efficiency of the tax system — End-Oct. 2021 — Not met; implemented with delay in Nov. 2021 - Social assistance / registry: - Complete the upgrade of the social registry and expand coverage to at least 80 percent of families in the bottom three deciles — Strengthen the social safety net — Mid-Apr. 2022 — Not met; implemented with delay - Expand the coverage of the social assistance program to no less than 70 percent coverage of the bottom three income deciles by province and no less than 65 percent of the first income decile nationwide — Strengthen the social safety net — End-Dec. 2022 — In progress; Proposed to be reset to end-Nov. 2022 - Financial sector asset quality reviews: - Initiate independent third-party asset quality reviews of the 2019 and 2020 balance sheets of all public banks by selecting the third-party firm and agreeing on terms of reference — Improve fiscal transparency — End-Nov. 2021 — Met - Share with IMF staff the completed independent third-party asset quality reviews of the 2019 and 2020 balance sheets of all public banks — Improve fiscal transparency — End-Jun. 2022 — In progress ### Structural conditionality objective themes (concise) - Strengthen public financial management framework and fiscal discipline, and increase fiscal transparency (regulation to implement July 2020 amendments to COPLAFIP) — End-Nov. 2020 — Implemented with delay - Strengthen anticorruption and AML/CFT and protect the public purse (multiple procurement transparency and UBO publication actions) — mixed statuses (Met; Partially implemented; Not met; converted/reformulated) - Strengthen SOEs and fiscal transparency through independent audits of Petroecuador/Petroamazonas and public banks — many items Not met or rescheduled; some items Met or In progress - Strengthen social safety net via social registry upgrades and expanded coverage — Not met; In progress; proposed resets - Improve fiscal statistics and arrears monitoring — mixed implementation and delays ### Implementation timing patterns - Multiple actions show delays, partial implementation, conversion to new structural benchmarks (SBs) or prior actions (PAs), or rescheduling into MEFP commitments for 2023. - Several items marked Met (e.g., BCE audit charter, cash management PGE plan, certain procurement transparency steps, financial sector initiation of AQRs). ### Debt Sustainability Analysis — Annex I (baseline summary and key numerical projections) - Baseline finding: - Under the baseline projection, Ecuador’s public debt remains sustainable with high probability, in line with the assessment at program approval and subsequent Reviews, owing to the successful debt restructuring operation and the envisaged fiscal consolidation. - Debt trajectory: - Debt is expected to decline gradually from its end-2021 peak of 62.2 percent of GDP to 45.1 percent of GDP by end-2027. - At 51.4 percent of GDP in 2025 and 45.1 percent in 2027 under the baseline, debt would be in compliance with the COPLAFIP targets with large buffers. - Gross financing needs: - Gross financing needs are projected to decline gradually from 6.7 percent in 2021, and average around 4.1 percent of GDP between 2022-27. - Vulnerabilities: - The debt profile is vulnerable to growth, oil price, and contingent liability shocks, but its trajectory is expected to be below the critical threshold through the forecasting period. - Definition and debt profile details: - Public-sector debt includes consolidated obligations of the non-financial public sector (general government and five major non-financial sector state-owned enterprises, and the Development Bank of Ecuador), as reported by the authorities, as well as liabilities under oil related financing, treasury certificates, central bank lending to the government, and other liabilities including arrears. - Under this measure, public debt more than tripled between 2012 and 2020 (from 17.5 to 60.9 percent of GDP). - Debt in 2021 reached 62.2 percent of GDP, including 2.2 percent of GDP in the transfer of public bank shares previously held at the central bank, as part of the central bank balance sheet clean up under the COMYF reform. - The difference between the SDR allocation and holdings (1.3 percent of GDP) have also been added as debt in 2021, in accordance with the Guidance Note (the allocations are being held as USD in government deposits). - Consistent with newly available data on interest revenues, the primary balance now excludes interest revenues. - Macroeconomic and fiscal assumptions: - Real growth in 2022 is projected at 2.9 percent, while inflation (GDP deflator) is projected at 5.7 percent. - Over the medium term, growth is forecasted to remain around 2.8 percent, in line with the economy’s potential, while the GDP deflator is projected below 1 percent. - The fiscal position of the NFPS is expected to improve gradually over the medium term and reach a primary surplus of 2.4 percent of GDP by 2026. This is conditional to a timely implementation of the measures envisioned under the program. - On the financing side, the framework envisaged support from the IFIs of about $4.6 billion in 2022 and about $1.8 billion in 2023, while market access is expected to resume from 2022 with an annual access between $1 and $2 billion. - Interest rate projections reflect forward rates implied by the recent global rate hikes. *Source: IMF staff calculations and accompanying program documents as presented in the content unit.* ### 3. Baseline Scenario. The authorities are committed to implement policies that reduce the ### 3. Baseline Scenario ### Baseline debt and fiscal projections - Public debt forecast: - Declines from 62.2 percent (end of 2021) to 51.7 percent of GDP by 2025. - Reaches 45.1 percent of GDP by 2027. - Comparison with COPLAFIP targets: baseline is ahead of targets of 57 percent of GDP by 2025 and 45 percent of GDP by 2030. - Stabilizing primary surplus: - A primary surplus of 0.8 percent of GDP beyond 2027 would stabilize debt at the 2030 target of 45 percent of GDP. - Risk thresholds: - Public debt remains below the critical risk threshold for emerging markets of 70 percent of GDP during the forecasting period. - Gross financing needs (GFN): - Decline from 6.9 percent of GDP in 2021 to an average of 4.3 percent of GDP between 2022-27. - Expected to remain at these levels through 2030. ### Stress tests and alternative scenarios - Growth shock: - Brings debt-to-GDP ratio to 66.5 percent in 2024, then declines to 57.1 percent in 2027. - Contingent liability shock: - Increases expenditures by about $6.5 billion in 2023. - Brings debt-to-GDP ratio to 67 percent before reaching 61 percent in 2027. - Shock size: equivalent to 10 percent of banking sector assets. - Oil shock: - Sharp fall in public revenues and collapse in economic activity over 2023-24. - Raises debt-to-GDP ratio to 69.4 percent. - Stress-test outcomes: - Under listed shocks, debt-to-GDP ratios remain within the emerging market threshold of 70 percent of GDP through the forecasting period. - However, shocks would breach COPLAFIP targets of 57 percent of GDP by 2025. - Gross financing needs critical threshold of 15 percent of GDP is not breached in any shock scenario. ### Risks and vulnerabilities - Market perception and debt holdings: - Spreads have continued to decline post-restructuring but remain high. - Non-residents hold about 72 percent of total debt (may be higher due to data limitations on secondary market transactions). - Mitigating factors: - About half of external debt is owed to official creditors, with long maturities and relatively low interest rates. - 2020 debt restructuring limited near-term external debt rollover risks. - Authorities working with Chinese authorities on reprofiling their $5 billion debt; if successful, this would lower GFNs and strengthen debt resilience. - The $400 million IDB guarantee improves prospects and cost of reaccessing markets. ### Debt transparency and data actions - Authorities’ commitments: - Committed to debt transparency, including on the debt holder profile in line with new requirements under the Debt Limits Policy (DLP). - Agreed to publication of all required elements on Debt Holder Profile. - Technical assistance and publications: - Received World Bank technical assistance to improve debt data and transparency. - Begun publishing the monthly public debt bulletin and accompanying excel file with detailed debt data on the website of MEF. ### Key statistics and projection table highlights (selected) - Nominal gross public debt (percent of GDP): 35.1 (2020), 60.9 (2021), 62.2 (2022), 58.9 (2023), 56.2 (2024), 54.5 (2025), 51.4 (2026), 47.7 (2027), 45.1 (E). - Public gross financing needs (percent of GDP): 11.8 (2020), 14.7 (2021), 6.7 (2022), 4.9 (2023), 3.5 (2024), 3.3 (2025), 4.2 (2026), 4.6 (2027), 4.1 (E). - Real GDP growth (in percent): 2.8 (2020), -7.8 (2021), 4.2 (2022), 2.9 (2023), 2.7 (2024), 2.8 (2025), 2.8 (2026), 2.8 (2027), 2.8 (R). - Inflation (GDP deflator, in percent): 2.3 (2020), -0.4 (2021), 2.6 (2022), 5.7 (2023), 1.5 (2024), 0.8 (2025), 0.6 (2026), 0.6 (2027), 0.6 (M). - Effective interest rate (in percent): 4.8 (2020), 5.0 (2021), 2.3 (2022), 2.5 (2023), 2.7 (2024), 3.1 (2025), 3.7 (2026), 4.1 (2027), 4.4 (F). - Change in gross public sector debt (cumulative 2022-27): -17.2 (percent of GDP). - Identified debt-creating flows (cumulative 2022-27): -10.8 (percent of GDP). - Primary deficit (cumulative 2022-27): -14.0 (percent of GDP). - Primary (noninterest) revenue and grants (2022-27 cumul): 203.4 (percent of GDP across period). - Primary (noninterest) expenditure (2022-27 cumul): 189.4 (percent of GDP across period). - Contingent liabilities (memo): 2,567 (US$ Mil), 2.4 (percent GDP); of which public guarantees 2,185 (US$ Mil), 2.1 (percent GDP). - Nominal GDP: 106,166 (2021); 115,469 (2022); 120,292 (2023) (US$ Mil). *Source: IMF staff calculations.* ### Annex II. Risk Assessment Matrix ### Annex II. Risk Assessment Matrix ### Conjunctural Shocks and Scenario - War in Ukraine escalation (sanctions broadened to include oil, gas, and food; Russia disconnected from global financial/trading systems) - Relative Likelihood: High - Possible Impact: Medium - Key impacts: Higher commodity prices, refugee migration, tighter financial conditions, adverse spillovers affecting LICs and commodity-importing EMs; difficulties finding new markets for agricultural exports (banana, shrimp, flowers) that were hit by supply chain disruptions can slow economic growth; higher oil and metal prices expected to have a net positive impact on Ecuador’s external and fiscal balances. - Policy Response: - Save the oil windfall to build buffers. - Stick to the planned fiscal consolidation to restore confidence, strengthen debt and fiscal sustainability. - Gradually reduce dependency on oil through economic diversification and promote private sector-led growth. - Continue to closely monitor financial sector stability. - Continue to address financing needs by closely working with IFIs and wait for an opportune time to re-access international markets. - Rising and volatile food and energy prices (commodity prices volatile and trend up amid supply constraints, war in Ukraine, export restrictions, and currency depreciations) - Relative Likelihood: High - Possible Impact: Medium - Key impacts: Short-run disruptions in the green transition, bouts of price and real sector volatility, food insecurity, social unrest, acute food and energy crises (especially in EMDEs with lack of fiscal space). For Ecuador: higher inflation may increase poverty and inequality, but inflationary pressures likely more muted compared to regional peers because Ecuador has a positive energy balance, is dollarized, and suspended the oil subsidy reform in October 2021, which is slowing down the green transition. - Policy Response: - Save oil proceeds to restore fiscal sustainability. - Continue expanding the coverage and improving the targeting of the social assistance programs to protect the poor and the vulnerable from the negative poverty impacts of rising inflation. - Widespread social discontent and political instability (social unrest fueled by increasing prices and shortages, rising inequality, inadequate healthcare, pandemic scars, rising interest rates) - Relative Likelihood: High - Possible Impact: High - Key impacts: Political instability, capital outflows, higher unemployment, slower economic growth; a rise in global food prices and slower global growth can translate into slower recovery in economic activity and employment, higher domestic prices, and increased poverty and inequality. - Policy Response: - Increase social assistance coverage to ensure fiscal adjustment does not hurt the poor and the vulnerable. - Continue engaging the broader public, explaining the benefits of the reform program. - Prioritize social spending, including health expenditures, to achieve more inclusive growth. - Continue to liberalize trade and improve the business climate to promote faster job creation and inclusive growth. - Continue to closely monitor household indebtedness, and rebuild the liquidity fund. - Abrupt growth slowdown in China (extended Covid-19 lockdowns, geopolitical tensions, property sector slowdown, inadequate policy responses) - Relative Likelihood: Medium - Possible Impact: High - Key impacts: China is Ecuador’s second largest trade partner; a slowdown implies lower exports and falling terms of trade, denting growth. - Policy Response: - Diversify the economy to reduce dependency on commodity exports. - Outbreaks of lethal and highly contagious Covid-19 variants (low vaccine protection or vaccine-resistant variants) - Relative Likelihood: Medium - Possible Impact: Medium - Key impacts: Could force social distancing or new lockdowns, extended supply chain disruptions, reassessment of growth prospects, triggering capital outflows, financial tightening, currency depreciations, and debt distress in some EMDEs. For Ecuador: a large share of population is fully vaccinated and boosted, but uncontrolled local outbreaks from vaccine-resistant variants could jeopardize expected economic recovery and widen BOP and fiscal financing gaps via lower external demand. - Policy Response: - Re-instate containment measures if a severe wave of vaccine-resistant infections occur. - Continue vaccination campaign, including boosters. - Prioritize social and health-related spending and continue supporting the population. - Provide targeted policy support to the most affected households and firms. - Pursue fiscal consolidation to rebuild buffers. - Should financial conditions tighten, seek additional concessional funding. - De-anchoring of inflation expectations in the U.S. and/or advanced European economies (worsening supply-demand imbalances, higher commodity prices, higher nominal wage growth) - Relative Likelihood: Medium - Possible Impact: Medium - Key impacts: Central banks may tighten faster than anticipated, causing sharp tightening of global financial conditions, spiking risk premia, lower global demand, currency depreciations, asset market selloffs, bankruptcies, sovereign defaults, and contagion across EMDEs. For Ecuador: fully-dollarized economy with no independent monetary policy; financial sector can absorb major shocks but vulnerability to lower commodity prices could pressure BOP and fiscal accounts; a drop in market confidence could delay market re-access and financing. - Policy Response: - Seek additional low-cost financing and reprofiling existing obligations should risk premia increase. - Seek re-entry to the international capital markets when conditions return to favorable. - Pursue fiscal consolidation to rebuild credibility with markets. - Strengthen (financial) crisis preparedness and management. ### Structural Risks - Geopolitical tensions and deglobalization (intensified tensions, conflicts, fragmentation of international monetary system, production reshoring) - Relative Likelihood: High - Possible Impact: Medium - Key impacts: Reduced oil prices could have significant fiscal, growth, and BOP ramifications for Ecuador; migration shock from Venezuela could intensify fiscal pressures and negatively impact growth in the short term though a positive impact on growth would be expected in the longer term. - Policy Response: - Adopt policies that improve the perception of Ecuador, including by removing trade barriers, limiting policy uncertainty through clearly articulated medium-term policy frameworks to limit discretion, and improving labor market flexibility. - In the event tensions reduce oil prices, implement identified fiscal contingency measures. - Cyberthreats (cyberattacks on critical physical or digital infrastructure, including digital currency platforms) - Relative Likelihood: Medium - Possible Impact: Medium - Policy Response: - Invest to protect critical financial, transport, communication or energy infrastructure. - Strengthen (financial) crisis preparedness and management. - Natural disasters related to climate change (higher frequency of natural disasters causing severe economic damage and accelerating emigration) - Relative Likelihood: Medium - Possible Impact: High - Key impacts: Ecuador is prone to many natural disasters. - Policy Response: - Implement policies to build resilience in infrastructure to natural disasters. - Invest to protect critical financial, transport, communication or energy infrastructure to minimize disruptions. - Build precautionary savings buffers. *Annex II. Risk Assessment Matrix — Ecuador* ### 11. Against this background, we request that the Fund complete the Fourth and Fifth Reviews of ### 1ecuea2022001 - 11. Against this background, we request that the Fund complete the Fourth and Fifth Reviews of ### Request to the Fund and disbursement plan - Request that the Fund complete the Fourth and Fifth Reviews of the Extended Arrangement under the IMF's Extended Fund Facility. - Request rephasing of access and modification of the review schedule due to delays in completing reviews and to better align them with budgetary financing needs that typically rise toward the end of the year. - Proposal to combine the Sixth and Seventh Reviews and have only one additional review in 2022, resulting in two disbursements in 2022: - SDR 710 million (about US$ 1 billion) following completion of the Fourth and Fifth Reviews. - SDR 497 million (US$ 700 million) following the Sixth and final review. - Intended use of disbursements: support budgetary efforts to contain the pandemic, increase coverage of targeted cash transfers to vulnerable households, and support economic recovery by addressing long-standing barriers to growth. ### Program monitoring and quantitative targets - Not ready to move to targeting the nonfinancial public sector due to: - Delays in capacity building. - Turnover of GFS compilers. - Pending upgrade of the accounting software of the Treasury. - Commitment to full transparency of data; more time needed to complete the review process and improve capacities. - Request to continue with: - The quantitative target for OB of PGE+CFDD. - Indicative targets on NFPS balances for the remainder of 2022. ### Publication and consultation commitments - Consent to publication of this letter, its attachments, and the Staff Report associated with the request for support. - Commitment to provide information requested by the Fund to assess policy implementation. - Commitment to consult with the Fund on additional measures needed during program implementation and before any changes to policy plans, in accordance with the Fund’s consultation policies. ### Memorandum of Economic and Financial Policies — program objectives and commitment - Government fully committed to the 27-month extended arrangement under the EFF, approved by the IMF Executive Board on September 30, 2020. - Program aims: stabilizing the economy, protecting lives and livelihoods, expanding social assistance coverage, ensuring fiscal and debt sustainability, and strengthening domestic institutions to lay foundations for strong, job-rich growth. ### COVID-19 vaccination and public health progress - Since May 2021, decisive actions to ensure vaccine access. - As of end-May: - 83 percent of the population over 3 years old received two doses of vaccines. - 37 percent received booster doses. - Mask requirement for public indoor establishments lifted by the end of April. - By end-April 2022, 83 percent of Ecuadorians over 3 years old are fully vaccinated against COVID-19. ### Social assistance and social registry progress - Efforts to address economic and social effects of COVID-19 on the most vulnerable, including upgrading the social registry and expanding coverage with assistance from UN and World Bank. - Targets and outcomes: - Slight shortfall on end-September 2021 target of incorporating 453,700 families from the bottom three income deciles by 901 families. - Surpassed end-December 2021 target of 514,000 families by a wide margin. - Plan to provide support to 625,600 additional families by May 2022, with a slight delay from the mid-April 2022 target (structural benchmark, not met). - Progress on targets of reaching 65 percent of the bottom income decile nationwide and 70 percent of the lowest three deciles in each province (structural benchmark for end-November 2022). - Aim to reach numbers in Table 1 corresponding to 57.5 percent and 65 percent of the two objectives by August 2022. ### Fiscal transparency, data revisions, and arrears - 2021 expenditure reclassification: - Reclassified 2021 spending totaling $1.5 billion on salaries, goods and services, and social assistance that had been recorded under capital expenditure. - Historical data revised back to 2017. - Arrears and COVID-related expenditures: - VAT refunds to GADs arrears cleaned, reaching $250 million. - COVID-19 related expenditures by end 2021 totalized $863 million (including vaccines, one-off social protection bonds, benefits to health workers). ### Fiscal outcomes and public debt - Quantitative fiscal target performance: - September QPC on PGE and CFDD met by a margin of $579 million. - After historical data corrections to PGE pension and healthcare transfers to the IESS, missed end-December QPC by $229 million; request a waiver of nonobservance. - Met September and December ITs on NFPS overall balance by margins of $891 million and $793 million respectively. - End-September IT on NOPBS missed by $593 million; December IT missed by $1,213 million. - If interest income had been included in NOPBS calculation, ITs would have been met by $297 million in September 2021 and missed by $30 million in December 2021. - Better-than-expected performance on NFPS OB allowed higher accumulation of NFPS deposits at the central bank compared to the adjusted QPC by $1.26 billion and $1.13 billion in September and December, respectively. - NIR higher-than-programmed by $1.24 billion by end-December 2021. - Public debt and financing: - Public debt, as measured by Fund definition, ended the year at 62.2 percent of GDP due to: - Transfer of public bank shares previously held at the central bank. - Addition of 1.3 percent of GDP in the difference between SDR allocation and holdings. - Delayed disbursements from the IMF and World Bank toward year-end created financing shortfalls; managed via more short-term borrowing from banking sector and public institutions and increasing other accounts payable. - Tax bill enactment: - Enactment of the tax bill (structural benchmark for end-October SB, implemented with delay in November 2021). - Expected yield: 0.7 percent of GDP in permanent revenues by 2023. - Temporary revenues: 0.8 percent of GDP in 2022 and 0.4 percent of GDP in 2023. - Measures include establishment of a Large Taxpayer Unit and enabling declaration of assets held abroad. - Pursuing information exchange agreements, including with the United States and the Global Forum (CAAM). ### Early 2022 fiscal performance and external support - So far in 2022: - Total revenues of the PGE+CFDD increased 30 percent by March compared to the same period in 2021. - Tax revenues increased 25 percent reflecting initial yields from tax reform, collection of temporary taxes on net wealth, better economic performance, and improved tax collection efficiency. - Non-oil primary expenditures remained flat for the same period. - World Bank and CAF support contributed to accumulation of deposits in the Central Bank of $831 million compared to $50 million in 2021. ### 2022 fiscal strategy and consolidation targets - COVID-19 related expenses for 2022 expected to reach $264 million, including $80 million in vaccination for booster doses. - Commitment to achieving a consolidation of 4.5 ppts of GDP of the NOPBS over 2020-25 (anchor measure of the program). - For 2022, target NOPBS improvement of 1.5 ppts of GDP (half of the planned consolidation in the last review). Rationale: balance supporting economic recovery, using some oil windfall for infrastructure, meeting fiscal objectives, saving some oil windfall to build buffers and boost reserves per Law of Defense for Dollarization (COMYF). - Drivers of consolidation: - Revenue-side: - Tax reform expected revenues for the year: $1.1 billion (1 percent of GDP) (largely temporary taxes). - Lifting remaining COVID-related restrictions expected to buoy VAT revenues and result in $126 million (0.1 ppts of GDP) improvement. - Offsets to revenues: tariff reductions (cost of 0.1 percent GDP) and gradual reduction of capital exit tax rate (ISD) from 5 to 4 percent this year (cost of 0.1 ppt of GDP). - Total non-oil revenues expected to increase by $2.5 billion compared to 2021, representing 0.3 ppts of GDP in fiscal consolidation. - Expenditure-side: - Consolidation in 2022 primarily expenditure-based: 1.2 ppts of GDP. - Measures include unwinding one-off COVID-related expenditure from last year, containing wages and salaries, rationalizing goods and services, and reprioritizing capital expenditure toward infrastructure projects (e.g., roads) damaged during a challenging rainy season. - Distribution of consolidation: - Most consolidation on non-oil expenditure side will come from the central government: 1.0 ppts of GDP (including an increase in subsidies by 0.5 ppt of GDP due to surge in oil prices). - 0.2 ppt of GDP expected from the rest of the NFPS. - Factors explaining gap between PGE and NFPS balances: more transparent accrual accounts between central government and social security, local government VAT withholdings going forward, and higher oil prices boosting public enterprises balances and central government transfers to local governments. *Source: Content unit 1ecuea2022001 (PDF chapter/section).* ### 19. Over the medium-term, our fiscal strategy will be guided by our 2021-2025 Development ### 19. Over the medium-term, our fiscal strategy will be guided by our 2021-2025 Development Plan and grounded in the medium-term fiscal framework (MTFF) ### Medium-term fiscal consolidation objective - Aim to reduce nonoil primary expenditures by 3.7 ppts of GDP over 2022-25. - Expected savings sources over 2022-25: - Improving procurement and spending prioritization: 0.4 ppt of GDP in goods and services, 0.4 ppt of GDP in capital expenditure, and 0.1 ppt of GDP in other spending. - Anticipated decline in oil prices (with fuel subsidy paused): 1.0 ppt of GDP in savings. - Containing the wage bill: 1.6 ppts of GDP (bulk of consolidation). - Allowance for social assistance: an expansion of 0.1 ppt of GDP to maintain increased coverage planned over 2022. ### Public sector wage bill and efficiency (policy measures and targets) - Rationale: - Public sector has among the highest share of spending dedicated to wages and salaries and capital expenditure compared to regional peers without delivering the highest quality of public services. - Relatively high public-private wage gap, especially at entry-level, disincentivizes private sector employment and reduces competitiveness. - Fiscal target: - Achieve fiscal consolidation of 1.5 ppt of GDP over 2022-25 at the NFPS level (corresponding to 1.8 ppt of GDP over 2019-25). - Strategy features: - Nominal wage bill may increase but decline as percent of nominal GDP through partial replacement of retirees, less reliance on occasional contractors, and wage growth below nominal GDP growth. - Protect frontline workers in education, health, defense, and police; comply with mandated increase in teacher salaries expected upon enactment of law. - Additional possible measures: revised pay scales for new hires and inflation-adjusted wages. - Implementation: - Guidelines on public sector workforce jointly defined with the Labor Ministry to enforce wage bill targets in annual budgets. - Presidential decrees for controlling public expenditures, including the wage bill strategy (prior action). - An inter-ministerial memorandum of understanding to ensure central government agencies follow the strategy. - Technical assistance from the IDB for a review of central government agencies to strengthen budgetary oversight and human resource planning (including merging agencies and reviewing institutional roles). ### Procurement reforms (expected savings and institutional actions) - Policy actions: - Reform procurement system to save costs while ensuring high transparency standards. - As per Decree 155, Office of the Comptroller General conducts market studies before public procurement to ensure ex-ante cost review and fair contract attribution. - Issue bylaws to the procurement law with a presidential decree (Reglamento General de Compras Públicas) (prior action) to: - Mandate use of public framework agreements and other dynamic procurement methods. - Mandate collection and publication of ultimate beneficiary ownership information in public procurement contracts. - SERCOP to issue Codification of Resolutions to operationalize bylaws within 180 days from issuance of the bylaws. - SERCOP priorities: enforce catalog, bulk and standardized purchases; expand electronic catalogues; negotiate bulk contracts; provide information to regulators on competitive bidding; collect and publish ultimate beneficiary owner information. - Anti-corruption and coordination: - Established National Control Subsystem (SNC) presided by SERCOP and integrated by UAFE, SRI, Office of the Comptroller, State Attorney’s Office, and financial regulators (October-2021 SB, partially implemented). - SNC to enable risk-based monitoring and database interoperability expected to be finalized before end-2022. - Expected savings: - SERCOP guidelines and SNC are estimated to yield cumulative savings of 1.5 percent of GDP over the next four years. - Resourcing: - Ensure SERCOP has needed resources and staff for effective implementation. ### Capital expenditure prioritization and transparency - Prioritization: - Focus capital expenditure projects, prioritizing the oil sector and opening it to private sector investment. - Promote PPPs and concessions for infrastructure investment, accounting for contingent liabilities and fiscal risks. - Ecuadorian Development Bank to channel multilateral and bilateral resources for local government infrastructure. - Institutional tools: - Undertake a Public Investment Management Assessment (PIMA) in 2022. - Reclassify spending in line with best practices to reduce overstatement of capital expenditure and increase transparency (¶12). ### Fuel subsidies and environmental measures - Background: - Fuel subsidy reform from July 2020 saved almost $500 million before suspension in October 2021 after a one-time price adjustment. - Fuel subsidies estimated cost this year: $3 billion, 2.6 percent of GDP, partly reflecting oil price surge due to Russia invasion of Ukraine (expected temporary). - Policy stance: - Maintain reform objective: reduce subsidies, reduce carbon footprint, avoid benefits to those not needing support, and reduce corruption and smuggling risk. - Seek opportunities to advance fuel subsidy reform; channel savings to priority investment (health, education, social assistance, growth-enhancing infrastructure). - Complementary actions: - Lowered import tariffs on energy efficient vehicles and encouraging import of higher quality gasoline. ### MTFF, budget targets, and NFCC coordination - The fiscal strategy for 2022 and medium term anchored in this year’s budget targets, expenditure ceilings, and MTFF. - National Fiscal Coordination Council (NFCC) voted on targets ensuring consistency across public sector. - MTFF, targets and ceilings published as approved by NFCC (prior action). - 2023 budget submission to National Assembly will be in line with fiscal consolidation commitments (structural benchmark for October 2022). ### Key numerical fiscal projections and changes (Select balances, Non-oil Primary Balance with Subsidies — change from previous year, in percent of GDP) - Non-Oil Primary Revenues: -1.1, 0.2, 0.3, 0.6, -0.1, 0.2, 0.2 (2020 2021 2022 2023 2024 2025 2020-2025) - o/w Tax policy reform: 0.4, 0.0, 0.1, 0.6, 0.0, 0.0, 1.1 - o/w Temporary tax measures: 0.0, 0.0, 0.8, -0.4, -0.5, 0.0, 0.0 - o/w Administrative measures: 0.0, 0.0, 0.2, 0.0, 0.1, 0.0, 0.3 - Non-oil Primary Expenditures including Subsidies: 0.7, -0.1, 1.2, 0.9, 1.0, 0.6, 4.3 - Wages and salaries 1/: -0.7, 1.0, 0.9, 0.3, 0.2, 0.2, 1.8 - Goods and services 1/: 0.5, 0.1, 0.3, 0.1, 0.1, 0.0, 1.1 - Social assistance: -0.4, -0.1, 0.0, 0.0, 0.0, 0.0, -0.5 - Other spending 2/: -0.8, 0.2, 0.3, 0.0, 0.1, -0.1, -0.3 - Capital spending 1/: 0.9, -0.3, 0.3, 0.1, 0.0, 0.1, 1.2 - Fuel subsidies 1.1, -1.0, -0.5, 0.5, 0.5, 0.5, 1.0 - Total: -0.4, 0.2, 1.5, 1.5, 0.8, 0.8, 4.5 - Memorandum items: - Second and Third Reviews Revenue: -0.7, -0.3, 0.7, 0.3, 0.2, 0.0, 0.2 - Expenditure: 0.6, -0.6, 2.3, 1.0, 0.6, 0.4, 4.2 - Total: -0.1, -0.8, 3.0, 1.3, 0.8, 0.4, 4.5 - Notes: - 2/ Excludes oil-related arbitration awards. - 1/ Current expenditures previously under capital expenditures have been reclassified from capital expenditures to wages and salaries and goods and services. ### Financing strategy - Prioritize borrowing from low-cost multilateral sources. - Seek re-entry to international capital market when conditions favorable; may leverage credit guarantee provided by IDB. - Negotiations with Chinese authorities and development banks to restructure those debt obligations to alleviate near-term financing pressures. ### Contingency policies and risk management - Risks to 2022-23 budgets and MTFF: deterioration of global oil price outlook, financing shortfalls, materialization of contingent liabilities. - Fiscal stance: - Budget based on conservative oil price assumptions lower than current or futures prices, providing upside risk to budget outturns. - Each $1 increase in international prices adds $70 million in net revenue at the NFPS level, and just short of $50 million for the central government. - If oil prices decline, annual fiscal deficit would widen by 0.7-0.8 percent GDP for each $10 dollar/barrel decline, after accounting for concomitant reduction in fuel subsidies and import bill for fuel derivatives. - Two-pronged strategy: - Near-term: use significant part of oil windfall to build buffers and reduce arrears; have backup fiscal measures to accelerate expenditure reforms and maintain conservative revenue forecasts. - Medium-term: consider inter-generational equity in allocating additional oil revenue windfalls; start analytics for creating oil stabilization funds per COPLAFIP reform; continue SOE reform and asset quality reviews of public banks to contain contingent liabilities. - Health audit related risk: - Program conservative estimates of obligations pending health audit results. - Improve fiscal transparency by reflecting contingent liabilities difference between total claims and estimated maximum cost. ### Strengthening fiscal institutions and data quality - COPLAFIP amendments (2020) set regulations on timely collection, accurate compilation, and publication of fiscal data with adequate coverage by NFPS subsectors. - Four implementation areas with IMF support: - Fiscal risk: strategy underpinning fiscal risk statement annexed to budget documents; establishing fiscal risks unit within MEF with IDB support. - MTFF: started presenting MTFF with budget documents from October 2021 and April 2022 to guide a top-down budget process and ensure better execution. - Fiscal rules: issuing regulations on expenditure ceilings to support the expenditure growth fiscal rule. - Fiscal coordination: established National Fiscal Coordination Committee (NFCC) (implemented December 2021) tasked with monitoring and evaluating the National Development Plan, budget execution, voting on overall and sectoral fiscal targets, and assessing spending quality. NFCC approved 2022 fiscal targets, expenditure ceilings, and MTFF. - Fiscal transparency agenda: - Undertake a Fiscal Transparency Evaluation (FTE) in 2023 with IMF technical assistance to improve fiscal reporting, forecasting, budgeting, fiscal risk analysis, and resource revenue management. - Update the Medium Term Debt Strategy (formulated in February) to set a debt policy agenda including cost and risk tradeoffs and impact on future debt portfolio. ### Procurement transparency, audits, and benchmarks - SERCOP actions: - Made all procurement contracts awarded since September 2020 available to public with legal ownership and, when available, ultimate beneficial ownership (UBO) information (end-November 2021 structural benchmark, met). - With SNC and Superintendency of Companies, SERCOP to backfill missing UBO information for companies awarded the 100 largest procurement contracts between October 2020 and December 2021 and publish on a government website (newly proposed end-June 2022 structural benchmark). - Tax audits: - SRI will conduct audits on tax expenditures of companies awarded the largest 100 public procurement contracts over 2020-21 (deadline reset from end-September to end-October). - Benchmark reworded: SRI is the appropriate entity to conduct these audits rather than the Comptroller General. ### Fiscal statistics corrections, transparency actions, and remedial measures - Revisions and corrections: - Revised historical balances of the Social Security Fund (IESS) and corrected transfers from central government to IESS for accrued pension liabilities back to 2017. - Incorporated additional healthcare transfer obligations to IESS for 2013-16 based on completed audits; conservatively estimated healthcare transfers to IESS for 2017-21 while health audits pending. - Published revised historical series for pension and healthcare transfers to IESS in April. - Performance criterion nonobservance: - Corrections changed assessment of end-December 2020 and end-April 2021 QPCs on the OB of PGE+CFDD from “met” to “unmet”, constituting nonobservance of a performance criterion under current Fund-supported program. - Requested remedial actions and benchmarks (to justify waiver request): - Publish corrected NFPS and PGE fiscal historical series back to 2013 with explanations for revisions (newly proposed structural benchmark for end-September 2022). - Establish a dedicated statistics unit at the MEF headed by a new chief statistician with GFS expertise. - Update training curriculum in GFS compilation and ensure ongoing training of staff; continue STA engagement including a long-term expert. - Estimate stock of potential claims on PGE, including with IESS, GADs, private sector or others by nature, year, and beneficiaries (newly proposed structural benchmark for end-June 2022). - Include in the central government 2023 budget and MTFF accrued pension transfer obligations and health transfer allocations to the IESS based on pre-specified criteria. *Source: IMF staff summary of Ecuador’s fiscal strategy and MTFF as presented in the referenced chapter.* ### 28. In addition to the data quality measures described above, we will evaluate and seek to ### 1ecuea2022001 - 28. In addition to the data quality measures described above, we will evaluate and seek to ### Healthcare audits and social security (IESS) - Sign an agreement (convenio) with IESS establishing that IESS will procure firm(s) to conduct medical audits of the healthcare expenditures for 2017-21, within the timeline and prioritization laid out in the convenio; terms of reference for such healthcare audits should reflect this (Prior Action). - Complete and share with Fund staff the results of 2020 and 2021 healthcare audits by end-October (proposed structural benchmark for end-October 2022). - Undertake by mid-2023 the medical audits of 2022 healthcare expenditure for timely verification and recording in the 2022 accounting and statistics of verified PGE healthcare obligations to the IESS. - Plan third-party independent audits of IESS’ 2019-2021 financial statements, with the support of IFIs, by end-March 2023, considering procurement and auditing processes. - Actions aim to ensure obligations of the state (if any) would be reported, recorded and cleared in a timely and transparent way starting in 2023. - IESS has started to reduce its personnel and will promote efficiency gains while protecting provision of health, pension, and disability benefits. ### Legal reform and strategy for social security - The President established a commission to develop proposals for a comprehensive reform of the social security system. - By end-October 2022, develop and share with Fund staff a time-bound plan/strategy to undertake legal reform and administrative actions to strengthen the legal framework for the State’s obligations on healthcare expenditures and related audits starting in 2023. - A diagnostic of the social security system was undertaken with World Bank; the commission will promote public communication on the need for pension reform and consider policy options. ### Clearing domestic arrears and cash management - Implementing a new monitoring system, with assistance from a long-term IMF expert, to evaluate the existing stock of domestic payment arrears of the central government and selected relevant entities of the NFPS. - Published a methodology to estimate the stock of arrears and reporting templates for public sector entities (end-November 2021 SB, implemented with delay in January 2022). - Will start preparing monthly arrears report, as per COPLAFIP law, including estimate of past arrears with the GADs and social security institutions not recognized as arrears or debt, if any. - MEF will design a policy to gather monthly information on arrears from other NFPS entities, as mandated by COPLAFIP. - Will outline detailed policies to prioritize payments and adopt a strategy for settling past potential PGE obligations (¶27) once confirmed, with a detailed calendar for recording in public accounts/statistics and for clearance. ### Rationalizing SOEs and monitoring fiscal risks - Committed to strengthening SOE framework, aligning standards to private companies to improve efficiency and limit contingent liabilities. - Government absorbed about $490 million in SOEs losses during 2018–2020 in addition to more than $600 million in transfers. - Begun rationalization including liquidation of some companies; seven SOEs are in the process of liquidation. - One-off measures support broader cost-optimization strategy including a comprehensive efficiency assessment of the state and enhancement of PPP-led investment. ### Audits of largest SOEs (Petroecuador / Petroamazonas) - Committed to having financial statements of Petroecuador (PEC) and Petroamazonas (PAM) audited as soon as possible. - Agreed on TOR and timeline for completing audits of the 2019 and 2020 financial statements of PEC and PAM, and the 2021 financial statement of the merged entity PEC (structural benchmark for November 2021, reset as prior action). - Given delays, will finish the 2019 audits of PEC and PAM by end-November 2022 (within timeframe for Executive Board’s consideration of final review of the program—part of end-April structural benchmark, not met, reset for end-Nov. 2022). - The 2020 audits of individual financial statements and the 2021 financial statement of the merged entity PEC will be done by April 2023. - Will share audit results with IMF staff and work to address issues identified. ### PPPs, fiscal risk unit, and debt transparency - PPP Committee developing guidelines—with IDB and US Treasury support—to operationalize executive decree institutionalizing approval and bidding process for PPPs (adopted November 2020). - A fiscal risk unit being set up within MEF reorganization to evaluate PPP viability, quantify risks to the public sector balance sheet, propose mitigation, and present such risks in fiscal risk statement. - Implemented new Debt Bulletin (monthly) following new debt methodological definition with World Bank and Fund TA; includes detailed information on previously not included past obligations related to internal debt, arrears, accounts payable and previous unregistered budgetary obligations, and publishes public external and internal debt profile and amortization profile by source and operation. The detailed database supporting the bulletin is accessible on the Ministry’s website. ### Strengthening the Institutional Framework of the Central Bank - Unit of Management and Regularization (UGR) for clean-up of legacy assets from 1999 banking crisis fully functioning since January of this year; after external audits completed in December 2021, all legacy assets, liabilities, obligations, and rights transferred to the new agency. - At end of May of this year, central bank balance sheet will be published excluding transferred items. - Appointed audit committee and external auditors following IMF safeguards assessment recommendations. - Anticipate having the 2021 central bank financial statements audited based on IFRS by the end of May 2022; financial statements will be based on IFRS going forward. - Central Bank of Chile completed peer-review of internal audit department; this will be key for approval of capacity development plan at end of May 2022. - Research department strengthening: published a macroeconomic report established by the Monetary and Financial Code, preparing a report on Ecuador’s financial stability framework, and presenting an annual technical assessment on the fiscal budget to the National Assembly. - BCE receiving TA from US Treasury Department and Bank of Spain on financial stability and macroprudential policies. ### Reserves, gold operations, and electronic payments - Central Bank renewed swap facility with the Bank for International Settlements up to $840 million as precautionary measure. - Refined 80,850.70 troy ounces of non-monetary gold, allowing addition of certified gold bars valued at USD 157.98 million into the International Reserves. - Monetary Board plans to update regulation on purchase of non-monetary gold in the second semester of this year. - Working on new regulations to reduce cost of electronic interbank transactions and diminish demand for cash; requested IDB TA to ensure interoperability among financial institutions and foster digital payments. ### Boosting resilience of the financial system - Financial system described as healthy, well-capitalized, and liquid; deposit and credit growth surpassing pre-pandemic growth rates and market-driven interest rates significantly declined across lending segments. - With Fund TA, improving stress testing models and received TA on tracking anti-money laundering activities and cybersecurity. - FSAP scheduled for second part of the year to assess resilience, stress testing, systemic risks, cyber risks, financial supervision quality, payment systems, microprudential and macroprudential frameworks, regulatory arbitrage, domestic capital markets, and financial safety net; plans to implement FSAP recommendations. - Crisis measures introduced early 2020: (i) deferral and restructuring of loans; (ii) temporary reduction in banks’ contributions to the Liquidity Fund; (iii) extension of period to classify loans as non-performing; and (iv) reduction in provisioning requirements. Except for deferral and restructuring, these measures have remained in place. - Extended NPL classification and provisioning measures through June 2022 for the banking sector and through December 2022 for the cooperatives sector. - Plan to roll back crisis measures in banking system in steps between November and December, exiting by end of the year, with possibility for supervisor to grant additional time on an institution-by-institution basis under conditions (financial plan, dividend restrictions, closer supervision). ### Liquidity framework and cooperatives sector measures - Reduced contributions to Liquidity Fund from 8 to 5 percent of deposits at pandemic outset. - Revised liquidity requirement framework in February 2022 to require financial institutions to hold a certain percentage of deposits in liquid assets at the Central Bank; monitoring daily financial institutions’ excess liquidity at the Central Bank. - Request upcoming FSAP mission to conduct comprehensive assessment of liquidity management and macroprudential policies. - January 2022 regulations to establish reserve requirements for large cooperatives to relocate part of liquid assets to BCE accounts. - By 2025, reserve requirements expected to reach 5 percent of deposits for banks, and 4.5 percent for segment 1 cooperatives, 4 percent for segment 2 cooperatives, and 3 percent for segment 3 cooperatives, maintaining regulatory gap between banks and cooperatives as mandated by the Constitution. - Plan, in consultation with the IMF, to close regulatory gaps on NPL classification and provisioning for banks and large cooperatives (segment 1 and 2), aiming to implement in 2023. ### Cooperatives capital and public banks reform - Monetary and Financial Policy and Regulation Board resolution No. 645-2021-F of January 31, 2021 issued "Standard to determine the minimum capital of Savings and Credit Cooperatives"; as of December 2021, 446 entities complied, representing 99.9 percent of total assets of the sector. - Presidential decree to merge CFN and Banecuador into Banco de Fomento Económico (BFE) to focus on small loans up to $20,000 to borrowers with limited access to private banks and to ensure strong capital position. - Asset quality reviews (AQRs) TORs agreed (structural benchmark for end-November 2021 met); AQR results to be finalized and shared with Fund staff by end-June 2022 (structural benchmark); plan to clean balance sheets and ensure BFE is well-capitalized. Anticipate merger completion by end of 2022. ### Electronic payments and RTGS - Actions to modernize payments: (i) eliminated 22-cent fee for receiving electronic interbank transactions in August 2021; (ii) channeled payments for basic public services of $76 or higher must be made through electronic means since January 2022; (iii) new regulations to reduce fee for electronic interbank transactions and diminish demand for cash; (iv) plan to implement a Real-Time Gross Settlement (RTGS) system for large-value interbank funds transfers in the second half of the year, with US Treasury Assistance. ### Strengthening competitiveness and private sector-led growth - Administration committed to restoring international competitiveness and catalyzing private sector-led growth to raise living standards. - Goals supported by international trade agreements, gradual reduction in the ISD, and reformed capital and labor markets. - Decree 95 expected to foster greater private sector participation in oil and gas sector via participation contracts. - Decree 151 to further facilitate investment in mining sector, which is increasing production and exports at a high rate. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ecuea2022001.pdf* ### 51. The COVID-19 pandemic has compounded pre-existing labor market weaknesses, resulting in ### 51. The COVID-19 pandemic has compounded pre-existing labor market weaknesses, resulting in ### Labor market impact and reforms - The Humanitarian Law in effect since June 22, 2020, has helped save 74,000 jobs and create an additional 240,000 jobs, including through a mechanism of emergency hour reduction upon agreement between employers and employees. - Recovery to date described as "a timid recovery in formal employment" with weak job quality. - Policy actions: - Modernize the labor market to foster new forms of labor contracts aimed at supporting female labor force participation and employment opportunities for the youth. - Adopt a consultative approach bringing together all labor market participants, including the unemployed, to build consensus and promote joint interests of employers and employees. - Plan to assess the best mechanism for setting the minimum wage, tied to concrete and predictable macroeconomic aggregates such as inflation and productivity. ### Transparency, asset declarations, and conflict-of-interest frameworks - Adopted a regulation in November 2020 to enhance the online publication of asset declarations by high-level officials and/or politically exposed persons (PEPs) to increase transparency and reduce corruption risks. - General Comptroller empowered to publish additional information online, including itemized information on assets and liabilities, and improved accessibility on its website for easy, searchable, free, and timely access. - Plan to expand asset declarations of PEPs to detect and enforce against illicit enrichment and to detect and prevent potential conflicts of interest. - The expanded declaration form will incorporate new categories such as incomes (types, sources, and values) and interests (positions held outside office, participation in public and private entities, professional experience, past employment, etc.) directly or indirectly owned by the public official or by their close family members, in the country or abroad. - To expand the asset declaration form, legislation will be submitted for enactment by end-August 2022 (structural benchmark). - Legislation will prioritize transparency and ensure on-line public access to relevant information on assets, incomes, liabilities and interests in the declarations. - Presidential decree (Number 4 of May 24, 2021) established norms for integrity and ethical behavior of high-level public officials in the Executive. - Commitment to strengthen implementation, ensuring interest declarations are duly submitted and published to prevent conflict of interests by the end of the calendar year, and proactively share information with the general public. ### AML/CFT, legal foundations, and related timelines - Plan to upgrade the AML/CFT framework in light of GAFILAT’s on-site visit in April 2022 and the recommendations expected in early 2023. - With technical support from the Fund, draft AML/CFT legislation has been developed to bring the framework in line with FATF international standards and planned to be submitted to the National Assembly in the coming days (end-March 2022 structural benchmark, not met, proposed to be reset to end-October 2022). ### Climate, environment, and resilience policies - Commitments: - Reduce reliance on oil and strengthen resilience to natural disasters. - Work with international partners to identify, cost, and implement concrete actions to reduce GHG emissions, including under the Paris Agreement. - Boost reliance on hydropower for electricity generation and reduce CO2 emissions. - Promote transition to electric vehicles and installation of electric recharging stations. - Rationale: - Climate change is a macroeconomic imperative for Ecuador, as the global drive towards net-zero CO2 emissions is likely to permanently depress oil prices. - Exposure to natural disasters calls for ex-ante preparation with international financial support to protect vulnerable populations. - Support and initiatives: - Receive IDB support to establish a climate finance unit within MEF. - Expanded several protected areas, including the Galapagos marine reserve, and are working with international partners to generate long term financing for its protection. - Ecuador supports the Fund recent approval of the Resilience and Sustainability Trust (RST). ### Domestic capital markets and public debt instruments - Objectives: - Develop domestic capital markets to allow financial deepening and diversify financing sources for government and private sector, with technical assistance from the Fund and United States Treasury. - Standardize government securities and replace, on a voluntary basis, non-standardized and excessively short-term government debt securities (including those held by BIESS) with standardized, longer-term ones. - Develop a domestic yield curve and lengthen maturities of government short-term instruments. - Progress: - Domestic bonds with standardized financial conditions have been placed to private and public investors. ### Capacity development and statistical improvements - Commitments and technical assistance: - Radically enhance capacity of civil servants in MEF and BCE through capacity building and technical assistance programs with international organizations, including the Fund. - Receiving support on cash management with assignment of a long-term expert. - Requested technical assistance on fiscal risks, fiscal rules, MTFF, and fiscal coordination. - Requested IMF support to undertake a Public Investment Management Assessment (PIMA) later this year and a Fiscal Transparency Evaluation (FTE) in early 2023. - Ongoing TA on tax administration (LTU) and customs. - Government finance statistics (GFS): - Create a statistics office headed by a senior expert and requested a long-term expert from STA to help build capacity in recording and reconciliation. - Sufficient staffing and training of GFS compilers critical to implement corrective actions outlined in ¶25 and the upcoming report to the Executive Board on the misreporting of a performance criterion. - Financial Programming and Policies (FPP): - Continue working with the Fund on a customized FPP for Ecuador. - MEF and BCE technical staff received virtual training on FPP; core capacity building scheduled for delivery in the second half of 2022. - FPP training intended to allow staff to study and model inter-linkages among different sectors and run internally consistent policy scenarios to strengthen inter-agency coordination. - Balance of payments and national accounts: - Continue improving balance of payments statistics and national accounts, improve quality and coverage of information on the private sector for external sector statistics, draw on micro data where relevant, and ensure full implementation of BPM6, including International Investment Position improvements. - Supervisory capacity and AML/CFT compliance: - Superintendencies (banks, cooperatives and mutuals) receiving TA on stress tests. - Financial and Economic Analysis Unit (UAFE) and Superintendency of Banks receiving capacity development to strengthen the AML/CFT framework. - Further TA underway with the Office of the Comptroller General to strengthen anti-corruption asset declarations framework. ### Monitoring, quantitative targets, and program implementation - Program monitoring based on performance criteria, indicative targets, and structural benchmarks as set out in Tables 1 and 2 and Technical Memorandum of Understanding. - Expected timing: - Sixth Review is expected to take place on or after December 1, 2022. - Selected quantitative figures from Table 1 (as presented): - Overall balance of the budgetary central government and CFDD (floor): -1,600 (In millions of US$, cumulative change from January 1, 2022). - Accumulation of NFPS deposits at the central bank (floor): 1/1,200 (In millions of US$, cumulative change from January 1, 2022). - Non-oil primary balance of the NFPS (including fuel subsidies, floor): 1/ 2/-4,350 (In millions of US$, excludes interest receipts and oil-related arbitration awards). - Overall balance of the NFPS (floor): 1/410 (In millions of US$). - Change in the stock of NIR - program definition (floor): 1/675 (In millions of US$). - Number of families in the first income decile nationwide covered by cash transfer programs (floor): 280,716. - Provincial targets for number of families in the lowest three income deciles covered by cash transfer programs (floor) include, for example: - AZUAY: 39,974 end-Aug.; 43,049 end-Nov. - GUAYAS: 198,818 end-Aug.; 214,112 end-Nov. - MANABI: 139,151 end-Aug.; 149,855 end-Nov. - GALAPAGOS: 145 end-Aug.; 157 end-Nov. - (Full list of provinces and figures reported in Table 1.) ### Structural benchmarks, prior actions, and status summary - Transparency and fiscal strategy actions: - Adopt a presidential decree (Reglamento General de Compras Públicas) to mandate use of public framework agreements and publication of ultimate beneficiary ownership information in public procurement contracts (Objective: Improve expenditure control and transparency). - Adopt presidential decree establishing optimization of public expenditure, including the wage bill, in line with MTFF and fiscal targets (Objective: Improve expenditure control). - Publish MTFF and fiscal targets approved by the NFCC (Objective: Improve expenditure control). - SOE and audit actions: - Initiate independent audits of the 2019 and 2020 financial statements of Petroecuador and Petroamazonas by agreeing on terms of reference and timeline (Objective: Strengthen SOEs). - Procurement and anticorruption actions: - Agreements between MOF and IESS to undertake procurement process and healthcare audits (Objective: Improve quality of fiscal statistics). - Make procurement contracts awarded since September 2020, including legal and beneficial ownership information, publicly available on procurement website (End-Nov. 2021) — Status: Met. - SERCOP to issue procurement guidelines to increase reliance on catalog purchases and enforce bulk and standardized purchases; phased enforcement through first quarter 2022 — Status: Not met, revised and converted to a PA. - Initiate third-party asset quality reviews of 2019 and 2020 balance sheets of all public banks by selecting firm and agreeing terms of reference — Status: Met. - Other structural benchmarks and status highlights (selected): - Enact AML/CFT legislation to align with FATF standards (End-Mar. 2022) — Status: Not met, reset for end-Oct. - Complete upgrade of the social registry and expand social assistance coverage to at least 80 percent of families in bottom three deciles (Mid-Apr. 2022) — Status: Not met, implemented with delay. - Establish NFCC as set out in COPLAFIP (End-Nov. 2021) — Status: Not met, implemented with delay in Dec. 2021. - Publish methodology to estimate arrears stock and templates for reporting arrears (End-Nov. 2021) — Status: Not met, implemented with delay in Jan. 2022. - Multiple proposed and in-progress benchmarks through end-2022 and beyond related to SOE audits, fiscal statistics publication, healthcare audits, social assistance coverage expansion, and submission of 2023 Budget in line with program and MTFF commitments. - Several benchmarks marked as "Not met", "In progress", "Proposed", "Implemented with delay", or converted to prior actions; specific due dates and status recorded in Table 2. *Source: IMF staff and the Technical Memorandum of Understanding as presented in the content unit.* ### 1. This Technical Memorandum of Understanding (TMU) sets out the understandings ### 1ecuea2022001 - 1. This Technical Memorandum of Understanding (TMU) sets out the understandings ### Overview - Purpose: Sets out understandings regarding definitions of the performance criteria (PCs) and indicative targets (ITs) applied under the Extended Fund Facility as specified in the Memorandum of Economic and Financial Policies (MEFP) and attached tables. Describes methods for assessing program performance and information requirements for monitoring targets. - Statistical treatment: Any monitoring variable not explicitly defined here is defined in accordance with the Fund's standard statistical methodology (e.g., Government Finance Statistics). Authorities of Ecuador will consult Fund staff for treatment of omitted but relevant variables. - Time convention: All references to “days” indicate “calendar days”, unless stated otherwise. ### Program exchange rates (program uses exchange rates that prevailed on 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$/ounce) 1,975.86 - Source: Bloomberg, as of July 31, 2020. ### Quantitative performance criteria and indicative targets (selected quantitative targets and specification) - Performance criteria (from Table 2; in millions of US$, unless otherwise indicated): - 1. Overall balance of the budgetary central government and CFDD (floor) 1/- : 1,600 - 2. Accumulation of NFPS deposits at the central bank (floor) 1/ : 1,200 - 3. Non-accumulation of external payments arrears (continuous PC): 0 - 4. (No new) Net credit to government from the central bank (continuous PC): 0 - Indicative targets: - 5. Non-oil primary balance of the NFPS (including fuel subsidies, floor) 1/ 2/: -4,350 - 6. Overall balance of the NFPS (floor) 1/: 410 - 7. Change in the stock of NIR - program definition (floor) 1/: 675 - 8. Number of families in the first income decile nationwide covered by cash transfer programs (floor): 280,716 - 9. Number of families in the lowest three income deciles by province covered by cash transfer programs (floor): (selected province entries) - AZUAY 39,974 43,049 - BOLIVAR 24,250 26,116 - CAÑAR 18,910 20,364 - CARCHI 10,416 11,217 - CHIMBORAZO 44,464 47,884 - COTOPAXI 41,592 44,791 - EL ORO 26,338 28,364 - ESMERALDAS 56,266 60,594 - GALAPAGOS 145 157 - GUAYAS 198,818 214,112 - IMBABURA 25,244 27,186 - LOJA 42,536 45,808 - LOS RIOS 84,751 91,271 - MANABI 139,151 149,855 - MORONA SANTIAGO 19,014 20,477 - NAPO 11,214 12,076 - ORELLANA 16,275 17,527 - PASTAZA 7,511 8,089 - PICHINCHA 36,178 38,960 - SANTA ELENA 21,857 23,538 - SANTO DOMINGO DE LOS TSACHILAS 25,920 27,913 - SUCUMBIOS 16,330 17,586 - TUNGURAHUA 30,322 32,654 - ZAMORA CHINCHIPE 10,237 11,025 - ZONA EN ESTUDIO 4,280 4,609 - Notes: - 1/ Cumulative change from January 1, 2022. - 2/ Excludes interest receipts and oil-related arbitration awards. ### Standard continuous PCs applicable to all Fund arrangements (monitored continuously) - No imposition or intensification of restrictions on the making of payments and transfers for current international transactions. - No imposition or intensification of import restrictions for balance of payments reasons. - No introduction or modification of multiple currency practices. - No conclusion of bilateral payments agreements that are inconsistent with Article VIII of the IMF Articles of Agreement. ### Quantitative PCs: Definitions, monitoring, and adjustors A. Floor on the Overall Balance of the Budgetary Central Government and CFDD - Coverage: - Budgetary central government (PGE) and the oil derivatives financing account Cuenta de Financiamiento de Derivados Deficitarios (CFDD). - Definition: - Overall balance = total revenues of PGE and CFDD minus their total spending. - Total revenues recorded on cash basis; 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 PGE and CFDD). - Total spending recorded on an accrual basis except interest expenditure recorded on cash basis; comprises wages and salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios), interest expenditure (interés), spending on social assistance programs, other current spending, and capital expenditures (including capital transfers and other investment outlays). - Other current spending includes expenditures under Account 99 (including oil-related arbitration awards and cost of imports and local purchases of oil derivatives (CFDD)). - Preliminary healthcare transfers to IESS recorded as above-the-line spending (50 percent of IESS claims) until audits are complete; difference recorded as contingent liability; upon completion, preliminary estimates replaced by actual data and contingent liability extinguished. - Government-funded PPPs treated as traditional public procurements; accrued obligations recorded in budget data and measured as part of PGE deficit as they accrue; accrued but not settled obligations recorded as public debt or contingent liability depending on nature. - Costs associated with divestments or liquidations recorded as spending. - All expenditures recorded as a credit in “Account 99” recorded in the year the obligation was accrued or, if year unknown, in the year the obligation is credited to the account. - Monitoring: - All fiscal data needed for program monitoring provided to the Fund within 45 days from the end of each test date as shown in Table 2. - Preliminary monthly data provided with lag of no more than 30 days after end of each month. - Adjustor on oil prices: - Floor 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. - Adjustor capped at US$178.9 million at corresponding test dates. - Average Ecuador mix oil price calculated as total value of crude oil exports divided by total volume of oil exports over period since prior test date. - Program oil price assumption (Aug. 2022): - Ecuador mix crude oil price (US$ per barrel) 85.7 - Sources: Ministry of Finance and IMF staff estimates B. Floor on the Accumulation of Non-Financial Public Sector (NFPS) Deposits at the Central Bank - NFPS composition (for the program): - PGE and CFDD; Decentralized Autonomous Governments (municipal, provincial, 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 payments to private operators of oil concessions (Ministerio de Energía y Recursos Naturales no Renovables). - Central Bank of Ecuador (BCE) is outside NFPS perimeter. - Deposits definition: - NFPS deposits at BCE include all depository liabilities (time and on-call deposits) at BCE of the NFPS. - Monitoring: - Accumulation measured as change in stock of deposits between first and last day of corresponding test dates as shown in Table 2. - NFPS deposits data provided to Fund at weekly frequency within 5 business days following end of the week. - Adjustors: - Adjustor on external borrowing: Floor adjusted upward/downward by amount of NFPS borrowing from non-residents above/below than envisioned under program (as reported in Table 5) and net of issuances related to liability-management operations with no net impact on outstanding stock of NFPS debt. International borrowing comprises issuance of international bonds. - Adjustor on disbursements from IMF and other multilaterals: Floor adjusted upward/downward by amount of excess/shortfall in program loan disbursements from IMF, other multilateral institutions (IDB, World Bank, CAF, and FLAR), and grants, relative to baseline projection in Table 6. Program loan disbursements defined as external loan disbursements (excluding project financing disbursements) from official creditors freely usable for financing NFPS budget operations. - Expected disbursement (Aug. 2022): - Expected disbursement of IMF credit 1/ : 1,000 - Expected disbursements of program loans by other multilaterals 1/ : 1,165 - 1/ Cumulative from January 1, 2022. - Adjustor on oil-related arbitration awards: Floor adjusted downward by payment of oil-related arbitration awards relative to baseline reported in Table 7. - Expected payments on oil-related arbitration awards (Aug. 2022): - 0. 0 - 1/ Cumulative from January 1, 2022. - Adjustor on oil prices: Same mechanism as for PGE/CFDD overall balance — US$23.85 million per US$1 per barrel deviation from program oil price assumption, capped at US$178.9 million; average price calculation as total value divided by total volume since prior test date. - Table 5 program assumption (Aug. 2022): - Total market issuance consistent with program targets (cumulative) 1/: 0. 0 - 1/ Cumulative from January 1, 2022. Market issuance projected in Table 3 is expected to take place after August, 2022. - Table 4: Non-Financial Public Sector Corporations covered (selected) - 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 (*) - Muestra de Empresas Públicas Menores (Empresas de Agua Potable) - (*) SOEs in liquidation process, which will be in fiscal data until the liquidation process is completed. C. Ceiling on External Payment Arrears by the NFPS - Debt definition: - Residency criterion determines external debt except for debt securities where criterion is place of issuance. - “Debt” understood as a current (not contingent) liability created under contract through provision of value in form of assets or services requiring future payments of assets or services to discharge principal and/or interest. Forms include loans, suppliers’ credits, and leases (with lease debt measured as present value at inception of lease payments expected over agreement, excluding payments covering operation/repair/maintenance). - Arrears definition for program monitoring: - (i) External debt obligations (principal and interest) falling due after September 30, 2020 that have not been paid within 90 days of due date, considering contractual grace periods; and (ii) payment arrears on goods delivered or services rendered by external entities. - Coverage: - Covers NFPS. - Excludes: (i) arrears on short-term trade credit or letters of credit; (ii) arrears on debt subject to renegotiation or restructuring; (iii) arrears from nonpayment of commercial claims subject to litigation initiated prior to September 30, 2020. - Monitoring: This PC monitored continuously. D. Ceiling on New Gross Central Bank Direct Financing to the NFPS and Indirect Financing to the NFPS Through the Public Banks - Definitions: - BCE direct financing and indirect financing through public banks includes overdraft transfers from BCE to NFPS entities, advance distribution of unrealized profits from BCE, BCE acquisition of government debt on primary market or by purchase from public institutions, and BCE lending to public banks for acquisition of government debt on primary market or by purchase from public institutions. - Monitoring: - PC monitored continuously. - Monthly data on amortizations and disbursements of credit to NFPS and to publicly-owned banks for financing NFPS provided within five business days to the Fund. ### Indicative targets (IT): Definitions — Non-Oil Primary Balance including Fuel Subsidies of NFPS - NFPS definition: As defined in section B above. - Non-oil primary balance of NFPS, including fuel subsidies: - Defined as the non-oil primary balance of the NFPS minus spending on subsidies on petroleum products. - Non-Oil Primary Balance of NFPS: - Defined as primary non-oil revenues minus primary non-oil spending. - Primary non-oil revenues: - Recorded on cash basis; included: tax revenues (ingresos tributarios) excluding corporate income tax paid by state-owned oil companies; social security contributions (contribuciones a la seguridad social); other revenues (otros ingresos); proceeds from asset monetization (leasing of assets owned by NFPS). - Explicitly excluded from primary non-oil revenues: interest income (recorded on cash basis); proceeds from sale of financial assets; revenues from privatization of government-owned entities; revenues from oil exports; revenues from domestic sales of oil derivatives; operating surplus of state-owned oil company (PetroEcuador). - Primary non-oil spending: - Recorded on accrual basis; comprises wages and salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios), social security benefits (beneficios de seguridad social), spending on social assistance programs, other current spending, and capital expenditures not related to oil investment. - Other current spending includes disbursements of property expense for investment income and expenditures under Account 99 and excludes: (i) obligations arising from oil-related arbitration awards; (ii) cost of imports of oil derivatives (CFDD); (iii) payments to private operators of oil concessions through service and participation contracts (Ministerio de Energia y Recursos Naturales no Renovables). *Source: IMF staff calculations (content unit: 1ecuea2022001).* ### 33. Petroleum product subsidies include, but are not limited to, subsidies for gasoline, diesel, ### 1ecuea2022001 - 33. Petroleum product subsidies include, but are not limited to, subsidies for gasoline, diesel, ### Petroleum product subsidies: definition and costing - Subsidies include, but are not limited to, subsidies for gasoline, diesel, jet fuel, fuel oil, and liquefied petroleum gas. - Subsidies are defined as a difference between the distributor sale price of the product and the cost of this product. - The cost of the product is a weighted average between: - the cost of imported petroleum derivative products, and - the cost of domestically produced petroleum products, - plus cost of transportation, storage, and commercialization. - For domestically produced petroleum products, the export price of Eastern crude (opportunity cost) is considered as raw material, as well as the cost of refining. - The import cost includes the price at FOB value plus freight and insurance. ### Treatment of public-private partnerships (PPPs) and related obligations - Government-funded public-private partnerships will be treated as traditional public procurements. - NFPS government obligations that are accrued on public private partnerships: - will be recorded transparently in budget data, - will be measured as part of the NFPS government deficit as they accrue. - Accrued but not settled obligations related to these PPPs will be transparently recorded either as: - public debt, or - a contingent liability of the government (e.g., public guarantees), - depending on the nature of the obligation. ### Divestment and liquidation costs - Costs associated with divestment operations or liquidation of public entities (e.g., cancellation of existing contracts or severance payments) will be recorded as spending. - All expenditures recorded as a credit in “Account 99” (due to the lack of corresponding budget allocations) will be recorded: - in the year the obligation was accrued, or - if information of the year is not available, in the year the obligation is credited to the account. ### Monitoring requirements and data submission timelines - 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. - All fiscal data referred to above and needed for program monitoring purposes will be provided with a lag of no more than 60 days after the end of each test date and preliminary data with a lag of no more than 45 days after the end of each month. - Monthly data on social assistance and registries will be provided with a lag of no more than 30 days after the end of each month. - Foreign exchange asset and liability data will be provided at weekly frequency within 5 business days following the end of the week. - Daily monetary and financial data: no later than 1 business days after the end of the day. - Weekly monetary data: no later than 5 business days after the end of the week. - Export price of Ecuador mix crude oil: with a lag of no more than 20 days after the closing of each month. - Detailed balance of payments data: no later than 90 days after the end of the quarter. - Detailed fiscal and debt data by NFPS subsectors: no later than 60 days after the end of the quarter. - NFPS stock of debt in US$ will be provided monthly with a lag of no more than 60 days after the end of each month. - Data on amortizations and disbursements of credit from the BCE to NFPS and to publicly-owned banks: within five business days from the end of the month. - Provision of collateralized debt contract details: within 2 weeks of signing new contracts. - NFPS cash flow data from the beginning to the end of the current fiscal year: lag of no more than 60 days after the closing of each month. ### Adjustors linked to oil prices, external borrowing, and multilateral disbursements - Adjustor on oil prices (non-oil primary balance including fuel subsidies of the NFPS): - Adjusted downward/upward 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$178.9 million at corresponding test dates. - The average price of 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. - Adjustor on oil prices (floor on the overall balance of the NFPS): - 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$178.9 million at corresponding test dates. - Average price calculation as above. - Adjustor on external borrowing (NIR floor): - The floor on net international reserves will be adjusted upward/downward by the amount of borrowing from non-residents above/below that envisioned under the program, as reported in Table 5 above and net of issuances related to liability-management operations that have no net impact on the outstanding stock of NFPS debt. - International borrowing comprises issuance of international bonds. - Adjustor on disbursement from other multilateral institutions (NIR floor): - The floor on NIR will be adjusted downward/upward by the shortfall/excess in loan disbursement by multilateral institutions (the IDB, World Bank, CAF, and FLAR), 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 the financing of the NFPS budget operations. - Adjustor on oil-related arbitration awards (NIR floor): - The floor on the net international reserves will be adjusted downward by the payment of oil-related arbitration awards relative to the amount in the baseline reported in Table 7. ### Net International Reserves (NIR): definition and composition - NIR of the central bank are computed as: - the US dollar value of the usable gross international reserve assets of the BCE minus - (i) gross reserve related liabilities to nonresidents of the BCE, and - (ii) the reserve holdings of domestic banks and deposits of other financial institutions held at the BCE. - Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates. - Usable gross international reserve assets include: - (i) currency and deposits; - (ii) monetary gold; - (iii) holdings of SDRs; - (iv) the reserve position in the IMF; - (v) securities (including debt and equity securities); - (vi) financial derivatives; - (vii) other claims (loans and other financial instruments). - Specifically excluded from gross international reserves: - Any precious metals or metal deposits, other than monetary gold, held by the BCE; - Assets in nonconvertible currencies and illiquid assets; - Claims on residents; - Any reserve assets that are pledged, collateralized or otherwise encumbered (in so far as those assets are not already excluded), including assets tied up in repurchase agreement transactions; - Net positions with ALADI and SUCRE. - Gross reserve-related liabilities comprise: - All short-term liabilities of the BCE vis-à-vis non-residents denominated in convertible foreign currencies with an original maturity of one year or less; - Short-term loans, securities, and other liabilities (excluding account payables) of the central government with an original 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 the sale of foreign currency or other reserve assets. - Reserve holdings of domestic banks at the BCE comprise: - 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 comprise: - 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). ### Overall balance of the Non-Financial Public Sector (NFPS) - The overall balance of the NFPS is defined as: - the non-oil primary balance of the NFPS plus - the oil balance of the NFPS plus - interest revenues of the NFPS minus - interest expenditures of the NFPS. - The oil balance of the NFPS is defined as the sum of: - (i) revenues from oil exports, - (ii) revenues from the domestic sales of oil derivatives, - (iii) the operating surplus of state oil company (PetroEcuador) - minus the sum of: - (i) expenditures on investment in the oil sector, - (ii) expenditures on imports of oil derivatives (CFDD), - (iii) payments to private oil companies (Ministerio de Energia y Recursos Naturales no Renovables). - NFPS interest revenues and interest expenditures are measured on cash basis while all other expenditures are measured on accrual basis. ### Social assistance coverage floor (central government programs) - Social assistance coverage of poor families 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 will occur through the following social assistance programs: - 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, - Bonos Mis Primeros 1000 Días. - 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: - Monthly data on (i) number of poor families with at least one active beneficiary in any of the social assistance programs, and (ii) monthly data on numbers of registries with information updated and validated following RS2018 by income decile and province will be provided to the Fund with a lag of no more than 30 days after the end of each month. ### Debt definition, consolidation, and NFPS debt coverage - In accordance with IMF GFSM 2014 and Public Sector Debt Guide, 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; - Other accounts payable. - Liabilities not considered debt: equity and investment fund shares, financial derivatives, and employee stock options. - For the program, Ecuador’s NFPS debt includes: - 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. - Any liabilities issued by entities of the NFPS, held as an asset by another NFPS entity should be netted out. - Since consolidation is done at the level of NFPS, central bank lending to the government is included in the stock of NFPS debt. ### Other specified data and reporting requirements - Daily: template including (a) movements of international reserves by inflows and outflows; (b) main balance sheet accounts of financial institutions broken down by private banks, cooperatives and mutuals; (c) daily oil production. - Weekly: consolidated balance sheets of the banking system by main accounts; BCE Balance Sheet; Financial Indicators: Deposits of Banks at the BCE. - Monthly: data on stocks and flows (above- and below-the-line), disaggregated by each subsector of the NFPS using agreed templates; NFPS financing data compiled from detailed financial asset and liability information. - Data on social spending to include BDH, BDH-V, Personas con discapacidad, Pensión para Adultos Mayores, Mis mejores años, Pensión Toda Una Vida, Bonos Mis Primer 1000 Dias, and Bonos Joaquin Gallego Lara. - Data to determine latest net SDR position at the end of each month; reported data denominated in SDRs. - Change in NIR will be measured as cumulative change in the stock of NIR between test dates in Table 2. ### Statement by the Fund staff representative (June 24, 2022) — key updates and completed prior actions - The statement provides information that became available since the staff report was finalized; it does not alter the thrust of the staff appraisal. - All five prior actions for the Fourth and Fifth Reviews have been completed: - MEF and IESS signed an agreement on May 30, 2022, to undertake the procurement process, agree on the timeline, and prioritization for medical firm(s) to undertake healthcare audits; MEF made a payment of US$140 million to IESS on May 31 for the recognized healthcare transfer obligations resulting from the 2013-16 healthcare audits. - Terms of reference and timeline for completing independent audits of the 2019 and 2020 financial statements of Petroecuador and Petroamazonas and the 2021 financial audit of the merged entity Petroecuador have been agreed; authorities are proceeding with contracting audit firms with financial and procurement support from the IADB. - The authorities published the MTFF, and fiscal targets approved by the NFCC, in line with program commitments on June 8, 2022, in the Official Bulletin No. 79. - A Presidential Decree issued on June 20, 2022 establishes optimization of public expenditure, including of the wage bill, in line with the MTFF and fiscal targets. - A Presidential Decree issued on June 20, 2022 mandates the use of public framework agreements and other dynamic procurement methods and collection and publication of ultimate beneficiary ownership information in public procurement contracts. - The MEF published on May 31 revised historical NFPS and PGE data back to 2017, with explanations for revisions; NFPS data included nonoil primary balance including subsidies, with the recommended treatment of interest income and its distribution; PGE data incorporated corrections to pension transfers based on accrual principles and conservatively estimated healthcare transfer obligations to the IESS. *Source: IMF staff report excerpts and statement (June 24, 2022).* ### 4. The authorities are progressing with upgrading the social registry and expanding ### 4. The authorities are progressing with upgrading the social registry and expanding ### Social assistance coverage and programs - The number of poor families that receive social assistance increased by 630,173 from July 2020 to June 2022, surpassing 80 percent coverage of families in the bottom three deciles of the income distribution. - As of June 3, 2022, social assistance coverage reached around 1.18 million families, corresponding to an increase of more than 630,000 families from July 2020. - On Children’s Day, June 1, 2022, the authorities announced a new cash transfer program to address child malnutrition called “1,000 Days.” - The “1,000 Days” program is expected to further enhance the coverage of the social safety net by an additional 37,500 households. - The implementation of the “1,000 Days Program” is designed to tackle child malnutrition and to engender a virtuous circle to reduce poverty in the future. ### Structural benchmarks (SBs), corrective actions (CAs), and institutional reforms - IESS has initiated a procurement process to hire an independent medical audit firm(s) to undertake healthcare audits, with the goal of hiring the first at end-June (CA). - MEF is making progress at identifying the existing stock of PGE potential obligations, including gross health claims from IESS, other claims from IESS, local governments, private sector or others (if any), by nature of expenditure, year and beneficiaries (end-June SB and CA). - Public banks’ asset quality reviews (AQR): one AQR is already finalized (CFN); two others are well advanced to be finalized by the June deadline of the relevant SB; BDE’s AQR was delayed by a management change in April and is expected to be finalized in July. - The Procurement Agency, SERCOP, is backfilling missing UBO information in the largest 100 procurement contracts awarded since September 2020 (end-June 2022 SB). So far, SERCOP has identified 4 contracts, out of the largest 100, with missing UBO information and has contacted the companies to request the information. - Authorities are advancing frameworks on conflict of interest and AML/CFT; draft legislation is close to being finalized and is expected to be submitted in time for enactment by the end-August SB target date. - Staff has been supporting the Comptroller General’s Office (CGE) and the Financial and Economic Analysis Unit (UAFE) with capacity building and technical assistance. ### Inflation, external assumptions, and macro outlook - May 2022 inflation: 0.6 percent monthly increase and a 3.4 percent year-on-year increase, slightly above staff’s projections; increase led by higher food and transport prices. - WEO assumptions released in June entail higher global food prices and pose upside risk to the inflation projections. - Authorities expect the economy will grow by 3 percent this year, with inflation of 3.8 percent and an external current account surplus of 2.4 percent of GDP. - 2021 outcomes: GDP growth recovered to 4.2 percent in 2021 (after a 7.8 percent decline in 2020); inflation 1.9 percent; external current account surplus of 2.9 percent of GDP. - NFPS deficit declined from 7.1 percent of GDP in 2020 to 1.5 percent of GDP in 2021. ### Social unrest, fiscal response, and fiscal impact - Protests by the indigenous movement (CONAIE) started on June 13, against rising cost of living, fuel prices, and natural resource extraction on indigenous land. - President Lasso announced a package of measures including higher social spending on low-income families and financial support to the agriculture sector and small businesses. - The measures are estimated to cost about $44 million (0.04 percent of GDP) but would not have a net fiscal impact as the authorities will absorb the cost within the current budget envelope by reprioritizing other expenditure. - Authorities are working to promote a dialogue and reach agreement with the protestors; they remain committed to program objectives and plan to absorb any potential new cost within existing fiscal plans. ### Market reaction and debt-service considerations - Ecuador’s spreads have risen relatively more than other emerging markets since the protests began, by about 200 bps to over 1,000 bps. - Bond yields have risen to over 14 percent up from 10-11 percent in early June, partly due to the spreads and partly due to higher global interest rates. - The impact on debt service is expected to be limited, as Ecuador’s debt other than to multilateral creditors has fixed rates, and the DSA already includes conservative assumptions on future rates and borrowing costs. - The $400 million IDB bond guarantee would enable Ecuador to reaccess markets at more favorable rates when they choose to do so. ### Program implementation, fiscal policy, and methodological changes - Program implementation: Ecuador met most performance criteria and indicative targets; the overall balance of the Budgetary Central Government target was met for end-September 2021 but not met for end-December 2021 due to a statistical correction regarding pension transfers to IESS. - The deposit accumulation target of the Non-Financial Public Sector (NFPS) was met for both end-September and end-December 2021. - All indicative targets were met—overall balance of the NFPS, accumulation of NIR, beneficiaries from social programs—except the end-December 2021 target on the non-oil primary balance including Subsidies (NOPBS) that was missed by only US$30 million when including interest income as per the original target setting. - Net international reserves (NIR) have increased considerably, with NIR accumulation targets met with comfortable margins. - Methodological changes: IMF Statistics Department assisted to register pension fund transfers to the IESS in Budgetary Central Government accounts and to include earnings of third-party pension funds managed by the IESS in NFPS data, with historical series revised accordingly. ### Fiscal rules, revenue measures, and expenditure priorities - COPLAFIP amendments fix debt limits and expenditure growth rules: public debt must be lower than 57 percent of GDP by 2025 and 45 percent of GDP by 2030; starting from 62.2 percent of GDP in 2021, public debt is projected to reach 51.4 percent by 2025 and 45.1 percent by 2027. - The landmark tax bill approved last year will yield 0.7 percent of GDP in permanent revenues in 2023, and 0.8 percent of GDP and 0.4 percent of GDP, respectively, in temporary revenues in 2022 and 2023. - Measures to contain the wage bill and improve procurement efficiency are prior actions; presidential decrees issued to optimize public expenditures including the wage bill and to optimize public procurement design and operation. - Public investment is prioritizing key projects and promoting PPPs and concessions to the private sector. ### Financial sector and monetary policy - Central Bank: measures taken to settle legacy assets from the 1999 banking crisis; published Central Bank balance sheet excludes legacy assets and obligations transferred to a Unit of Management and Regularization. - Financial system: credit and deposits are recovering, system remains liquid and well-capitalized, and non-performing loans remain low. - Progress is being made to unwind COVID-19 crisis related measures and to close the regulatory gap between banks and large cooperatives. - An upcoming FSAP mission is expected to help identify measures to further improve and strengthen the financial system. ### Key quantitative figures and targets (selected) - Increase in poor families receiving assistance: 630,173 (July 2020 to June 2022) - Coverage of families in bottom three deciles: 80 percent - Additional households under “1,000 Days” program: 37,500 - May 2022 inflation: 0.6 percent monthly; 3.4 percent year-on-year - Protest start date: June 13 (year implied 2022) - Cost of announced measures in response to protests: $44 million (0.04 percent of GDP) - Increase in spreads since protests began: about 200 bps to over 1,000 bps - Bond yields: over 14 percent (up from 10-11 percent in early June) - IDB bond guarantee: $400 million - GDP growth 2021: 4.2 percent (2020 decline: 7.8 percent) - Inflation 2021: 1.9 percent - External current account 2021 surplus: 2.9 percent of GDP - NFPS deficit 2020: 7.1 percent of GDP; 2021: 1.5 percent of GDP - Public debt: 62.2 percent of GDP in 2021; projected 51.4 percent by 2025; 45.1 percent by 2027 - Tax reform revenue: 0.7 percent of GDP permanent in 2023; 0.8 percent of GDP temporary in 2022; 0.4 percent of GDP temporary in 2023 - Missed NOPBS target shortfall: US$30 million - NFPS overall balance 2021 outperformance: US$843 million (stronger oil balance US$377 million; better non-oil primary balance US$558 million; higher interest payments US$92 million) - Accumulation of NFPS deposits at the Central Bank: higher by US$1.13 billion *Statement by Afonso Bevilaqua, Executive Director for Ecuador; Ricardo Cicchelli Velloso, Senior Advisor to Executive Director; and Jorge Gallardo, Advisor to Executive Director — June 24, 2022* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ecuea2022001.pdf_