## 1ecuea2022002 ## Source details **Canonical URL:** [1ecuea2022002](https://www.imf.org/-/media/files/publications/cr/2022/english/1ecuea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1ecuea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1ecuea2022002.pdf.json) --- ### EXECUTIVE SUMMARY — Context and Program Status - Real GDP expected to expand by 2.7 percent in 2022, slightly lower than in the last review due to protests-related disruptions in June and slower growth in trading partners. - Headline inflation expected to reach 3.8 percent yoy at end-2022; core inflation reached 2.7 percent at end-October 2022. - Government remains committed to the EFF of SDR 4,615 million (661 percent of quota, about $6.5 billion) approved September 30, 2020; completion of the Sixth and final Review would make an additional SDR 497 million (about $700 million) available. - June 18-day protests caused nationwide production disruption; concessions included higher fuel subsidies. Oil production fell sharply; economic losses estimated at about $1 billion (1 percent of GDP). - Bond yields reached 16–20 percent; baseline assumes re-access to international markets in 2024. - Program achievements: recovery from the pandemic, restored fiscal sustainability with more equity, reduced dependency on oil, strengthened basis for dollarization, advanced transparency and anti-corruption agenda. - Key structural reforms completed: COPLAFIP operationalization, progressive tax reform, criminalization of acts of corruption (COIP), COMYF reforms strengthening BCE autonomy and dollarization regime. ### RECENT DEVELOPMENTS AND OUTLOOK - Growth and production: - Real GDP growth slowed to 1.7 percent y/y in 2022:Q2 from 3.8 percent y/y in 2022:Q1. - Growth mainly driven by private consumption; services were the main engine on the production side. - High-frequency indicators show signs of faster growth after July. - Inflation: - Headline inflation reached 4.0 percent at end-October (yoy). - Drivers: food and beverages 7.4 percent; transport prices 5.1 percent; non-tradables 3.3 percent. - Inflation remains lower than regional peers due to dollarization and subsidized fuel prices. - External sector and reserves: - Exports grew 30 percent (yoy) through August 2022; imports increased by 33 percent (yoy) over the same period. - 2022 current account expected to end in a surplus of 2.1 percent of GDP. - Gross international reserves increased to $8.5 billion as of mid-October from $7.5 billion a year ago; GIR were 3.2 months of imports at mid-October 2022. - REER appreciated by 3.6 percent from December 2021 to September 2022. - External position assessed as moderately weaker than implied by fundamentals and desirable policies (Annex II). - Financial sector: - Credit to private sector increased about 16 percent yoy in September; deposits growth 10 percent. - About 60 percent of loans to households and 40 percent to companies. - Liquid assets about 24 percent of short-term deposits for banks and about 25 percent for cooperatives as of end-September. - NPLs at end-September: banks 2.2 percent; cooperatives 4.4 percent (crisis measures allowed overdue loans to be classified after 60 days). - Cooperatives’ share of financial system deposits increased to about 31.5 percent in September from about 28.7 percent a year earlier. - Fiscal developments and financing: - NFPS nonoil primary balance including subsidies (NOPBS) set to improve by 1.2 ppts of GDP over 2020-22. - NFPS fiscal balance set to turn into a surplus in 2022 for the first time in over a decade. - Public debt expected to fall below the 2025 target of 57 percent in 2023 (Annex III). - Reserves (excluding the SDR allocation) have already exceeded the level expected in 2025 at program approval. - OB of the budgetary central government (PGE), including CFDD, expected to overperform previous expectations by $268 million; NFPS OB expected to close year approximately $175 million better than last review. - Deposit accumulation projected at $2,693 million. - Near-term financing alleviated by: IDB $400 million credit allocation converted to budget support; reprofiling of $3.2 billion bilateral debt to China lowering debt service over 2022-2024 by $400 million per year on average; settlement of Perenco obligations (first payment in 2022, prospective final payment in 2023; $375 million expense accrued in 2021 fiscal balance). - Outlook and projections: - 2022 growth revised to 2.7 percent (0.2 ppts lower than previous review). - 2023 growth projections revised slightly upward to 3 percent. - Medium-term: growth expected to converge to potential of 2¾ starting in 2024. - Inflation expected to moderate to 1.5 percent over the medium term. - Current account surplus expected to moderate to around 2 percent in the medium-term as oil prices decrease. - Selected fiscal comparisons (US$ million, Sixth Review vs Fourth and Fifth Review): - Overall Balance PGE+CFDD: -2,277 → -2,009 → Difference 268 - Oil Balance: 3,116 → 3,460 → Difference 343 - Tax Revenue: 1,531 → 1,533 → Difference 17 - Other Revenue: 284 → 127 → Difference -155 - Nonoil Expenditure: 2,354 → 2,355 → Difference 1 - Overall Balance NFPS: 1,004 → 1,179 → Difference 175 - Change in NFPS deposits: 2,723 → 2,693 → Difference -30 - Risk matrix (selected downside risks): - Another wave of protests or security concerns; weaker global growth; tighter global financing conditions delaying market re-access beyond 2024; worsened oil price outlook. - Upside risks: - Higher oil prices; lower inflation relative to trading partners; faster reforms improving governance, competition, anticorruption, AML/CFT, and reducing nontariff barriers. ### PROGRAM IMPLEMENTATION AND CONDITIONALITY - Quantitative performance criteria and indicative targets (end‑August 2022 outcomes): - Four QPCs and all but one IT met with sizeable margins. - End-August outturns (adjusted/actual; US$ unless otherwise indicated): - Overall balance (OB) of PGE+CFDD: overperformed target by $1,793 million. - Accumulation of NFPS deposits at the central bank: $1,006 million above adjusted target. - OB of the NFPS: overperformed adjusted target by $1,411 million. - NOPBS IT: met with a margin of $733 million; fuel subsidy bill $500 million higher-than-expected due to supply chain disruptions and refined oil price margins. - NIR accumulation IT: met with a margin of $1,241 million. - Nationwide social assistance IT: met with a margin of 105,066 families. - Provincial social assistance IT: Not Met on provincial indicator; missed by 2,359 families in Galapagos, Orellana, and Zamora Chinchipe (less than 0.2 percent of total beneficiaries); aggregate target met but assessment “Not Met.” - Key table entries (end-August 2022; Prog./Adj./Actual): - QPC 1. Overall balance PGE+CFDD (floor): 1/-1,600-1,455-338 — Status: Met - QPC 2. Accumulation of NFPS deposits at central bank (floor): 1/1,200-1,264-2,270 — Status: Met - IT 5. NOPBS (incl. fuel subsidies) (floor): 1/-4,350-4,495-3,762 — Status: Met - IT 9. Number of families in lowest three income deciles by province (floor): 947,713-1,181,777 — Status: Not Met (miss in three provinces) - Structural benchmarks and corrective actions (out of 16 due by end-November): - Five met on time (e.g., publishing revised historical NFPS and PGE data through 2013; completing tax expenditure audits; updating GFS training curriculum; including estimated pension and health obligations in 2023 budget and MTFF; submitting a 2023 budget in line with program and MTFF). - Seven implemented with delay (e.g., public bank AQRs, health audits procurement and completion, restructuring of Statistics Unit, backfilling UBO information). - SBs unlikely to be completed before program end: enactment of AML/CFT and conflict of interest legislations; completing oil company audits. - SB on envisioned expansion of social assistance program will not be fully implemented across a few richer provinces by end-November as lower income regions prioritized. ### FISCAL OUTTURNS, STRATEGY, AND MEDIUM‑TERM PLANS - Historical and revised fiscal anchors: - At program approval in 2020, public debt and deficit projected to peak at 69 and 9 percent of GDP, respectively; COPLAFIP anchor of 57 percent debt target expected in 2025. - Revised medium-term consolidation of 4.3 ppts of GDP over 2020-25 (compared to 4.5 ppts earlier). - Under 4.3 ppt path: fiscal balances and public debt still reach medium-term targets; NFPS deposits and reserves broadly similar; slower pace of adjustment supports growth. - Near-term NOPBS recalibration: - Planned consolidation in NOPBS in 2022 of 1.1 ppts of GDP, 0.4 ppts lower than last review. - Main drivers: higher-than-expected fuel subsidy bill (+0.8 ppts of GDP) and expenditure restraint plus measures to contain/reduce wage bill. - 2023 planned consolidation 1.4 ppts of GDP (0.1 ppts lower than prior review): 0.4 ppts from tax bill enacted Nov 2021; 1.0 ppts from lower oil prices reducing fuel subsidy bill; remainder from containing goods and services and other spending. - Expenditure- and revenue-side measures (2023 and medium term): - Revenue: risk-based audits, address compliance gaps, broaden tax base, digitalization, incoming TA on TADAT in January 2023. - Expenditure: contain public wage bill while protecting vulnerable, rationalize capital expenditure, procurement reforms to improve efficiency, preserve social assistance. - Specific policies: - Public sector wage bill strategy targets fiscal consolidation of 0.6 ppts of GDP over 2023-25 at NFPS level (corresponding to 1.8 ppts over 2020-25): nominal increase in 2023 but wage bill to grow below nominal GDP. - Procurement reforms: SERCOP Resolutions to enforce catalogs, bulk purchases, expand electronic catalogues; interoperability work on SNC expected to be fixed during 2023. - Capital expenditure: prioritize projects and promote PPPs; PIMA in early 2023 including C-PIMA component. ### FISCAL TRANSPARENCY, STATISTICS, AND AUDITS - Fiscal Transparency Evaluation (FTE) planned for May 2023 with IMF TA. - Medium-Term Debt Management Strategy to be updated/published by end-2022 with MCM TA. - SERCOP backfilled missing UBO information for the 100 largest procurement contracts and published results (implemented with delay in October). - Revised historical NFPS and PGE data published back to 2013 (end-September SB/CA, met) with STA support. - IESS healthcare audits: - IESS hired firm to complete healthcare audits of 2017-21 medical claims; results of 2020 and 2021 healthcare audits expected in late November (prior action). - Time-bound action plan to undertake legal reforms/administrative actions to strengthen legal framework for state healthcare obligations to IESS starting 2023 (prior action). - Contract auditor to undertake financial audits of IESS by end-March 2023. ### FINANCIAL STABILITY, CENTRAL BANK, AND FSAP - BCE liquidity access: - Federal Reserve Bank of New York granted BCE access to a FIMA Repo Facility of $1 billion for exclusive central banking operations. - BCE renewed swap facility with BIS for up to $840 million. - FSAP scheduled for December 2022 and April 2023; focus on credit and liquidity vulnerabilities, oversight, macroprudential framework, safety nets, payment systems, and capital markets preconditions. - Crisis measures on loan classification/provisioning scheduled to expire end-December; starting January 2023 banks and large cooperatives to comply with the same classification/provisioning framework. - AQRs of four public banks completed (end-June 2022 SB, implemented with delay); AQR results pointed to need to increase provisioning in one public bank with plan to phase in recommended provisioning over two years. - Regulatory changes and sectoral measures: - Minimum capital for cooperatives $200,000 established in January 2021; about 90 percent of entities in compliance (99.9 percent of sector in assets). - Pandemic measure reduced Liquidity Fund contributions from 8 to 5 percent of deposits. - Public banks merger (Banecuador and CFN into Banco de Fomento Económico) conditional on clean, well-capitalized balance sheets. ### DEBT REPROFILING, OIL AGREEMENTS, AND EXTERNAL FINANCING - Reprofiling of debt to China (Annex IV): - Agreement to reprofile $3,220 million (78 percent of debt to China). - CDB operation: extended $1.4 billion in loans due through 2024; reduced interest rate by 0.3–1 ppts; reduces principal+interest by $687 million between 2022-24. - Exim Bank operation: extended $1.8 billion in loans due 2025-2029; renegotiation included 0.55 ppts decrease in fixed rate loan and 20 bps decrease in margin for two variable loans; reduces financing needs by $569 million through 2025. - Aggregate impact: post-reprofiling total debt service to Exim Bank and CDB increased from $3,637 to $4,023 million through end-2032 due to a nearly $386 million rise in interest payments even as near-term amortization eased. - Oil sale renegotiation: - Extension of oil delivery terms to Petrochina by 3 years (2024 to 2027); improvement in price per barrel; more oil available for free export in spot market. - Contracts published on MEF website; government issued press release on new terms. ### SOCIAL ASSISTANCE, VACCINATION, AND INCLUSION - Pandemic response and vaccination: - 84 percent of eligible population fully vaccinated; 53 percent boosted (as of end-October 2022). - Less than 10 new cases per million inhabitants after vaccination campaign. - Social protection expansion: - From June 2020 to end-August 2022 incorporated 634,129 families from bottom three deciles; by end-December 2022 expected to have incorporated more than 647,000 new families, surpassing target of 625,600 new families. - Result: 82 percent of families in bottom three deciles—almost 1.2 million families—receive social assistance. - New “Mil Días” program: average transfer $60 per month; current reach 28,352 mothers (68 percent of qualified beneficiaries); target reach 75 percent by end-2022. - Fiscal cost of social support: - Total support to low-income families increased from around $500 million in 2020 to over $1.2 billion in 2022. - Quantitative social targets: - IT 8 coverage first income decile nationwide: 280,716 → 385,782 — Met. - IT 9 coverage lowest three deciles by province: 947,713 → 1,181,777 — Not Met (miss in Galapagos, Orellana, Zamora Chinchipe by total 2,359 families). ### FUEL SUBSIDY POLICY AND FISCAL IMPACT - Fuel subsidies: - Suspension of fuel subsidy reform in October 2021 and price reductions in June 2022 represented a costly backtracking. - At elevated international oil prices, fuel subsidies cost government almost $4 billion in 2022 (reported as nearly $3.9 billion in detailed sections). - Subsidies disproportionately benefit the rich, encourage overconsumption, increase carbon footprint, and provide grounds for corruption and smuggling. - Recommendation: reform to reduce the bill and make support more targeted; potential savings to be channeled to health, education, social assistance, and growth-enhancing infrastructure. - Diesel subsidy elimination for large shrimp producers (Dec 2): expected annual average savings about $160 million (about 0.1 percent of 2022 GDP). ### EXCEPTIONAL ACCESS ASSESSMENT (Annex I) — Key judgments - Criterion 1: Exceptional BOP pressures — met (spreads rose to around 1900 bps then retreated to about 1400 bps; bond yields 16–20 percent; planned $1 billion Eurobond issuance postponed). Residual Fund financing gap estimated at $700 million for remainder of 2022. - Criterion 2: Debt sustainability — staff judgment public debt sustainable with high probability; public debt projected to fall below 57 percent target in 2023; gross financing needs around 3–4.5 percent of GDP medium term. - Criterion 3: Prospects for regaining market access — historical record of regaining access within 24–36 months; recent political shocks raised spreads; staff and authorities assume modest international issuance from 2024 under contingency buffers. - Criterion 4: Prospect of program success — authorities committed and implemented major reforms; policy setbacks noted (suspension of subsidy reform, June 2022 concessions); technical corrective actions on data and audits being implemented. ### DEBT, PUBLIC FINANCES, AND MACRO PROJECTIONS (selected numeric series preserved) - NFPS overall balance (percent of GDP, selected): - 2020: -7.1 - 2021: -1.6 - 2022 (Est.): 0.9 - 2023 (Proj.): 1.0 - 2024 (Proj.): 1.9 - 2025 (Proj.): 1.6 - 2026 (Proj.): 2.0 - 2027 (Proj.): 2.1 - 2028 (Proj.): 2.2 - 2029 (Proj.): 1.9 - NFPS gross public debt (percent of GDP, selected): - 2020: 60.9 - 2021: 62.3 - 2022 (Est.): 58.9 - 2023 (Proj.): 58.3 - 2024 (Proj.): 56.2 - 2025 (Proj.): 55.6 - 2026 (Proj.): 53.1 - 2027 (Proj.): 49.3 - 2028 (Proj.): 45.3 - 2029 (Proj.): 42.0 - Real GDP growth (percent change, yoy; selected): - 2020: -7.8 - 2021: 4.2 - 2022 (Est.): 2.9 - 2023 (Proj.): 2.7 - 2024–2029: 2.7, 3.0, 2.8, 2.8, 2.8, 2.8 - CPI (period average, percent): - 2020: -0.3 - 2021: 0.1 - 2022 (Est.): 3.2 - 2023 (Proj.): 3.5 - 2024–2029 projections: 2.4, 2.5, 1.5, 1.5, 1.5, 1.5 - Current account balance (percent of GDP): - 2020: 2.7 - 2021: 2.9 - 2022 (Est.): 2.4 - 2023 (Proj.): 2.1 - 2024–2029: 2.2, 1.8, 1.9, 2.0, 2.0, 2.0 - Gross financing needs (percent of GDP): - 2020: 14.4 - 2021: 6.4 - 2022 (Est.): 4.9 - 2023 (Proj.): 4.4 - 2024–2029: 3.5, 3.4, 3.2, 4.3, 4.8, 4.2 ### GOVERNANCE, ANTI-CORRUPTION, AML/CFT, AND CAPACITY DEVELOPMENT - Authorities submitted conflict of interest and AML/CFT legislations prepared with LEG assistance to National Assembly; SBs on enactment not met. - Enactment of AML/CFT and conflict of interest laws prioritized to advance integrity and reduce corruption vulnerabilities. - CD needs identified: - Support to anti-corruption legal framework and expanded asset declaration coverage. - IT interoperability and risk-based framework support for SNC. - FSAP and other TA to strengthen supervision, stress testing, and macroprudential frameworks. - STA and FAD LTX support to strengthen GFS, fiscal statistics, cash management, and arrears monitoring. - CD priorities and delivery: - Medium-term: FTE (May 2023), PIMA (early 2023 including C-PIMA), TADAT (January 2023 TA), long-term STA and FAD experts. ### EXIT FROM CRISIS MEASURES, REGULATORY TRANSITION, AND FINANCIAL SECTOR RISKS - Crisis measures allowing longer loan classification and lower provisioning scheduled to expire end-December; January 2023 transition to common framework for banks and large cooperatives. - Opportunity to close provisioning and classification gaps between banks and large cooperatives. - Fast credit growth, especially in cooperatives, warrants close monitoring. - Ensuring adequate liquidity and deposit insurance fund resources is a priority in a dollarized economy. - FSAP to provide comprehensive assessment and roadmap; first FSAP in almost two decades. ### FUTURE ENGAGEMENT, POST‑PROGRAM ASSESSMENTS, AND STAFF RECOMMENDATIONS - Authorities interested in formal engagement with Fund after EFF ends; plan to end current program on time and decide modalities in early 2023. - Authorities expressed interest in the Resilience and Sustainability Trust (RST). - Given outstanding credit to the Fund exceeds 200 percent of quota, staff propose a Post Financing Assessment (PFA) commence. - Staff supports: - Retention for a one-year period of the exchange restriction arising from the ISD for BOP reasons (temporary and non-discriminatory). - Completion of the financing assurances review. - Authorities’ request for completion of the Sixth Review under the EFF by the Executive Board. - IMF recommendation: next Article IV consultation to revert to standard 12-month cycle; initiation of a PFA recommended given Fund credit outstanding exceeds 200 percent of quota. _International Monetary Fund. (Content unit 1ecuea2022002)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Real GDP is expected to expand by 2.7 percent in 2022, slightly lower than expected in the last review due to the protests-related disruptions in June and slower growth in trading partners. - Headline inflation is expected to reach 3.8 percent yoy at end-2022. - Tighter financing conditions for all EMs and an increasingly challenging domestic political environment sharply increased spreads and postponed international market access. - 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 Sixth and final Review under the EFF-supported program, an additional SDR 497 million (about $700 million) would be made available. - The final review of the EFF-supported program takes place amidst a challenging domestic and external environment: - The 18-day protests in June, led by the indigenous community, resulted in a nationwide production disruption and in exchange for a temporary truce the government granted concessions, including higher fuel subsidies. - Domestic security has become more challenging, with rising narcotraffic and crime adversely affecting daily life in big cities. - The government is planning a public referendum at the time of local elections in February on legal amendments mainly aimed at fighting crime, reforming political institutions, and protecting the environment. - With Ecuador’s bond yields reaching 20 percent, the baseline scenario assumes international markets re-access in 2024. - Program achievements to date: - The EFF-supported economic program helped recover from the pandemic, restore fiscal sustainability with more equity, reduce dependency on oil, strengthen the basis for dollarization, and advance the transparency and anti-corruption agenda. - Key structural reforms completed include operationalizing reforms to the organic budget code (COPLAFIP), a progressive tax reform, legislation criminalizing acts of corruption (COIP), and reforms to the organic monetary and financial code (COMYF) that strengthened the autonomy and governance of the central bank (BCE) and the institutional basis of the dollarization regime. - Preserving gains and continuing reforms to cement fiscal and debt sustainability, rebuild buffers, reduce oil dependency, and ensure financial sector resiliency are crucial for lasting macroeconomic stability. ### Recent developments and outlook - Growth and production: - Real GDP growth slowed to 1.7 percent y/y in 2022:Q2, from 3.8 percent y/y in 2022:Q1. - Growth was mainly driven by private consumption; services were the main engine of growth on the production side. - Oil production fell sharply during the protests; overall economic losses are estimated at about $1 billion (1 percent of GDP). - High frequency indicators (energy demand, credit growth, vehicle sales, and local sales) show signs of faster growth after July. - Labor market indicators continue to strengthen, although under employment and unemployment remain above pre-pandemic levels. - Inflation: - Headline inflation reached 4.0 percent at end-October (yoy). - Drivers: food and beverages 7.4 percent; transport prices 5.1 percent; non-tradables 3.3 percent percent. - Core inflation reached 2.7 percent at end-October 2022. - Inflation remains lower than regional peers due to dollarization and subsidized fuel prices. - External sector and reserves: - Exports grew 30 percent (yoy) through August 2022, driven by oil, shrimp and mining; imports increased by 33 percent (yoy) over the same period, leading to a modest improvement in the trade balance. - The 2022 current account (CA) is expected to end in a surplus of 2.1 percent of GDP. - Gross international reserves increased to $8.5 billion as of mid-October from $7.5 billion a year ago. - From December 2021 to September 2022, the real effective exchange rate (REER) appreciated by 3.6 percent. - The external sector assessment for 2022 (Annex II) concludes Ecuador’s external position is moderately weaker than the level implied by medium-term fundamentals and desirable policies. - Financial sector: - Credit to the private sector increased by about 16 percent yoy in September; deposits growth was 10 percent. - About 60 percent of loans are to households and 40 percent to companies. - Liquid assets are about 24 percent of short-term deposits for banks and about 25 percent for cooperatives as of end-September. - Non-performing loans (NPLs) at end-September: banks 2.2 percent; cooperatives 4.4 percent; these reflect crisis measures that allow overdue loans to be classified as NPLs after 60 days instead of 15-30 days. - Cooperatives’ share of financial system deposits increased to about 31.5 percent in September from about 28.7 percent a year earlier. - Fiscal developments and financing: - The NFPS nonoil primary balance including subsidies (NOPBS) is set to improve by 1.2 ppts of GDP over 2020-22. - The NFPS fiscal balance is set to turn into a surplus in 2022 for the first time in over a decade. - Public debt is expected to fall below the 2025 target of 57 percent in 2023 (Annex III). - Reserves (excluding the SDR allocation) have already exceeded the level expected in 2025 at program approval. - Despite likely higher spending in the last three months, end-2022 fiscal balances are expected to be stronger than projected in the last review. The OB of the budgetary central government (PGE), including the petroleum derivatives account (CFDD), is expected to overperform expectations by $268 million. - The NFPS OB is expected to close the year approximately $175 million better than expected at the last review. - Deposit accumulation is projected at $2,693 million, in line with expectations at the last review. - Near-term financing alleviated by recent deals: - The IDB $400 million credit allocation was converted into direct budget support disbursement for 2022. - Reprofiling of $3.2 billion of bilateral debt to China lowered debt service over 2022-2024 by $400 million per year on average (Annex IV). - Settlement of the Perenco obligations: first payment in 2022 and prospective final payment scheduled in 2023; the settlement was accrued as a $375 million expense in the 2021 fiscal balance. - Outlook and projections: - 2022 growth revised to 2.7 percent (0.2 ppts lower than expected in the previous review) due mainly to protests-related disruptions and slower global growth. - 2023 growth projections revised slightly upward to 3 percent, reflecting the 2022 base effect. - Medium-term: growth expected to converge to potential of 2¾ starting in 2024. - Inflation expected to moderate to 1.5 percent over the medium term as global inflationary pressures ease. - The current account surplus is expected to moderate in the medium-term to around 2 percent as oil prices decrease. - Selected fiscal comparisons (Sixth Review vs Fourth and Fifth Review Forecast, US$ million): - Overall Balance PGE+CFDD: -2277 (4th/5th Rev.) → -2009 (6th Rev.) → Difference 268 - Oil Balance: 3,116 (4th/5th Rev.) → 3,460 (6th Rev.) → Difference 343 - Tax Revenue: 1531 (4th/5th Rev.) → 1533 (6th Rev.) → Difference 17 - Other Revenue: 284 (4th/5th Rev.) → 127 (6th Rev.) → Difference -155 - Nonoil Expenditure: 2354 (4th/5th Rev.) → 2355 (6th Rev.) → Difference 1 - Overall Balance NFPS: 1,004 (4th/5th Rev.) → 1,179 (6th Rev.) → Difference 175 - Oil Balance (NFPS): 4,721 (4th/5th Rev.) → 4,744 (6th Rev.) → Difference 23 - Nonoil Balance (NFPS): -3,717 (4th/5th Rev.) → -3,565 (6th Rev.) → Difference 151 - Change in NFPS deposits: 2,723 (4th/5th Rev.) → 2,693 (6th Rev.) → Difference -30 - Risks to the baseline (Annex V): - Downside risks: - Another wave of protests or security concerns could disrupt activity, hurt confidence, discourage investment, and lead to policy reversals. - Weaker-than-anticipated global growth could reduce trading partner demand and strain the external position. - Tighter global financing conditions could dampen capital flows, postpone international market re-access beyond 2024, and increase financial sector risk. - A worsened oil price outlook would reduce the build-up of fiscal and external buffers or force abrupt policy adjustments that could stifle recovery. - Upside risks: - Higher than expected oil prices would raise liquidity buffers and reserves, boost revenues, and improve growth prospects. - Lower inflation compared to trading partners can strengthen competitiveness and the external position. - Faster and more ambitious reforms to improve governance, competition, anticorruption and AML/CFT frameworks, and/or to reduce nontariff barriers to trade and investment, could boost potential growth, lower sovereign credit risk, and allow re-access to international capital markets under better terms. ### Program implementation - Performance through the review: - All quantitative performance criteria (QPCs) and all but one indicative targets (ITs) for this review were met with sizeable margins, helped by higher-than-expected oil prices and expenditure restraint. - Most structural benchmarks (SBs) and corrective actions (CAs) to address the latest misreporting were implemented, albeit with delays mostly due to turnover at senior levels in key agencies. - The exceptional access criteria continue to be met (Annex I). - Review process: - Discussions were held in Quito, Guayaquil, and in Washington, DC and via videoconferences during October 18-November 1, 2022. - Report prepared by a team comprised of Ceyda Oner (head), Anastasia Guscina (deputy head), Giovanni Ugazio, Asli Şenkal (all WHD), Majdi Debbich (SPR), Pablo Druck (MCM), Mariano Moszoro (FAD), Ivana Rossi (LEG), Mariana Sabates Cuadrado (STA), Jorge Salas (Resident Representative), Juan Pablo Erráez, Paola Hidalgo (Resident Representative Office), with support from Natalia Martinez-Camelo, Kristine Laluces (WHD) and Lizeth Crow (Resident Representative Office). Staff from FAD, LEG, and STA joined meetings. Bernardo Acosta and Ricardo Velloso (OED) joined the discussions. _International Monetary Fund. EXECUTIVE SUMMARY (1ecuea2022002)._ ### 13. The four quantitative performance criteria (QPC) and all but one indicative target (IT) ### 13. The four quantitative performance criteria (QPC) and all but one indicative target (IT) ### Quantitative performance criteria and indicative targets: end-August 2022 outcomes - The four QPCs and all but one IT on social assistance for end-August 2022 were met with significant margins. - End-August outturns (adjusted/actual; reporting in US$ unless otherwise indicated): - Overall balance (OB) of PGE+CFDD: overperformed the target by $1,793 million. - Accumulation of NFPS deposits at the central bank: $1,006 million above the adjusted target. - OB of the NFPS: overperformed the adjusted target by $1,411 million (attributed to higher oil balances and lower expenditure). - NOPBS IT: met with a margin of $733 million; fuel subsidy bill came in $500 million higher-than-expected mainly due to supply chain disruptions causing a larger price margin for refined oil over crude oil. - NIR accumulation IT: met with a margin of $1,241 million. - Nationwide social assistance IT (families in the first income decile covered by cash transfer programs): met with a margin of 105,066 families. - Provincial social assistance IT (families in the lowest three income deciles by province covered by cash transfer programs): Not Met on the provincial indicator; target met on aggregate but missed by a small margin in three provinces (Galapagos, Orellana, and Zamora Chinchipe) for a total of 2,359 families (less than 0.2 percent of total beneficiaries in the country). Assessment reported as “Not Met.” - Aggregate table summary (selected entries, end-August 2022): - QPC 1. Overall balance of the budgetary central government and CFDD (floor): Prog. 2/Adj. 3/Actual = 1/-1,600-1,455338 — Status: Met - QPC 2. Accumulation of NFPS deposits at the central bank (floor): 1/1,2001,2642,270 — Status: Met - QPC 3. Non-accumulation of external payments arrears (continuous PC): 000 — Status: Met - QPC 4. (No new) Net credit to government from the central bank (continuous PC): 000 — Status: Met - IT 5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor): 1/-4,350-4,495-3,762 — Status: Met - IT 6. Overall balance of the NFPS (floor): 1/4105551,966 — Status: Met - IT 7. Change in the stock of NIR - program definition (floor): 1/6757902,031 — Status: Met - IT 8. Number of families in the first income decile nationwide covered by cash transfer programs (floor): 280,716385,782 — Status: Met - IT 9. Number of families in the lowest three income deciles by province covered by cash transfer programs (floor): 947,7131,181,777 — Status: Not Met - Notes: - 1/ Cumulative change from January 1, 2022. - 2/ Staff report for the EFF Fourth and Fifth Reviews. - 3/ Adjusted for oil prices and disbursements from multilateral institutions. - 4/ Target met on aggregate but missed by a small margin in three provinces for a total of 2,359 families. - Sources cited in text for the outturns: Ministry of Economy and Finance and IMF staff estimates. Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU). ### Structural benchmarks (SBs), corrective actions (CAs), and implementation status - Out of 16 SBs and/or CAs due by end-November: - Five met on time: - Publishing revised historical NFPS and PGE data through 2013 (¶23). - Completing tax expenditure audits (¶21). - Updating the training curriculum and schedule in government fiscal statistics (GFS) compilation (¶22). - Including the estimated pension and health obligations in the 2023 budget and MTFF (¶19). - Submitting a 2023 budget in line with the program and MTFF (¶19, end-October SB). - Seven implemented with delay: - Completing public bank AQRs (¶28). - Providing estimates/template for potential central government obligations (¶24). - Developing a time-bound action plan/strategy to undertake legal reforms to report, record, and clear PGE healthcare obligations to the Social Security Fund (IESS) (¶3; prior action). - Completing the 2020 and 2021 healthcare audits (¶23; prior action). - Restructuring the Statistics Unit, headed by a Chief Statistician with expertise in GFS (¶23). - Hiring an audit firm to undertake healthcare audits (¶23). - Backfilling missing UBO information (¶21). - SBs unlikely to be completed before end of the EFF-supported program: - Enacting two legislations (AML/CFT and conflict of interest) — submitted to the National Assembly (¶31). - Completing oil company audits — faced challenges and will not be implemented before program end (¶32). - SB on envisioned expansion of social assistance program: will not be fully implemented across a few richer provinces by end-November as lower income regions are prioritized (¶13). ### Fiscal outturns, near-term strategy, and medium-term plans - Fiscal outturns: - At program approval in 2020, public debt and deficit were projected to peak at 69 and 9 percent of GDP, respectively. - The COPLAFIP anchor of 57 percent of GDP debt target had been expected to be reached in 2025. - Better-than-expected outcomes driven by: saving much of the oil windfall, keeping non-oil primary expenditure under control, and more buoyant non-oil revenues. - Near-term recalibration of NOPBS improvement: - Planned consolidation in NOPBS in 2022 would be 1.1 ppts of GDP, 0.4 ppts lower than expected at the last review. Main drivers: - Higher-than-expected fuel subsidy bill (by 0.8 ppts of GDP) due to refined oil price increases from supply chain disruptions and a $0.15/gallon reduction in gasoline and diesel prices in response to June protests. - Broad-based expenditure restraint and permanent measures to contain/reduce the wage bill to partially compensate. - Planned consolidation for 2023 will be 0.1 ppts of GDP lower than planned in last review; planned 1.4 ppts of GDP consolidation comprises: - 0.4 ppts from full impact of tax bill enacted in November 2021. - 1.0 ppts from lower oil prices reducing the fuel subsidy bill. - Remainder from containing goods and services and other spending. - The fiscal plan includes higher wage bill to accommodate hiring additional police officers, staff for new hospitals, and higher salaries to teachers following the Constitutional Court decision in July. - Government may implement measures to reduce fuel subsidies; savings could be channeled to priority investment (health, education, social assistance, growth-enhancing infrastructure). - Medium-term consolidation: - Revised medium-term consolidation of 4.3 ppts of GDP over 2020-25 (compared to 4.5 ppts in earlier reviews). - Under the 4.3 ppt path: fiscal balances and public debt would still reach medium-term targets; NFPS deposits and international reserves would approach broadly same levels; slower pace of adjustment expected to support growth. - 2023 budget and MTFF are in line with the program and include 40 percent accrued pension obligations and estimated healthcare transfer obligations to the IESS (end-October SB, met). ### Financing strategy and expenditure-reform priorities - Financing strategy for 2023: - Conservatively revised to avoid reliance on international markets while sovereign spreads remain elevated. - Plan to rely on multilateral and bilateral external funding and domestic financing. - Lower amortizations to China and higher buffers accumulated in 2022 would reduce borrowing needs. - Financing envelope includes $465 million to cover domestic arrears clearance and payments to Perenco. - Expenditure- and revenue-side measures for 2023 and medium term: - Revenue-side: continue risk-based audits; address compliance gaps with tax incentives rules (¶23); address tax evasion; broaden the tax base through higher formality and digitalization; incoming TA on TADAT in January 2023. - Expenditure-side: bulk of medium-term discretionary consolidation from containing public wage bill while protecting the most vulnerable; rationalize capital expenditure; improve efficiency of goods and services spending through procurement reforms; preserve social assistance spending. - Specific policies described: - Public sector wage bill strategy targets fiscal consolidation of 0.6 ppts of GDP over 2023-25 at NFPS level (corresponding to 1.8 ppts over 2020-25). Strategy details: - 2023 nominal increase, maintain wage bill in percent of GDP. - Nominally increasing wage bill that grows below nominal GDP growth. - Partial replacement of retirees and less reliance on occasional contractors. - Protect frontline workers in education, health, and security. - Procurement reforms: - SERCOP issuing Resolutions (Secondary Norms) to operationalize bylaws issued in June. - Measures include enforcing catalog, bulk and standardized purchases; expanding electronic catalogues; negotiating bulk contracts; providing information to regulators on competitive bidding. - Work on interoperability of the National Control Subsystem’s (SNC) entities’ databases expected to fix remaining issues during 2023. - Capital expenditure: - Prioritize capital projects and promote PPPs with due account to explicit and contingent liabilities and fiscal risks. - Undertake a Public Investment Management Assessment (PIMA) in early 2023, including C-PIMA component for low-carbon and climate-resilient infrastructure. ### Improving fiscal frameworks, governance, and transparency - Fiscal transparency initiatives: - Fiscal Transparency Evaluation (FTE) planned for May 2023 with IMF TA to improve fiscal reporting, forecasting, budgeting, fiscal risk analysis and management, and resource revenue management. - Update and publish the Medium-Term Debt Management Strategy by end-2022 with MCM TA to establish a debt policy agenda, including analysis on costs and risk tradeoffs of financing options and impact on future debt portfolio. - Procurement and tax-expenditure transparency: - SERCOP backfilled missing UBO information for companies awarded the 100 largest procurement contracts between October 2020 and December 2021 and published the information (end-June 2022 SB, implemented with delay in October). - Internal Revenue Service (SRI) conducted audits on tax expenditures of companies awarded the largest 100 public procurement contracts over 2020-21 (end-October SB, met). - Fiscal statistics and corrective actions after misreporting: - Revised historical NFPS and PGE data published back to 2013 (end-September SB/CA, met) with STA support. - Healthcare audits completion will allow replacement of conservative estimates of historical PGE healthcare obligations to the IESS with actual data. - Restructured statistics unit at the MEF, now headed by a new Chief Statistician with GFS expertise; updated training curriculum on GFS compilation and reconciliation. - Incoming STA long-term expert (LTX) to work with the revamped unit starting mid-November on improving MEF capacity in compiling, verifying, and reconciling government finance and debt statistics. - Healthcare audits and PGE–IESS obligations: - IESS hired a firm to complete healthcare audits of 2017-21 medical claims; results of 2020 and 2021 healthcare audits expected in late November (prior action). - Authorities developed a time-bound action plan to undertake legal reforms/administrative actions to strengthen the legal framework for state healthcare obligations to the IESS starting in 2023 (prior action). Plan requires regular medical audits and sets a deadline for MEF to pay IESS within a specified timeframe. - December plan: contract auditor to undertake financial audits of IESS by end-March 2023. - Domestic arrears monitoring and mitigation: - Authorities created template of PGE potential payment obligations by nature of expenditure, year, and beneficiaries and began providing monthly data to staff (end-June CA, implemented with delay in August). - With FAD LTX assistance, authorities are implementing a new monitoring system to evaluate existing stock of domestic payment arrears of the central government. - More work needed to collect information for wider NFPS and to address underlying causes of arrears through ongoing TA. - Note: expenditures recorded on accrual basis; accumulation of arrears reflects deficiencies in cash management and forecasting and timing uncertainty of disbursements. ### Strengthening the central bank and safeguarding financial stability - Liquidity lines and dollarization system resilience: - In October, the Federal Reserve Bank of New York granted the BCE access to a FIMA Repo Facility of $1 billion for exclusive central banking operations to access liquid resources through repo operations. - BCE renewed its swap facility with the Bank for International Settlements for up to $840 million as a precautionary measure for USD liquidity shortages. - FSAP (Financial Sector Assessment Program): - FSAP missions scheduled for December 2022 and April 2023. - FSAP focus areas: credit and liquidity vulnerabilities, financial sector oversight, macroprudential framework, and financial sector safety nets. - FSAP will analyze oversight framework of payment systems, preconditions for capital markets development and access to finance. - FSAP will evaluate risks from rapidly increasing private sector credit and authorities’ options to address such risks (including macroprudential tools) and assess recent changes to liquidity and deposit insurance frameworks. *Source: Ministry of Economy and Finance and IMF staff estimates, as reported in the IMF staff report (end-August 2022).* ### 27. The planned exit from the crisis measures will present an opportunity to start closing ### 1ecuea2022002 - 27. The planned exit from the crisis measures will present an opportunity to start closing ### Banking sector regulatory transition and crisis measures - Crisis measure allowing a longer period for classifying loans as non-performing and lowering provisions is scheduled to expire by end-December. - Starting in January 2023, banks and large cooperatives will have to comply with the same regulatory framework for classifying loans and provisioning. - Both superintendencies (for banks and for cooperatives) have been working on a smooth transition, giving more time, if needed, to individual institutions. - All financial institutions should be in compliance with the new regulatory framework during 2023. - Removal of crisis measures presents an opportunity to close regulatory gaps on provisioning and loan classification between banks and large cooperatives. - Fast credit growth, particularly in the cooperatives sector, warrants close monitoring to safeguard credit quality. - Ensuring that the safety nets of the liquidity and deposit insurance funds have adequate resources should be a priority in an officially dollarized economy. - The upcoming FSAP, the first in almost two decades, will offer a comprehensive assessment of the financial sector and set out a roadmap for reforms. ### Public financial institutions, AQRs, and provisioning - Authorities completed the AQRs of the four public banks (end-June 2022 SB, implemented with delay). - AQR results pointed to the need to increase provisioning in one public bank. - Authorities plan to start increasing the provisioning this year, aiming to fulfil the recommended provisioning in the next two years. - In line with staff advice, authorities plan to first ensure balance sheets of both institutions are clean and well-capitalized before proceeding with the merger of Banecuador and CFN (MEFP ¶49). ### Interest rates, lending caps, and financial inclusion - Tightening in global financial conditions could translate into an increase in interest rates in Ecuador; in the presence of interest rate caps this could create credit rationing, hurting financial inclusion. - Gradually relaxing caps on lending rates would allow for proper pricing of credit risk. - Interest rate developments should be monitored closely. ### Governance, competitiveness, and growth potential - Raising Ecuador’s growth potential is a priority. - REER overvaluation, combined with increases in average and minimum wages outpacing productivity growth, continue to weigh on external competitiveness (Annex II). - Labor and product market rigidities (e.g., complex regulatory procedures, barriers to entry in some sectors) and high borrowing costs remain key challenges to private-sector-led growth. - Authorities have taken steps to create a level playing field, improve economic governance, fight corruption, and make Ecuador a preferred destination for businesses, supported by international trade agreements and a gradual reduction in the ISD. ### AML/CFT, anti-corruption, and transparency efforts - Authorities submitted conflict of interest and AML/CFT legislations prepared with LEG technical assistance to the National Assembly; SBs on enactment by end-August and end-October have not been met. - Authorities plan to continue enhancing the AML/CFT framework following recommendations from the GAFILAT Mutual Evaluations Report expected in December. - Enactment of the AML/CFT and conflict of interest laws should be a priority to advance public sector integrity and reduce vulnerabilities to corruption. - Sustained publication of ultimate beneficiary ownership of entities awarded public procurement contracts will strengthen transparency. ### Oil sector audits and SOE transparency - Financial audits of Petroecuador (PEC) and Petroamazonas (now merged into the largest SOE in Ecuador) are high priority. - Numerous changes in PEC leadership led to delays in starting audits. - Authorities obtained IDB financing for the audits and launched a tender restricted to top-tier international audit firms in October; the tender process ended with no bids in November. - Authorities remain committed to procuring an auditor with IDB support and to incorporate any audit findings into policy plans. ### Climate and environmental actions - Authorities are working with international partners to identify, cost, and implement concrete actions to reduce GHG emissions as part of their commitment under the Paris Agreement. - An institutional committee on climate finance has been established within MEF with IDB support. - Several protected areas have been expanded, including the Galapagos marine reserve; authorities are working with partners to generate long-term financing for its protection. ### Program financing, exceptional access, and safeguards - With international market re-access no longer expected this year (was planned at $1 billion), near-term financing pressures have been alleviated by: - reprofiling of debt to CDB and Chinese Exim bank (Annex IV), - conversion of IDB’s $400 million credit allocation for an international bond guarantee into budget support, - additional financing from domestic banks. - Staff judge that the exceptional access criteria continue to be met (Annex I). - Ecuador’s capacity to repay (CtR) the Fund remains adequate but is contingent on implementation of sound policies beyond the end of the program. - Protracted fragile market confidence, a worse oil price outlook, or new contingent liabilities could put pressure on building buffers and potentially strain CtR. - BCE published the full set of audited financial statements and completed the project to adopt IFRS in 2022; gaps remain (e.g., fair value recognition of financial instruments) and a safeguards recommendation is outstanding. - Ecuador maintains a residual amount of arrears to international private bond holders from 2008/2009: US$52 million remain outstanding in the hands of individual creditors; authorities have been unable to identify these creditors to settle the claims. - Staff judge that good faith efforts have been made and requirements under the policy on lending into arrears have been met; authorities indicate no outstanding arrears to bilateral or multilateral creditors. - Authorities requested temporary Fund approval to maintain the exchange restriction arising from the tax on transfers abroad (ISD) for one year for balance of payments reasons (see LOI). ### Fiscal outcomes, social support, and reform priorities - Public sector expected to reach its first fiscal surplus since 2008 this year. - Public debt is expected to reach its 2025 target of 57 percent of GDP in 2023. - Non-oil primary expenditure and deficit have remained under control despite higher oil prices. - Social support expansion: - In 2020 only 3 out of 10 households in need received support; now more than 8 out of 10 do. - Social support programs expanded to over 650 thousand new families, bringing total recipients to over 1.2 million families. - Subsequent phase focused on reaching 65 percent of the lowest income, and 70 percent of the lowest three income deciles in every region. - A new program to support low-income mothers of infants will further expand coverage. - Total support to low-income families increased from around $500 million in 2020 to over $1.2 billion in 2022. - Fuel subsidy reform: - Suspension of the fuel subsidy reform in October 2021 and subsequent reductions in gas and diesel prices in June 2022 represented a costly backtracking. - At currently elevated international oil prices, fuel subsidies cost the government almost $4 billion this year. - Fuel subsidies disproportionately benefit the rich, encourage overconsumption, increase carbon footprint, and provide grounds for corruption and smuggling; reform to reduce the bill and make support more targeted is recommended. - Fiscal policy recommendations: - Continue with expenditure-led consolidation, particularly wage bill plan and better procurement practices. - Use times of high oil prices to improve fiscal balances and rebuild buffers. - Proactively implement contingency measures if shocks arise. - Encourage private investment to reduce public capital expenditure burden. - With continued fiscal improvement, re-access international markets at favorable rates. ### Public finance management and data quality - Accumulation of domestic arrears within the year highlights the need to build capacity in cash forecasting and management (IMF supporting through an FAD LTX). - FTE and PIMA technical assistance activities planned for next year will support improvements in public finance management. - Budget process more transparent with inclusion of pension and health care obligations of the state; operationalizing action plan to regularize health care audits and payments should continue. - Ongoing STA LTX support from the IMF will help strengthen fiscal data quality and timeliness. ### Future engagement, assessments, and staff recommendations - Authorities remain strongly interested in continuing formal engagement with the Fund after the current EFF-supported arrangement ends; plan to end current program on time and decide modalities of future engagement in early 2023. - Authorities have expressed interest in the Resilience and Sustainability Trust (RST). - In the absence of a successor arrangement and given outstanding credit to the Fund exceeds the 200 percent of quota threshold, staff propose that a Post Financing Assessment (PFA) commence. - Future engagement likely to focus on: - further improving fiscal and debt sustainability and the quality of fiscal statistics, - strengthening public finance management, - structural reforms to improve competitiveness, - implementing FSAP recommendations to strengthen financial sector resilience. - Staff supports: - retention for a one-year period of the exchange restriction arising from the ISD, maintained for BOP reasons, temporary and non-discriminatory; - completion of the financing assurances review; - authorities’ request for completion of the Sixth Review under the EFF arrangement by the Executive Board. *Source: IMF staff report (section and paragraphs 27–52) contained in the provided PDF chapter.* ### 53. It is recommended that the next Article IV consultation revert to the standard 12- ### 1ecuea2022002 - 53. It is recommended that the next Article IV consultation revert to the standard 12- ### IMF recommendation - It is recommended that the next Article IV consultation revert to the standard 12-month cycle. - Given that outstanding credit to the Fund exceeds the 200 percent of quota threshold, staff recommend initiation of a PFA. ### Real economy — recent developments - Services led growth in 2022:H1 on the production side. - Private consumption was the engine of growth on the expenditure side. - Labor market outcomes continued to improve, but remain weaker than pre-pandemic levels. - High frequency indicators point to a pickup in growth after July, following the protests. - Consumer price inflation: - Inflation registered at 4 % in October. - Inflation in nontradables increased to 3.3 percent in October. ### External sector — recent developments and stocks - The current account registered a surplus of 3.8% of GDP in 2022Q2. - Exports grew 28% (noted in the figure caption for 2022Q2). - Imports grew strongly at 40% in 2022Q2. - Gross international reserves (GIR) stood at $8.4 billion as of September 2022. - The financial account registered net portfolio outflows. - Both public and private external debt continued to fall from their 2020Q2 highs. ### Fiscal developments — outcomes and structure - The fiscal deficit reached the lowest level in a decade and public debt stabilized. - The deficit was financed by external official credit and domestic bond issuance. - Oil and non-oil revenue have recovered to their pre-pandemic levels. - Primary expenditure contracted slightly. - Selected fiscal balances (percent of GDP, NFPS overall balance (deficit -)): - 2020: -7.1 - 2021: -1.6 - 2022 (Est.): 0.9 - 2023 (Proj.): 1.0 - 2024 (Proj.): 1.9 - 2025 (Proj.): 1.6 - 2026 (Proj.): 2.0 - 2027 (Proj.): 2.1 - 2028 (Proj.): 2.2 - 2029 (Proj.): 1.9 - Public debt (percent of GDP, NFPS gross debt consolidated): - 2020: 60.9 - 2021: 62.3 - 2022 (Est.): 58.9 - 2023 (Proj.): 58.3 - 2024 (Proj.): 56.2 - 2025 (Proj.): 55.6 - 2026 (Proj.): 53.1 - 2027 (Proj.): 49.3 - 2028 (Proj.): 45.3 - 2029 (Proj.): 42.0 ### Monetary and financial system highlights - Banking system indicators show recovery in deposits and credit (figures and series presented in figures and tables). - Financial soundness (selected indicators, end-of-period): - Regulatory capital to risk-weighted assets (CAR) ranged around 13.5–14.5 in recent years (e.g., 13.5 in Q4 2021; 13.7 in Q2 2022). - Nonperforming loans to gross loans around 2.1–2.8 percent in recent quarters. - Gross international reserves (US$ millions), selected values: - 2020: 7,133 - 2021: 7,898 - 2022 (Est.): 10,634 (table) and GIR stood at $8.4 billion as of September 2022 (figure caption). ### Key projections and macro snapshot (selected items drawn from staff tables) - Real GDP (percent change, yoy): - 2020: -7.8 - 2021: 4.2 - 2022 (Est.): 2.9 - 2023 (Proj.): 2.7 - 2024–2029 (annual projections): 2.7, 3.0, 2.8, 2.8, 2.8, 2.8 - Consumer price index (period average, percent): - 2020: -0.3 - 2021: 0.1 - 2022 (Est.): 3.2 - 2023 (Proj.): 3.5 - 2024–2029 (projections): 2.4, 2.5, 1.5, 1.5, 1.5, 1.5 - Current account balance (percent of GDP): - 2020: 2.7 - 2021: 2.9 - 2022 (Est.): 2.4 - 2023 (Proj.): 2.1 - 2024–2029 (projections): 2.2, 1.8, 1.9, 2.0, 2.0, 2.0 - Exports (percent change, yoy): - 2020: -14.2 - 2021: 31.0 - 2022 (Est.): 13.6 - 2023 (Proj.): 27.9 - Imports (percent change, yoy): - 2020: -23.2 - 2021: 43.4 - 2022 (Est.): 17.7 - 2023 (Proj.): 29.8 - Gross financing needs (percent of GDP): - 2020: 14.4 - 2021: 6.4 - 2022 (Est.): 4.9 - 2023 (Proj.): 4.4 - 2024–2029 (projections): 3.5, 3.4, 3.2, 4.3, 4.8, 4.2 ### Additional analytical notes captured in the source - Lower domestic inflation offset the appreciation in the USD. - Ecuador's minimum wage increased once more in 2022; public sector wages remain considerably above those of the private sector. - Market share in non-oil exports continued to decline. - Political instability, tax rates, and restrictive labor regulations are cited as impediments to investment. *Source: IMF staff compilation from the Ecuador chapter and associated tables and figures (figures and tables as presented in the supplied content).* ### 1. Overall balance of the budgetary central government and CFDD (floor) 1/-1,600-1,455338Met ### 1. Overall balance of the budgetary central government and CFDD (floor) 1/-1,600-1,455338Met ### Quantitative performance criteria and indicative targets - Continuous performance criteria (PC) and floor/ceiling targets (cumulative change from January 1, 2022, unless otherwise noted): - 1. Overall balance of the budgetary central government and CFDD (floor) 1/ -1,600 -1,455 338 Met - 2. Accumulation of NFPS deposits at the central bank (floor) 1/ 1,200 1,264 2,270 Met - 3. Non-accumulation of external payments arrears (continuous PC) 0 0 0 Met - 4. (No new) Net credit to government from the central bank (continuous PC) 0 0 0 Met - Indicative targets: - 5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) 1/ -4,350 -4,495 -3,762 Met - 6. Overall balance of the NFPS (floor) 1/ 410 555 1,966 Met - 7. Change in the stock of NIR - program definition (floor) 1/ 675 790 2,031 Met - 8. Number of families in the first income decile nationwide covered by cash transfer programs (floor) 280,716 385,782 Met - 9. Number of families in the lowest three income deciles by province covered by cash transfer programs (floor) 947,713 1,181,777 Not Met 4/ ### Provincial coverage for target 9 (Number of families in the lowest three income deciles by province covered by cash transfer programs) - AZUAY 39,974 44,859 Met - BOLIVAR 24,250 29,851 Met - CAÑAR 18,910 21,289 Met - CARCHI 10,416 16,843 Met - CHIMBORAZO 44,464 54,709 Met - COTOPAXI 41,592 55,435 Met - EL ORO 26,338 34,909 Met - ESMERALDAS 56,266 71,116 Met - GALAPAGOS 14 563 Not Met - GUAYAS 198,818 232,935 Met - IMBABURA 25,244 43,593 Met - LOJA 42,536 47,196 Met - LOS RIOS 84,751 100,651 Met - MANABI 139,151 161,097 Met - MORONA SANTIAGO 19,014 24,904 Met - NAPO 11,214 12,485 Met - ORELLANA 16,275 15,809 Not Met - PASTAZA 7,511 7,639 Met - PICHINCHA 36,178 66,189 Met - SANTA ELENA 21,857 39,598 Met - SANTO DOMINGO DE LOS TSACHILAS 25,920 36,104 Met - SUCUMBIOS 16,330 17,246 Met - TUNGURAHUA 30,322 38,831 Met - ZAMORA CHINCHIPE 10,237 8,426 Not Met - Note on target 9: Target met on aggregate but missed by a small margin in three provinces (Galapagos, Orellana, and Zamora Chinchipe) for a total of 2,359 families. - Sources for quantitative targets and statuses: Ministry of Economy and Finance and IMF staff estimates. - Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU). - Timing reference: End-August 2022. ### Key numerical highlights (exact values preserved) - Overall balance of budgetary central government and CFDD: -1,600; -1,455; 338 (Met) - Accumulation of NFPS deposits at central bank: 1,200; 1,264; 2,270 (Met) - Non-oil primary balance of NFPS (including fuel subsidies): -4,350; -4,495; -3,762 (Met) - Overall balance of NFPS: 410; 555; 1,966 (Met) - Change in stock of NIR (program definition): 675; 790; 2,031 (Met) - Coverage — first income decile nationwide: 280,716; 385,782 (Met) - Coverage — lowest three deciles by province (aggregate): 947,713; 1,181,777 (Not Met 4/) ### Observations from quantitative performance - All continuous PCs listed (3 and 4) show 0 and are recorded as Met. - Several floors and indicative targets were met on aggregate, including fiscal and foreign reserve-related floors. - The social assistance target by province was missed in three provinces for a combined shortfall of 2,359 families, though the aggregate target was met. --- ### Structural conditionality: Prior actions and structural benchmarks (summary of objectives, due dates, and status) - Reform areas covered: Fiscal transparency, Transparency and Governance, Cash Management, Organic Monetary and Financial Code (COMYF) reform of the Central Bank Framework, Debt Management, Domestic Arrears, Fiscal Statistics, Transparency, Tax Reform, Social Assistance, Financial Sector, SOE reforms, AML/CFT, Fiscal Framework, Fiscal Strategy. - Selected prior actions and structural benchmarks with due dates and status: - Fiscal transparency: Develop and share a time-bound action plan/strategy to strengthen legal framework for State obligations on healthcare expenditure and related audits starting in 2023 — Objective: Improve reliability of fiscal statistics, avoid accumulation of arrears. (Status not explicitly listed in the excerpt.) - Transparency and Governance: Complete the 2020 and 2021 healthcare audits and share the results with Fund staff — Objective: Improve the quality and reliability of PGE fiscal data recording. (Status: appears in list as later entries; "Complete 2020 and 2021 healthcare audits and share the results with Fund staff." — End-Oct. 2022 — Not met, set as prior action.) - Fiscal Framework: Adopt a regulation, in consultation with Fund staff, to implement the July 2020 amendments to COPLAFIP — Due: End-Nov. 2020 — Implemented with delay. - BCE (Central Bank): JPRF to approve an internal audit charter aligned with international standards — Due: End-Nov. 2020 — Met. - Transparency and AML/CFT: Enhance online publication of asset declarations for high-level public officials and/or politically exposed persons (PEPs) — Due: End-Nov. 2020 — Partially implemented; reformulated as a new SB for Aug. 2022. - Cash Management: Deliver to IMF staff a PGE financial plan for 2021 approved by the Financial Committee — Due: Dec. 16, 2020 — Met. - Transparency and Governance: Enact anticorruption legislation criminalizing acts of corruption in line with UNCAC Articles 15–30 — Due: End-Dec. 2020 — Met. - COMYF (Central Bank legal framework): Enactment of amendments to the Central Bank’s legal framework as committed under the 2019 EFF — Due: End-Jan. 2021 — Not met. Implemented with delay in April. - Debt Management: Publish a Medium-Term Debt Management Strategy (MTDS) prepared with IMF TA — Due: End-Feb. 2021 — Met. - Domestic Arrears: Share updated arrears’ clearance strategy with IMF staff — Due: End-Apr. 2021 — Not met; converted to new SB for Nov. 2021. - Fiscal Statistics: Prepare a compilation guide in consultation with IMF TA and disseminate to data providers — Due: End-May 2021 — Met. - Transparency: Undertake independent audit of COVID-19-related spending by Office of the Comptroller General and publish results — Due: End-Jun. 2021 — Not met; completed as a prior action in Sep. 2021. - Tax Reform: Enactment of a tax reform elaborated with Fund staff — Due: End-Oct. 2021 — Not met; implemented with delay in Nov. 2021. - Transparency: Establish and start operating the National Control Subsystem (SNC) to fight corruption in procurement — Due: End-Oct. 2021 — Not met; partially implemented. - Procurement transparency (SERCOP): Make all procurement contracts awarded since Sept. 2020 publicly available with ownership information — Due: End-Nov. 2021 — Met. - SERCOP procurement guidelines for catalog purchases and bulk standardized purchases — Due: End-Nov. 2021 — Not met; reformulated and met as a Prior Action in June 2022. - Financial Sector: Initiate independent third-party asset quality reviews of 2019 and 2020 balance sheets of all public banks (select firm and agree TOR) — Due: End-Nov. 2021 — Met. - SOE audits: Initiate independent audits of 2019 and 2020 financial statements of Petroecuador and Petroamazonas by agreeing TOR and timeline — Due: End-Nov. 2021 — Not met; was met as a Prior Action in June (year implied in context). - Domestic Arrears: MEF to publish methodology to estimate arrears’ stock and templates for reporting — Due: End-Nov. 2021 — Not met; implemented with delay in Jan. 2022. - Fiscal Framework: Establish the National Fiscal Coordination Committee (NFCC) as set out in COPLAFIP — Due: End-Nov. 2021 — Not met; implemented with delay in Dec. 2021. - AML/CFT: Enact new AML/CFT legislation in line with FATF standards — Due: End-Mar. 2022 — Not met; reset for end-Oct 2022. - Social Assistance: Complete upgrade of social registry and expand coverage to at least 80 percent of families in bottom three deciles — Due: Mid-Apr. 2022 — Not met; implemented with delay. - SOE audits and financial sector AQRs: Series of deliverables with multiple due dates through mid-2022; several items "Not met" or "Not met, implemented with delay" (specifics preserved in the table entries). - Transparency and AML/CFT: Enact legislation to strengthen conflict of interest framework, broaden asset declaration system and ensure online publication in line with UNCAC Articles 7 and 8 — Due: End-Aug. 2022 — Not met. - Fiscal Statistics: Publish revised historical NFPS data, with explanations for IESS data revisions, back to 2013 — Due: End-Sep. 2022 — Met. - Transparency and Governance: Share results of SRI audits of tax expenditures of companies awarded the largest 100 public procurement contracts over 2020–2021 — Due: End-Oct. 2022 — Met. - SOE: Share completed independent audits of the 2021 financial statements of the merged entity of Petroecuador and Petroamazonas — Due: End-Oct. 2022 — Changed to MEFP commitment to finish in 2023 as the earliest possible completion. - Fiscal Strategy: Submit a 2023 Budget in line with program and MTFF commitments — Due: End-Oct. 2022 — Met. - Transparency and Governance: Complete 2020 and 2021 healthcare audits and share results with Fund staff — Due: End-Oct. 2022 — Not met, set as prior action. - SOE: Share completed independent audits of 2019 individual financial statements of Petroecuador and Petroamazonas — Due: End-Nov. 2022 — Not met. - Social Assistance (concluding entry): Expand coverage of social assistance program to no less than 70 percent coverage of bottom three income deciles by province and no less than 65 percent of the first income decile nationwide — Due: End-Nov. 2022 — Not met; partially implemented. Target on first income decile met; target by province met in all but three provinces. - Implementation pattern: - Several structural benchmarks were met (some with delays). - Multiple items were "Not met" or "Not met, implemented with delay", and several were reformulated, reset, or converted into Prior Actions or MEFP commitments with revised timelines. - Areas with repeated implementation challenges include AML/CFT legislation, SOE audits, domestic arrears methodologies, procurement governance, and comprehensive completion of healthcare audits. *Source: IMF staff presentation of program performance and structural conditionality (End-August 2022).* ### Annex I. Assessment of Exceptional Access Criteria ### Annex I. Assessment of Exceptional Access Criteria ### Criterion 1 — Exceptional balance of payments pressures - Staff judgment: exceptional access criteria are met. - Ecuador continues to experience exceptional BOP pressures despite an economic recovery from its deepest recession on record. - Key developments: - Renewed loss of market access in June 2022. - Spreads rose to around 1900 bps (levels last seen during the COVID-19 pandemic and debt crisis) before retreating to about 1400 bps in November. - Bond yields reached 16-20 percent at end-September. - Authorities postponed plans to issue $1 billion in Eurobond(s) in 2022. - Financing gap and Fund support: - The residual financing gap proposed to be provided by the Fund is estimated at $700 million over the remainder of 2022, after factoring in fiscal consolidation, support from other IFIs, and other financing sources. ### Criterion 2 — Debt sustainability analysis - Staff judgment: public debt assessed to be sustainable with high probability at program approval; assessment remains favorable. - Reasons and projections: - Assessment based on successful debt exchange, credible financing assurances from bilateral and multilateral creditors, and commitment to ambitious medium-term fiscal consolidation. - Prudent fiscal management and higher oil prices have resulted in lower deficits and debt levels compared to projections at program approval. - Public debt is projected to fall below its 2025 target of 57 percent of GDP already in 2023. - Gross financing needs remain around 3-4.5 percent of GDP over the medium term, well below stress levels. - Risks and safeguards: - Stress tests show debt trajectory is sensitive to shocks to contingent liabilities and growth, particularly in the near term. - Small share of international bonds in total debt stock implies debt projected to remain on a firmly downward trajectory even if Ecuador were to issue at elevated rates. - Anchors in COPLAFIP: 57 percent of GDP by end-2025 and 40 percent of GDP from 2032 onwards are enshrined in the organic budget code, providing a key safeguard to debt sustainability. ### Criterion 3 — Prospects for regaining market access - Historical performance and prospects: - Prior to losing market access, Ecuador sustained access to foreign financial markets with long-term global bond issuances of around $3-5 billion per year over the previous four years. - Historical evidence suggests Ecuador has been successful in regaining access to international capital markets within 24-36 months following a debt restructuring. - Recent market dynamics: - Spreads had fallen and remained around 800 bps until June 2022 protests; over the summer spreads jumped by almost 700 bps to around 1450 bps, then spiked to around 1900s in late September before declining to 1400s in November. - Rise in spreads attributed to tighter global financial conditions and domestic political concerns despite improved economic fundamentals. - Near-term funding outlook: - Higher oil prices, stronger buffers, lower deficits, and the reprofiling operation with Chinese banks have reduced near-term financing needs. - Cancellation of the planned bond issuance in 2022 has not led to a financing shortage. - Staff and authorities assume more modest international bond issuances in 2024 and beyond, at volumes that could be covered by contingency buffers (deposits, reserves, additional IFI financing) in a downside scenario. ### Criterion 4 — Prospect of program success (policy, institutional, political capacity) - Implementation and commitment: - Authorities have continued implementing program policies and proactively addressing implementation challenges; remain fully committed. - Smooth change in administration in May 2021 provided continuity for the EFF-supported arrangement. - A critical tax reform was enacted in November 2021, making the system more efficient and progressive. - Five reviews have been successfully completed; authorities seek timely completion of the last review. - Policy setbacks and political risks: - Policy reversals: suspension of subsidy reform in October 2021 and lowering diesel and gasoline prices by $0.15/gallon in June 2022 following protests. - Delays in structural conditionality largely attributed to management changes at MEF, the IESS, and Petroecuador. - Fragmented politics, upcoming local elections, potential for further protests, and a fragmented National Assembly pose risks to policy continuity; President narrowly survived an impeachment attempt in June. - Minister of Government actively working to strengthen relations with political parties and stakeholders to improve governability. - Legislative and institutional progress: - Successfully implemented legislative actions include: anticorruption reform of the organic penal code (COIP), reform of the COMYF to strengthen dollarization, and the late-2021 tax reform. - Remaining legislative benchmarks (overhauling AML/CFT framework and expanding political actors’ asset declaration forms) have been submitted to the National Assembly; enactment pending. Authorities may use decrees or regulations with LEG support if laws are not approved. - All other economic and structural policies under the program are within the authority of the government and the executive. - Technical and corrective actions to address data and institutional weaknesses: - Authorities have received extensive capacity development from the Fund and other development partners; fiscal data quality has improved and further improvements are planned. - Corrective actions implemented (exact wording preserved): - (i) publishing revised historical series for PGE and NFPS with explanations for revisions back to 2013 (completed); - (ii) hiring of medical audit firms to conduct healthcare audits for 2017-21 medical expenditure (June 2022, completed); and completing the audits of 2020 and 2021 claims by end-October (prior action); - (iii) identifying the existing stock of PGE potential obligations to IESS, GADs, private sector and others (completed); - (iv) inclusion in the 2023 budget and MTFF properly estimated pension and healthcare transfers to IESS (completed); - (v) establishing a dedicated statistics unit at the MEF headed by a senior Chief Statistician (pending), and upgrading the training curriculum in GFS compilation, reconciliation, and verification (end-October, completed); - (vi) developing a time-bound plan to undertake legal reform aimed at strengthening the legal framework for State healthcare obligations and related audits (end-October, prior action); and - (vii) completing the financial audit of IESS statements from 2019-21 by an independent third party by end-March 2023. - Authorities have sought further technical assistance from the Fund and other IFIs. - Overall judgment: - Strong macroeconomic policy management to date, progress toward reducing oil dependency, completion of five reviews with significant reforms and macroeconomic improvements, and commitment to strong prior actions provide a reasonably strong prospect of success for the Fund-supported program. *Source: Annex I. Assessment of Exceptional Access Criteria* ### 8.7 percent in the 2020 ESA. ### 8.7 percent in the 2020 ESA. ### Capital and Financial Accounts: Flows and Policy Measures - Background findings: - FDI reached 0.8 percent of GDP in 2022 from 0.9 percent of GDP in 2019, mostly driven by investments in the mining sector. - Net public sector inflows narrowed to 0.3 percent of GDP from 2.2 percent in 2019, reflecting lower disbursements from bilateral and multilateral creditors (other than the IMF). - Other private sector flows recorded a large net outflow of 6.9 percent of GDP in 2020 at the onset of the pandemic; private sector net outflows receded and reached 3.2 percent of GDP in 2022. - Assessment: - External financing needs have narrowed over the medium-term due to lower public debt service from the restructuring of debt owed to China. - Continued reform efforts are expected to build investor confidence and attract more private sector flows. - The tax on transfers abroad (Impuesto a la Salida de Divisas, or ISD) remains a capital flow measure (CFM) under the Fund’s Institutional View on Liberalization and Management of Capital Flows and an exchange restriction subject to Fund approval under article VIII Section 2(a), despite authorities’ decision to progressively retire the tax. ### FX Intervention and Reserves Level - Background findings: - Ecuador is a fully dollarized economy and does not have its own currency. - Gross international reserves (GIR) rose to $8.5 billion as of mid-October 2022 from $7.5 billion a year earlier. - The 2021 SDR allocation of $949 million is equivalent to 10.7 percent of the 2022 ARA metric for Ecuador and contributed to improved reserve adequacy metrics. - Assessment and adequacy metrics: - At mid-October 2022, GIR were 3.2 months of imports (slightly above the traditional 3-months of imports metric). - GIR were 13.1 percent of broad money (below the 20 percent metric). - GIR represented 43 percent of the Fund’s risk-weighted ARA metric. - Despite improvements, international reserves remain below levels adequate for prudential purposes. - Continued efforts to build reserves— including higher government deposits and higher private sector inflows as the economy strengthens and reforms bear fruit—will support the reserve position and strengthen the basis for dollarization. ### Sovereign Risk and Debt Sustainability Assessment (Annex III) - Overall judgment: - Ecuador’s public debt remains sustainable with high probability in the baseline forecast. - The overall risk of sovereign stress is assessed as low; medium-term risks are moderate, driven largely by the width of the debt fanchart (uncertainty around the baseline). - Background and recent developments: - Post-COVID recovery, the 2020 debt operation, and ongoing fiscal consolidation under the EFF-supported program stabilized public debt during 2021. - High oil prices have mitigated fiscal and external vulnerabilities. - Political instability concerns following the June 2022 events caused a sharp increase in borrowing costs and forced authorities to postpone market access. - Baseline assumptions and projections: - Public debt is forecast to decline from 62 percent of GDP in 2021 to 42 percent of GDP by 2027. - Gross financing needs (GFNs) are forecast to decline from 6.4 percent of GDP in 2021 to an average of about 4 percent in the medium-term. - The reprofiling of US$3.2 billion in bilateral debt to China reduced GFNs by about 0.3 percent of GDP over 2022-24. - Public debt definition (SRDSF): - Consolidated liabilities of the nonfinancial public sector (NFPS): central government, petroleum derivatives account (CFDD), social security funds, public nonfinancial corporations, and Development Bank of Ecuador (BEDE). - Instruments include loans, securities, liabilities under oil-related financing, central bank lending to the government, deposits at BEDE, and other accounts payable including arrears. - Risks and realism: - The baseline relies on continuous implementation of ambitious fiscal consolidation relative to historical and cross-country experience. - Downside risks include fiscal slippages from negotiations with protestors, a faltering economic recovery, and lower oil prices. - Mitigating factors: large share of multilateral and bilateral official debt with comparatively low debt service and long maturities; low financing requirements remaining below the 15 percent critical threshold. - Key baseline numeric projections (selected from Figure 4; public debt and financing): - Public debt (percent of GDP): 2021 = 62.3; 2022 = 58.3; 2023 = 55.6; 2024 = 53.1; 2025 = 49.3; 2026 = 45.3; 2027 = 42.0. - Change in public debt (percent of GDP): 2022 = -4.0; 2023 = -2.7; 2024 = -2.5; 2025 = -3.8; 2026 = -4.0; 2027 = -3.3. - Primary deficit (percent of GDP): 2021 = 1.5; 2022 = -1.4; 2023 = -1.9; 2024 = -2.4; 2025 = -2.8; 2026 = -3.0; 2027 = -2.8. - Noninterest revenues (percent of GDP): 2021 = 33.0; 2022 = 35.4; 2023 = 34.3; 2024 = 33.9; 2025 = 33.6; 2026 = 33.4; 2027 = 32.7. - Noninterest expenditures (percent of GDP): 2021 = 34.5; 2022 = 34.0; 2023 = 32.4; 2024 = 31.5; 2025 = 30.8; 2026 = 30.4; 2027 = 29.9. - Gross financing needs (percent of GDP): 2021 = 6.4; 2022 = 4.4; 2023 = 3.4; 2024 = 3.2; 2025 = 4.3; 2026 = 4.8; 2027 = 4.2. - Debt service (percent of GDP): 2021 = 6.0; 2022 = 6.9; 2023 = 6.4; 2024 = 6.7; 2025 = 8.2; 2026 = 8.8; 2027 = 8.0. - Real GDP growth (percent): 2021 = 4.2; 2022 = 2.7; 2023 = 3.0; 2024 = 2.8; 2025–2032 = 2.8 (each year reported as 2.8). - Inflation (GDP deflator; percent): 2021 = 2.6; 2022 = 6.4; 2023 = 1.3; 2024 = 1.3; 2025–2032 = 1.1 (each year reported as 1.1). - Effective interest rate (percent): 2021 = 2.3; 2022 = 2.6; 2023 = 2.6; 2024 = 2.9; 2025 = 3.6; 2026 = 3.9; 2027 = 4.2. - Medium-term risk analysis (selected indicators from Figure 6): - Fanchart width = 80.0. - Probability of debt not stabilizing = 12.8 (pct). - Terminal debt level x institutions index = 32.4. - Average GFN in baseline = 4.0 (percent of GDP). - Bank claims on government (pct bank assets) = 2.5. - Change in claims on government in stress (pct bank assets) = 6.8. - GFN financeability index (normalized) and medium-term index indicate overall moderate risk; GFN financeability module suggests low risk. ### Annex IV. Reprofiling of Debt to Chinese Institutions - Agreement summary: - In mid-September, Ecuador reached an agreement with China Development Bank (CDB) and China Exim Bank to reprofile $3,220 million of debt (78 percent of debt to China). - The deal spread debt service over a longer horizon and lowered near-term financing needs; it included improvements in linked oil sales and transparency terms. - Full contracts expected to be published soon (as stated in source). - CDB operation: - Extended $1.4 billion of debt in four loans coming due through 2024 and reduced the interest rate by 0.3-1 ppts. - Will reduce total debt service (principal plus interest) by $687 million between 2022-24. - China Exim Bank operation: - Extended $1.8 billion of debt in four loans due in 2025-2029. - Renegotiation included a 0.55 ppts decrease in the interest rate of a fixed rate loan, and a 20 bps decrease in the margin over Libor for two variable rate loans. - Through 2025, this operation will reduce financing needs by $569 million through 2025. - Aggregate impact on debt service: - Following the reprofiling, Ecuador's total debt service to Exim Bank and CDB increased from $3,637 to $4,023 million due to a nearly $386 million rise in interest payments through the end of 2032, since the remaining principal payment remains unchanged. - CDB restructuring (USD Millions) — selected excerpts: - Post restructuring principal payments by year include 2023 = 276.2; 2024 = 276.2; 2025 = 276.2; 2026 = 276.2; 2027 = 276.2; total principal = 1,387.9. - Post restructuring interest payments total = 234.1. - Post restructuring debt service total = 1,622.0. - Financial Relief* (difference pre vs post) total = -123.1. - Note: A USD/RMB exchange rate of 7.12 as of September 23, 2022 is used for the debt service calculation. - Exim Bank restructuring (USD Millions) — selected excerpts: - Post restructuring principal payments by year include 2023 = 261.1; 2024 = 261.1; 2025 = 261.1; 2026 = 261.1; 2027 = 261.1; 2028 = 261.1; 2029 = 261.1; total principal = 1,831.6. - Post restructuring interest payments total = 560.9. - Post restructuring debt service total = 2,392.4. - Financial Relief* (difference pre vs post) total = -262.9. *Source: IMF staff.* ### 4. Oil Sale Agreements. The renegotiation also ### 4. Oil Sale Agreements. The renegotiation also ### Oil sale renegotiation and delivery terms - The renegotiation led to an extension of 3 years in the oil delivery terms (2024 to 2027) to Petrochina. - The renegotiation produced an improvement in the price per barrel of oil exports. - The extension in the delivery term volume will allow Petroecuador to have more oil available for free export in the spot market, leaving better prices for Ecuador. ### Transparency of contract renegotiation - Once the renegotiation process of the contracts was completed, the government issued a press release about the new terms of the contracts (changes in interest rates and savings to 2025 in amortization payment schedule). - The contracts have been published on MEF website. - The authorities continue to publish all legally permitted oil contracts to date, including modification contracts, if applicable. - URLs provided in the source: - https://www.finanzas.gob.ec/biblioteca/ - https://sistemasinternos.eppetroecuador.ec:8301/rcppe/GCIComercial/invitaciones/consultaInvitacionesNS.cfm?titulo=%24titulo&anio=2021&tipo=contratos&ejecuta=Buscar ### Exim Bank & CDB Debt Service Schedule (Pre and Post Renegotiation) - Chart title: Exim Bank & CDB Debt Service Schedule, Pre and Post Renegotiation (in USD millions). - Timeline labels shown: 2022* 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 - Series components shown in chart legend: Principal; Interest - Note under chart: Sources: Ministry of Economy and Finance and IMF staff calculations - Footnote: *Sep-Dec 2022. ### Risk Assessment Matrix — Conjunctural shocks and scenario highlights - Footnote explaining RAM probabilities: “The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent).” - Key conjunctural risks, relative likelihood, possible impact, and policy responses: - Intensifying spillovers from Russia’s war in Ukraine. - Relative Likelihood: High - Possible Impact: Medium - Notes: Further sanctions and related uncertainties exacerbate trade and financial disruptions and commodity price volatility. - 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. - Commodity price shocks. - Relative Likelihood: High - Possible Impact: Medium - Possible Impact detail: Higher inflation may increase poverty and inequality. However, inflationary pressures are likely to be more muted compared to the regional peers, as Ecuador has a positive energy balance, is dollarized, and has lowered domestic hydrocarbon prices in June 2022. - 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. - Systemic social unrest. - Relative Likelihood: High - Possible Impact: High - Possible Impact detail: A rise in global food prices, slower global growth can translate into slower recovery in economic activity and employment, higher domestic prices and can in turn raise social discontent due to increased poverty and inequality. - Policy Response: Increase social assistance coverage to ensure that the 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 liberalizing 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 global slowdown or recession. - Relative Likelihood: Medium - Possible Impact: High - Possible Impact detail: Weaker-than-anticipated global growth could reduce trading partner demand, lower exports and deteriorate terms of trade, which would put a dent on growth and strain the external position. - Policy Response: Diversify the economy to reduce dependency on commodity exports. - Local Covid-19 outbreaks. - Relative Likelihood: Medium - Possible Impact: Medium - Possible Impact detail: A large share of population is fully vaccinated and boosted. However, uncontrolled local outbreaks from vaccine-resistant variants could lead to local disruptions and jeopardize the expected economic recovery. Lower external demand would widen BOP and fiscal financing gaps. - Policy Response: Re-instate containment measures if a severe wave of vaccine-resistant infections occurs. 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 and stagflation. - Relative Likelihood: Medium - Possible Impact: Medium - Possible Impact detail: Ecuador is a fully-dollarized economy with no independent monetary policy. The financial sector can absorb major shocks. As a commodity exporter, it is vulnerable to knock-on effects from lower commodity prices, which could pressure both BOP and fiscal. - Policy Response: Should risk premia increase, seek additional low-cost financing and reprofiling existing obligations; and seek re-entry to the international capital markets when the conditions return to favorable. Pursue fiscal consolidation to rebuild credibility with markets. Strengthen (financial) crisis preparedness and management. ### Risk Assessment Matrix — Selected structural risks and policy responses - Deepening geo-economic fragmentation and geopolitical tensions. - Relative Likelihood: High - Possible Impact: Medium - Possible Impact detail: In the case of Ecuador, geopolitical tensions that reduce oil prices further could have significant fiscal, growth, and BOP ramifications. The shock from migration from Venezuela could also intensify fiscal pressures and have a negative impact on 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. - 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. - Relative Likelihood: Medium - Possible Impact: High - Possible Impact detail: 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 VI — Country Capacity Development (CD) Strategy Note: context and priorities - Context and program background: - Extensive Fund CD has been central to EFF-supported program objectives: (i) stabilize the economy, (ii) restore fiscal and debt sustainability, while expanding coverage of social assistance programs; (iii) generate sustainable growth with high quality jobs; and (iv) implement structural reforms, including to strengthen the anticorruption and transparency frameworks. - Following the Rapid Financing Instrument disbursement in May 2020, the Executive Board approved on September 30, 2020, Ecuador’s request for a 27-month arrangement under the EFF of about $6.5 billion. - CD engagement areas and providers: - CD areas include GFS, debt management and recording, PFM, governance, stress testing for monetary and financial institutions, supervision of credit cooperatives, AML/CFT, macroeconomic modelling and forecasting, and social safety net strengthening. - CD coordination with other partners includes World Bank, UNDP, UNODC, IADB, US Treasury, and AFD. - CD effectiveness and traction — selected outcomes: - Debt Management and Statistics: - (i) publication of more transparent and timely debt statistics in line with the new requirements of the Debt Policy Limits (new fiscal rule introduced under the program). - (ii) publication of the Medium-Term Debt Management Strategy at end-February 2021. - MTFF: - The authorities operationalized a strengthened PFM framework in 2020; and, at end-May 2022, published a Medium-Term Fiscal Framework (MTFF) with a top-down approach, fiscal rules, expenditure ceilings, and a fiscal risk assessment. - Tax Revenue and Administration: - Following Fund TA recommendations, a Large Taxpayers’ Unit (LTU) was created. Legal incentives and mediation processes for taxpayers with tax debts were developed and incorporated in the tax reform legislature enacted in November 2021. - Fiscal Statistics: - Significant improvements in timeliness, reliability, and consistency of fiscal statistics at different levels of the public sector; more accurate recording of central government fiscal data for the years 2013-2021; better recognition of central government’s contingent liabilities with other entities of the Non-Financial Public Sector. Revised data published on the BCE and the MEF websites. - Governance and Transparency: - Anti-corruption framework (COIP) amended in December 2020 to criminalize corruption in line with international standards. In September 2020, regulations were adopted to request ultimate beneficial ownership information in public contracts. All public procurement contracts are published with beneficial ownership information when available on SERCOP website. Improved asset declaration publication for high-level officials. Audits of COVID-related expenditures published on the Comptroller General's Office’s website. - CD priorities going forward: - Strengthening Public Finance Management: - Fully implement the COPLAFIP reform. FAD’s long-term expert (LTX) to continue support on financial planning and domestic arrears clearance strategy. - MCM provided follow-up TA on the Medium-Term Debt Management Strategy (MTDS) framework in September 2022. - The authorities have requested a Public Investment Management Assessment (PIMA) for early 2023, including the climate component (C-PIMA), and a Fiscal Transparency Evaluation (FTE) for mid-2023. - Implementation of the Tax Administration Diagnostic Assessment Tool (TADAT) by FAD will further strengthen tax administration following a TA request from the Internal Revenue Service (SRI). *Source: IMF staff compilation from the provided content unit.* ### 7. More CD is needed in to support the development of the anti-corruption legal ### 7. More CD is needed in to support the development of the anti-corruption legal framework in line with international standards ### Anti-corruption legal framework and capacity development (CD) needs - Need for CD to develop the anti-corruption legal framework in line with international standards, including: - Requirement for an asset declaration that takes into account all types of income and additional interests of high-level public officials and/or politically exposed persons (PEPs). - Potential CD needs to support the newly created National System of Control (SNC), which acts as a coordination mechanism for all institutions acting on procurement and anti-corruption: - SNC requires IT and CD support to ensure interoperability of the databases and a risk-based framework. - Authorities indicated potential need for further LEG CD support to address recommendations from the upcoming GAFILAT Mutual Evaluation Report, expected to be issued in December 2022. ### Supporting monetary and financial stability - Financial Sector Assessment Program (FSAP): - FSAP is ready to begin in coordination with the World Bank; scoping mission took place in August 2022. - This will be the first comprehensive evaluation of the Ecuadorian financial system in almost 20 years. - FSAP will assess credit and liquidity risk management, systemic risk, capital market development, payment systems, stress testing, financial sector supervision, regulatory arbitrage, and effectiveness of the financial safety net. - Implementing FSAP recommendations will require extensive CD to align supervision and regulation with international standards and best practices. - Capacity building for newly created Monetary and Financial Boards: - Building capacity will help ensure a smooth post-COVID transition and strengthen supervisory and regulatory capacities. - Authorities identified potential priorities for future TA: digital payments (regulatory framework), stress testing, growth-at-risk, and regulation of the stock exchange and insurance sectors. ### Improving quality and consistency of government finance statistics (GFS) - Since 2018 Ecuador has received extensive Fund support on GFS, intensified after the misreporting case in April 2020. - STA regular CD has enabled continued improvement in compilation of fiscal data in line with the GFS Manual 2014. - Institutional and technical weaknesses remain, evidenced by the recent misreporting case. - Authorities, in consultation with Fund staff, developed a comprehensive corrective action plan to address weaknesses. - Recent STA CD helped correct above- and below-the-line fiscal data and corresponding debt statistics back to 2013 (corrections back to 2017 have already been done in May). - Upcoming STA LTX will support the Chief Statistician and the statistics office (once restructured by the MEF this fall) to: - Adopt best practices for data collection, verification, and coordination with other subsectors on the NFPS to ensure timely and accurate data provision. - Design and implement a new training curriculum for new and existing MEF staff to build and retain capacity over time. ### Improving quality of macroeconomic statistics and forecasting - Continued CD on measurement of macroeconomic aggregates is essential for the central bank (BCE), legally responsible for compilation of macroeconomic statistics. - Strong cooperation and data sharing among institutions, including between MEF and BCE, is crucial for reliable and consistent statistics. - Further STA CD needed, particularly in external sectors and national accounts statistics: - BCE needs to improve quality and coverage of non-financial public and private sector information for external sector statistics. - A formal agreement with MEF should be established for information exchange. - Further TA on national accounts is essential to more accurately capture economic activity in GDP numbers and better reflect recent evolution of prices. - TA in Financial Programming and Policies (FPP) will help MEF and BCE staff better understand and model interrelationships between sectors and execute internally consistent policies. - Planned development of a semi-structural model to enhance fiscal projections with ICD’s support in response to a TA request from the authorities. ### Challenges and mitigating factors - Authorities are committed to the Fund-supported program and underlying CD and TA activities. - Incorporating TA advice and CD lessons into program conditionality has helped strengthen traction; adoption of TA recommendations has led to significant progress in reliability, transparency, and consistency of information. - Capacity building is long-term; recent changes in authorities and high turnover of technical staff necessitate follow-up and repeat CD activities. - To improve traction, TA recommendations should be: - Broken into smaller, more digestible pieces; - Adapted to local constraints; - Implemented gradually but steadily, with sufficient planning and resource allocation to ensure absorption capacity and long-lasting effects. - The planned CD agenda for the remainder of FY23 (Table 1) has been discussed and agreed with authorities, taking into account their priorities and absorptive capacity as well as IMF staff’s views on Ecuador’s pressing needs for capacity building. ### Key statistics and program highlights from the Letter of Intent and Memorandum - Vaccination and COVID-19 measures: - 84 percent of the eligible population fully vaccinated and 53 percent boosted. - Economic activity: - Expected 2.7 percent expansion in real economic activity this year. - Fiscal and debt outcomes: - Expecting the first fiscal surplus of NFPS in 2022 after thirteen consecutive years of fiscal deficits. - Public debt expected to reach the 57 percent debt target of 2025 in 2023, two years earlier than envisaged at the outset of the program. - Financial market conditions and program financing: - International bond yields reaching 20 percent. - Request for completion of the Sixth and Last Review with a disbursement of SDR 497 million (about US$700 million). - Program status and commitments: - Met all quantitative performance criteria (QPC) and all indicative targets (IT) for end-August, except for the IT on regional coverage of the social protection program in all but three provinces. - Two prior actions for final review (corrective actions to address recent misreporting): - Complete audits of 2020 and 2021 healthcare expenditures. - Prepare a time-bound action plan to undertake legal reform and administrative actions to strengthen the legal framework for State obligations on healthcare expenditures. *Source: 1ecuea2022002 - 7. More CD is needed in to support the development of the anti-corruption legal framework in line with international standards (IMF).* ### 3. We have acted timely and prudently to minimize the health and economic fallout of the ### 1ecuea2022002 - 3. We have acted timely and prudently to minimize the health and economic fallout of the ### Pandemic response and health system measures - Expanded healthcare capacity and provided access to COVID-19 vaccines for all Ecuadorians. - Vaccination coverage (as of end-October 2022): - 84 percent of the population over 3 years old received two doses of vaccines. - 53 percent of the population over 12 years old received booster doses. - Well-executed vaccination campaign enabled sustained reopening despite multiple waves. - Public health outcome: less than 10 new cases of COVID-19 per million inhabitants (date context: after the vaccination campaign). - Central Bank measures: clearing balance sheet of legacy assets from the 1999 banking crisis and strengthening auditing capacities to support financial stability and credit flow. ### Social protection: coverage expansion and targeted programs - IMF financing used to meet urgent spending needs: - $5.8 billion disbursed under the current program. - $643 million provided under the RFI in May 2020. - Social registry and program coverage: - June 2020: less than 550,000 families (38 percent) in the bottom three income deciles received social protection. - From July 2020 to end-August 2022: incorporated 634,129 families from the bottom three income deciles. - By end-December 2022: will have incorporated more than 647,000 new families, surpassing the program target of 625,600 new families. - Result: 82 percent of the families in the bottom three income deciles—almost 1.2 million families—receive social assistance support. - Geographic inclusion targets and outcomes: - End-August 2022 achievement: target number of families corresponding to 65 percent coverage met in all but three provinces; shortfall ~2,300 families (less than 0.2 percent of total beneficiaries). - End-August recalibration for the lowest income decile: incorporated 79 percent of families in the lowest income decile, surpassing the end-August target of 57.5 percent and ahead of the end-December target of 65 percent. - New program: “Mil Días” (One Thousand Days) - Conditional transfer supporting mothers from pregnancy to early childhood. - Average transfer: $60 per month. - Current reach: 28,352 mothers, i.e., 68 percent of qualified beneficiaries. - Target: reach 75 percent of qualified beneficiaries by end-2022. ### Fiscal consolidation, debt profile, and buffers - Public debt and financing developments: - Successful reprofiling of US$3.2 billion in bilateral debt to China in September 2022. - Result: lowered debt service by an average of 0.3 percent of GDP per year over 2022-24. - Expected end-2022 outcomes: public debt to reach 58 percent of GDP; NFPS fiscal surplus of 1 percent of GDP (first surplus since 2008). - At program approval in 2020: public debt and deficit were projected to peak at 69 and 9 percent of GDP, respectively. - Fiscal performance and buffers (2022 year-to-date): - Nonoil revenues of the PGE increased 15 percent by September compared to the same period in 2021. - Tax revenues increased 14 percent (reflecting initial yields from the tax reform, temporary taxes on net wealth, improved tax collection). - Accumulation of NFPS deposits in the Central Bank through September: over $2 billion (compared to $1 billion over the same period in 2021). - Quantitative fiscal target performance (this review): - August QPC on the PGE and CFDD met by a margin of $1.8 billion. - August ITs on the overall balance of the NFPS met by a margin of $1.4 billion. - August IT on the non-oil primary balance including subsidies (NOPBS) met with a margin of $733 million. - Subsidy bill this year: nearly $4 billion. ### Revenue mobilization and tax reform - Tax reform outcomes and expected yields: - Enactment of the tax bill in November 2021 expected to yield 0.7 percent of GDP in permanent revenues by 2023. - Temporary revenues from the tax bill: 0.8 and 0.4 percent of GDP in 2022 and 2023, respectively. - Measures: Large Taxpayer Unit; enabling declaration of assets held abroad; pursuing information exchange (agreement established with the United States; pursuing agreement with the Global Forum (CAAM)). - Medium-term consolidation targets and path: - Aim to achieve medium-term consolidation in the NOPBS of 4.3 ppt of GDP over 2020-25 (0.2 ppts lower than earlier reviews). - 2023 target: NOPBS improvement of 1.4 ppts of GDP. - 2023 fiscal accommodation includes additional wage-bill spending of $410 million for police hiring, teachers’ wage increases, hiring medical personnel in rural areas, and gradual headcount reduction elsewhere. - 2023 revenue and expenditure assumptions: - Revenue-side: tax policy reform expected to bring 0.6 percent of GDP in savings; improved tax administration to save 0.1 percent of GDP; rollback of temporary taxes to reduce this by 0.3 percent of GDP. - Non-oil consolidation in 2023 primarily expenditure-based (1 ppts of GDP). - All consolidation on non-oil expenditure side in 2023 will come from the central government (0.4 ppts of GDP), despite overall NFPS non-oil expenditure increasing by 0.1 percent of GDP. ### Expenditure strategy and specific reform measures - Medium-term expenditure reduction objective: - Reduce nonoil primary expenditures (including subsidies) by 3.6 ppts of GDP over 2023-25. - Expected savings from procurement and prioritization: - Procurement and spending prioritization: 0.2 ppt of GDP savings in goods and services and 0.2 ppt of GDP in other spending over the next 3 years. - Anticipated decline in oil prices expected to yield 1.7 ppt of GDP in savings (despite recent fuel policy decisions). - Allow expansion of capital expenditure (0.1 ppt of GDP over 2023-25) while maintaining expanded social assistance. - Public sector wage bill strategy: - Target fiscal consolidation of 0.6 ppt of GDP over 2023-25 at the NFPS level (corresponding to 1.8 ppt of GDP over 2020-25). - Strategy features: nominally increasing wage bill but decline as percent of nominal GDP via partial replacement of retirees, less reliance on occasional contractors, and wage growth below nominal GDP growth. - Protects frontline workers (education, health, defense, police) and accommodates mandated teacher salary increases and rural health staffing. - Implementation steps: presidential decrees adopted in June to control public expenditures; Ministry of Labor to issue secondary norms before year-end to operationalize the wage bill strategy. - Procurement reforms and institutional measures: - Decree 155: Comptroller General conducts market studies before procurement. - Presidential decree (Reglamento General de Compras Públicas) mandated public framework agreements, dynamic procurement methods, and publication of ultimate beneficiary ownership in contracts. - SERCOP issuing Resolutions (Secondary Norms) to operationalize bylaws; task to be completed within 180 days from issuance. - Interoperability work: SERCOP interoperable with SRI, IESS and Superintendency of Companies; other interoperability legal and technological issues expected to be solved during 2023. - National Control Subsystem (SNC) established to enable risk-based monitoring and information sharing among control entities. - Estimated savings from SERCOP guidelines and the SNC: cumulative 1.5 percent of GDP over the next four years. - Capital expenditure and infrastructure: - Prioritize capital projects; open oil sector to private investment; promote PPPs and concessions with attention to contingent liabilities. - Ecuadorian Development Bank to channel multilateral and bilateral resources for local government infrastructure. - Public Investment Management Assessment (PIMA) scheduled for early 2023 (including C-PIMA for low-carbon, climate-resilient infrastructure). ### Fuel subsidy policy and related fiscal impact - History and fiscal effects: - Fuel subsidy reform beginning July 2020 saved almost $500 million before being suspended in October 2021 after a one-time price adjustment. - June 2022 response: lowered diesel and gasoline pump prices by $0.15. - Current high cost of subsidies this year: estimated at $3.9 billion, 3 percent of GDP (attributed to surge in oil prices and increased oil derivative margins). - Policy intent: - Acknowledge high fiscal cost and distributional inefficiency of universal fuel subsidies. - Administration priority: advance fuel subsidy reform and analyze targeting mechanisms for industrial and transport sectors to redirect savings to priority investment in health, education, social assistance, and growth-enhancing infrastructure. - Complementary measures: - Lowered import tariffs on energy efficient vehicles and importation of higher quality gasoline to support cleaner energy use. ### Financial sector resilience and oversight - Undertaking a Financial Sector Assessment Program (FSAP)—the first in almost two decades—to create a roadmap for financial sector reforms to ensure resilience, health, and financial inclusion. - Strengthened oversight measures for SOEs: first financial audits in years to address fiscal risks stemming from SOEs. ### Program outlook and continued Fund engagement - Program completion and post-program commitments: - EFF-supported program ending in December; government commits to continue fiscal consolidation, buffer rebuilding, strengthening public finance management, and structural reforms to improve competitiveness and raise potential growth. - Memorandum purpose: - Stocks major achievements under the program to-date, details progress toward program objectives since last review, and outlines policy plans for the remainder of the program and beyond. *Source: 1ecuea2022002* ### 24. The fiscal strategy described above for 2023 and the medium term will be anchored in 2023 ### 24. The fiscal strategy described above for 2023 and the medium term will be anchored in 2023 ### Fiscal strategy, MTFF, and budgeting - The 2023 and medium-term fiscal strategy will be anchored in 2023 budget targets, expenditure ceilings, and the MTFF. - The National Fiscal Coordination Council (NFCC) voted on these targets in May 2022 to ensure consistency across the public sector (¶22). - The MTFF, and the targets and ceilings as approved by the NFCC, were published in June 2022. - In November 2022, compliance of the 2022 projected outturns with the NFCC targets will be assessed. - The October 2022 MTFF was submitted to the National Assembly together with the 2023 budget to guide the budget process with a top-down approach (¶24). ### Near-term financing actions and market access - Recent financing decisions in 2022: - Convert the $400 million bond guarantee from the IDB to budget support of the same amount for 2022. - Increase domestic debt issuance to replace some lost external financing. - Reprofiled about $3.2 billion of debt to Chinese banks, lowering debt service over 2022-2024 by about $400 million per year on average. - Settled the Perenco dispute with a prospective payment of US$375 million plus interest minus the taxes owed to the SRI until the end of 2023. - Market conditions and plans: - Spreads and yields have increased rapidly and remain elevated; bond yields reached 20 percent. - Decision to postpone issuing a Eurobond in the current year and pursue a gradual return to the international capital markets once conditions normalize. ### Contingency policies and oil price sensitivity - A fiscal risk monitoring section was included in the medium-term fiscal program published in September 2022. - Key fiscal risk drivers identified: deterioration of the global oil price outlook, shortfalls in financing, and materialization of contingent liabilities. - Oil price impacts (as estimated in the MTFF): - Each $1 increase in international prices adds $67 million in net revenue at the NFPS level. - Each $1 increase yields just short of $47 million for the central government. - A $10 dollar/barrel decline in oil prices would widen the annual fiscal deficit by 0.7-0.8 percent GDP, after accounting for reductions in fuel subsidies and import bills for fuel derivatives. - Two-pronged strategy to cushion risks: - Near-term: use a significant part of oil windfall to build buffers and reduce arrears; prepare backup fiscal measures to be implemented should there be a sharp decline in global oil prices or shortfalls in financing, including accelerating expenditure-side reforms while using conservative revenue forecasts. - Medium-term: consider inter-generational equity and public finance implications when allocating oil windfalls to counter procyclicality; start analytics for creation of an oil stabilization fund as per COPLAFIP reform; ongoing SOE reforms and asset quality reviews of public banks, and upcoming audits of oil companies and IESS financial statements to estimate and contain contingent liabilities. - To address uncertainty around health audit results affecting PGE overall balance targets: - Program conservative estimates of obligations in the 2023 budget and MTFF. - Implement action plan/strategy to strengthen the legal framework for state healthcare obligations to IESS (¶33); require medical audits on a quarterly basis presented to MEF; Subsecretaria de Relaciones Fiscales to validate audits to pay IESS within a certain timeframe. - Procure the auditor for 2022 obligations later in the year and start 2022 audits in June 2023. ### Strengthening fiscal institutions, fiscal rules, and coordination - COPLAFIP amendments adopted in 2020 require timely collection, accurate compilation and publication of fiscal data, with adequate subsector coverage. - Implementation with IMF support across four areas: - Fiscal Risk: - Fiscal risk monitoring section included in the September 2022 medium-term fiscal program. - Policy for prevention, mitigation, and management of fiscal risks with NFPS coverage enclosed to the 2023 budget. - Advances in establishing a fiscal risk unit within MEF, with IDB support (¶38). - Final steps to approve new MEF structure taken in October 2022; implementation in early 2023. - Medium-Term Fiscal Framework (MTFF): - MTFF presented with budget documents since October 2021 and April 2022. - October 2022 MTFF submitted with the 2023 budget to guide the budget process and strengthen fiscal balances (¶24). - Fiscal Rules: - Regulations on expenditure ceilings issued to support implementation of the expenditure growth fiscal rule (¶x). - Expenditure ceiling methodology published in 2021 budget instructions. - Expenditure ceilings per entity approved in May 2022. - Fiscal Coordination: - National Fiscal Coordination Committee (NFCC) established in December 2021 to monitor National Development Plan and budget execution, vote on sectoral fiscal targets, and assess public spending quality. - NFCC approved fiscal targets and expenditure ceilings in May 2022. ### Fiscal transparency, debt strategy, and procurement transparency - Fiscal Transparency Evaluation (FTE) planned for May 2023 with IMF technical assistance to improve fiscal reporting, forecasting, budgeting, fiscal risk analysis and resource revenue management. - Medium-Term Debt Strategy to be updated and published by end-2022 with MCM TA to enhance debt transparency and predictability. - Procurement transparency: - SERCOP made all procurement contracts awarded since September 2020 publicly available in November 2021, including legal ownership and, when available, UBO information. - SERCOP backfilled missing UBO information for companies awarded the 100 largest procurement contracts between October 2020 and December 2021 and published results by end-June 2022 (structural benchmark implemented with delay in October). - SRI audits on tax expenditures of companies awarded the largest 100 public procurement contracts over 2020-21 were conducted (end-October structural benchmark, met). VAT, corporate income tax, personal income tax, and ISD were included. - Of audited companies, 32 percent were identified as having some deficiencies in compliance with tax incentives rules. - Potential recoverable amount from the conducted audits: $592,216; SRI plans to use lessons learned in tax administration operations. ### Fiscal statistics, IESS audits, and improving data quality - Revisions and inclusions in fiscal statistics: - Revised historical balances of the Social Security Fund (IESS) and corrected transfers from the central government to IESS for accrued pension liabilities back to 2013 (end-September structural benchmark, met). - Incorporated additional healthcare transfer obligations to IESS for 2013-16 based on completed audits and conservatively estimated transfers for 2017-21 pending health audits. - Included accrued pension transfer obligations and health transfer allocations to IESS in central government 2023 budget and MTFF per pre-specified criteria agreed in last review; will continue recording these conservative estimates until healthcare audits are completed. - Institutional capacity building: - Established a dedicated statistics unit at MEF and appointed a new chief statistician with expertise in government finance statistics. - With STA support, updated GFS training curriculum and produced a training schedule. - STA long-term expert (LTX) to work with the statistics unit starting mid-November to improve capacity in compiling, verifying, and reconciling government finance and debt statistics. - Health audit actions and timeline: - May agreement (convenio) with IESS for IESS to procure medical audits of healthcare expenditures for 2017-21; results of 2020 and 2021 healthcare audits to be completed and shared with Fund staff (end-October structural benchmark, prior action). - Time-bound plan/strategy to undertake legal reforms and administrative actions to strengthen legal framework for state healthcare obligations to IESS starting in 2023 (prior action, ¶27). - Plan third-party independent audits of IESS’ 2019-2021 financial statements by end-March, with IFI support; procurement process for audits to begin in November 2022. - Recognize need for reform of social security system; a diagnostic was undertaken with World Bank. ### Arrears, cash management, and monitoring - Commitment to clear domestic arrears and improve cash management to avoid new arrears. - Implementing a new monitoring system with IMF long-term expert assistance to evaluate existing stock of central government and selected NFPS entities’ payment arrears. - January 2022: published methodology to estimate stock of arrears and reporting templates for public sector entities. - Estimated stock of potential claims on PGE (including IESS, GADs, private sector) by nature of expenditure, year, and beneficiaries was completed (end-June 2022 structural benchmark, implemented with delay in August). - Started publishing monthly arrears data in public debt bulletins per COPLAFIP; will work to include estimates of past arrears with GADs and social security institutions not yet recognized as arrears or debt. - MEF will design a policy to gather monthly information on arrears from other NFPS entities and outline detailed policies to prioritize payments and systematize them. - Strategy to settle past potential PGE obligations once confirmed, including a detailed calendar for recording and clearance. ### SOEs, audits, and contingent liabilities - Rationalizing SOEs and monitoring fiscal risks: - Government absorbed about $490 million in SOE losses during 2018–2020 in addition to more than $600 million in transfers. - Seven SOEs are in the process of liquidation. - One-off measures to be complemented by a structural cost-optimization strategy, comprehensive efficiency assessment of the state, and enhanced PPP-led investment. - Petroecuador (PEC) and Petroamazonas (PAM) audits: - Commitment to have financial statements of PEC and PAM audited as soon as possible; audits initiation delayed by leadership changes and tendering issues. - In June 2022 agreed on TOR and timeline for audits of 2019 and 2020 PEC and PAM financial statements and the 2021 financial statement of the merged entity PEC. - Tender process financed by IDB for an independent top-tier audit firm ended without bids; working with IDB to identify way forward. - Will share audit results with IMF staff when available and incorporate findings into statistics and fiscal plans. - Continued engagement with IMF beyond current arrangement through the Post-Financing Arrangement, and collaboration to address audit findings. *Source: 1ecuea2022002 - 24. The fiscal strategy described above for 2023 and the medium term will be anchored in 2023* ### 38. Consistent with our quest for private sector-led growth, the PPP Committee is developing ### 1ecuea2022002 - 38. Consistent with our quest for private sector-led growth, the PPP Committee is developing ### Public-Private Partnerships (PPPs) and fiscal risk management - PPP Committee developing guidelines—with IDB and US Treasury support—to operationalize the executive decree institutionalizing the approval and bidding process for PPPs adopted in November 2020. - A fiscal risk unit is being set up within the ongoing reorganization of MEF and should be operational by early 2023 (¶28). - The unit will evaluate PPP project viability, including quantification of risks to the public sector’s balance sheet, and propose mitigation measures. - These risks will be clearly presented in fiscal risk statements, such as the one annexed to the 2023 budget. ### Debt transparency and reporting - MEF implemented actions to improve debt transparency: - Adopted a new debt methodological definition with World Bank and Fund technical assistance. - Developed and released a new Debt Bulletin on a monthly basis on the official website of the Ministry of Economy and Finance. - Bulletin includes detailed information on previously not included past obligations related to internal debt, arrears, accounts payable and previous unregistered budgetary obligations. - Public external and internal debt profile and amortization profile by source and operation are published. - The detailed database supporting the bulletin is accessible on the Ministry website. - Obtained improved transparency terms in newly-renegotiated debt contracts with the China Development Bank (CDB and Eximbank); these contracts were published on the Ministry website by end-November. ### Strengthening the institutional framework of the Central Bank (BCE) - COMYF revised to: - Eliminate the possibility of monetary financing of the government. - Restore full reserve coverage of private and public financial institutions’ deposits at the BCE. - Give more autonomy and independence to the central bank. - Strengthen the central bank balance sheet by removing all legacy assets from the 1999 banking crisis. - Improve transparency by establishing an audit committee, appointing external auditors, and publishing audited central bank financial statements on the BCE website. - Additional measures to strengthen BCE institutional framework: - Implemented a capacity development program for auditors. - Required certification of the audit departments and individual auditors by the Institute of Internal Auditors. - Implemented recommendations from a peer-review assessment for the audit department. - Liquidity access enhancements: - Federal Reserve Bank of New York granted BCE access to a FIMA Repo Facility of USD 1 billion for exclusive central banking operations. - BCE renewed its swap facility with the Bank for International Settlements for up to USD 840 million as a precautionary measure in case of USD liquidity shortages. - Research and policy support: - BCE published a macroeconomic report as envisaged by COMYF; preparing a financial stability report and presenting an annual technical assessment on the fiscal budget to the National Assembly. - Receiving technical assistance from the US Treasury Department and advice from Bank of Spain on financial stability and macroprudential policies. - Digital payments: - Strategic goal to promote electronic payments and diminish cash demand. - Working on new regulations and receiving technical assistance from the IDB to ensure interoperability of digital payments nationwide. ### Financial system resilience and supervision - System health and recent dynamics: - Financial system described as healthy, adequately capitalized, and liquid. - Deposits growing about 10 percent yoy in September 2022. - Credit growing about 16 percent during the same period. - FSAP engagement: - Requested Financial Sector Assessment Program (FSAP) team to assess credit growth development and appropriate macroprudential tools. - Ecuador’s FSAP scheduled for December of this year to assess credit and liquidity vulnerabilities, oversight, macroprudential policies, safety nets, payment systems oversight, preconditions for capital markets development and access to finance. - Plan to implement FSAP recommendations to meet international standards and best practices. - Regulatory adjustments and transitions: - Extended pandemic-related crisis measures to allow a longer period for classifying loans as non-performing and lower provisioning requirements until end-2022 for banks and cooperatives. - New regulatory framework (Resolution JPRF-F-2022-030 of June 29, 2022) approved by the Financial Board: - Classification of NPLs and provisioning will be the same for banks and cooperatives starting in January 2023. - Supervisory institutions (Superintendency of Banks and SEPS) working with financial institutions to ensure smooth transition. - SEPS reforms for cooperatives: - Introduced minimum capital requirement: minimum capital for cooperatives of $200,000 established in January 2021. - Updated statutes to include requirements on minimum capital, money laundering regulations, and provisions. - Compliance: about 90 percent of entities are in compliance with the minimum capital requirement (99.9 percent of the sector in terms of assets). - Statute updates: 306 entities have updated their statutes (97 percent of the sector in terms of assets). - Plan completion expected by mid-2023. - Liquidity framework revisions: - Pandemic measure: reduced contributions to the Liquidity Fund from 8 to 5 percent of deposits. - In January of this year, the Monetary Board revised liquidity requirement regulations to reduce regulatory arbitrage and complexity. - Plan to evaluate liquidity framework with FSAP and set roadmap for further reforms. - Public banks consolidation and asset quality: - Presidential decree to merge CFN and BanEcuador into Banco de Fomento Económico (BFE) to grant low-cost, long-term credit to agricultural and productive sectors. - Commit to clean and well-capitalized balance sheets before merger; ensure full operational coordination and IT interconnection. - Completion may take longer than anticipated, possibly beyond 2023. - Measures planned: improve credit committees, strengthen controls to ensure timely credit payments before merger to avoid repeating past NPL accumulation. - Asset quality reviews (AQRs) of public banks finalized in August 2022 (end-June 2022 structural benchmark, implemented with delay) showed only one institution still needs to increase provisioning (half will be done this year and completion in the next two years). ### Strengthening competitiveness, governance, and anti-corruption - Policy goals: - Restore international competitiveness and raise living standards. - Create level playing field for businesses, improve economic governance, fight corruption, and make Ecuador a preferred destination for businesses. - Supported by international trade agreements and gradual reduction in the ISD. - Decree 151 to facilitate investment in the mining sector (production and exports increasing at a high rate). - Transparency and conflict-of-interest measures: - Adopted regulation in November 2020 to enhance online publication of asset declarations by high-level officials and PEPs. - Ensured the General Comptroller can publish additional online information, including itemized assets and liabilities. - Draft Organic Law for the Prevention of Conflict of Interests in the Public Administration prepared by the General Comptroller and Anti-Corruption Secretariat; submitted to the National Assembly and awaiting enactment (end-August 2022 structural benchmark, not met). - Draft expands asset declaration content to include incomes (types, sources, and values), interests (positions held outside office, participation in entities, professional experience, past employment), and beneficial ownership by close family members, domestically and abroad. - Emphasizes public online access to declarations. - Draft has been well received by key stakeholders for technical discussions supporting enactment. - Presidential decree Number 4 of May 24, 2021 establishes norms for integrity and ethical behavior of high-level public officials in the Executive. - Commitment to strengthen implementation so interest declarations are submitted and published to prevent conflicts of interest by the end of the calendar year and proactively share information with the public. - AML/CFT and international standards: - Plan to upgrade AML/CFT framework in light of GAFILAT’s on-site visit in April 2022; recommendations expected in early 2023. - With Fund technical support, developed draft AML/CFT legislation to align with FATF international standards and submitted it to the National Assembly in October (end-October 2022 structural benchmark, not met). - Conducting communications campaign to increase chances of legislation enactment. ### Climate, environmental policy, and diversification - Commitments and actions: - Pursue equitable and environmentally-friendly policies to 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 as part of Paris Agreement commitments. - Promote hydropower for electricity generation and reduce CO2 emissions; promote transition to electric vehicles and installation of electric recharging stations. - Established institutional committee on climate finance within MEF, with support of the IDB. - Expanded several protected areas, including the Galapagos marine reserve, and working with international partners to generate long term financing for its protection. - Support Fund’s Resilience and Sustainability Trust (RST); RST is of interest for future engagement. ### Domestic capital markets and financing diversification - Objectives and actions: - Develop domestic capital markets to deepen finance 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 held by market participants (including BIESS) with standardized, longer-term ones. - Develop a domestic yield curve and lengthen maturities of government short-term instruments. - Domestic bonds with standardized financial conditions have been placed to private and public investors. ### Capacity development and statistics - Technical assistance and planned assessments: - Engaging in capacity building and technical assistance programs with international organizations, including the Fund. - Receiving support on cash management with assignment of a long-term expert. - Received technical assistance on fiscal risks, fiscal rules, MTFF, fiscal coordination, and training on formulating medium-term debt management strategy. - Requested IMF support to undertake a Public Investment Management Assessment (PIMA), including the climate component (C-PIMA) in early 2023 and a Fiscal Transparency Evaluation (FTE) in mid-2023. - Requested IMF to implement the Tax Administration Diagnostic Assessment Tool (TADAT). - Government finance statistics (GFS): - Vice Ministry of Finance committed to improving GFS quality. - Benefitted from TA missions from IMF Statistics Department (STA), including a short-term expert. - Restructured statistics office, headed by a Chief Statistician. - Working with a recently appointed long-term STA expert to build capacity in GFS recording and reconciliation. - Emphasis on sufficient staffing and training of GFS compilers to address technical and institutional weaknesses that led to past misreporting of a performance criterion. - Financial Programming and Policies (FPP) and modeling: - Committed to continue working with the Fund on a customized FPP for Ecuador. - MEF and BCE technical staff received virtual training on FPP; core capacity building expected to deliver results by the first half of 2023. - Plan to develop a semi-structural model to enhance fiscal projections, building on the FPP framework; scoping mission for this project should take place by the end of the year. - Balance of payments and national accounts: - Continue improving balance of payments statistics and national accounts with STA TA missions. - Work to improve quality and coverage of information on the private sector for external sector statistics, drawing on micro data where relevant. - Continue efforts to ensure transition to BPM6 is fully implemented, including strengthening compilation and dissemination and improving the International Investment Position coverage and quality in accordance with IMF recommendations. - Enhance cooperation and data sharing among institutions, including between MEF and the BCE, to ensure data consistency. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ecuea2022002.pdf* ### 60. To help strengthen supervisory capacity, various Superintendencies, e.g., of banks and of ### 1ecuea2022002 - 60. To help strengthen supervisory capacity, various Superintendencies, e.g., of banks and of ### Strengthening supervisory capacity, AML/CFT, and anti‑corruption frameworks - Various Superintendencies, e.g., of banks and of cooperatives and mutuals, are receiving technical assistance support on stress tests. - The Financial and Economic Analysis Unit (UAFE) and the Superintendency of Banks have received capacity development (CD) to strengthen the AML/CFT framework. - Further technical assistance with the Office of the Comptroller General has helped strengthen the anti-corruption asset declarations framework. ### Quantitative performance criteria and indicative targets (end‑Aug. 2022) — key figures from Table 1 (US$, unless otherwise indicated) - Quantitative performance criteria - 1. Overall balance of the budgetary central government and CFDD (floor) 1/-1,600-1,455338 — Met - 2. Accumulation of NFPS deposits at the central bank (floor) 1/1,2001,2642,270 — Met - 3. Non-accumulation of external payments arrears (continuous PC)000 — Met - 4. (No new) Net credit to government from the central bank (continuous PC)000 — Met - Indicative targets - 5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) 1/-4,350-4,495-3,762 — Met - 6. Overall balance of the NFPS (floor) 1/4105551,966 — Met - 7. Change in the stock of NIR - program definition (floor) 1/6757902,031 — Met - 8. Number of families in the first income decile nationwide covered by cash transfer programs (floor)280,716385,782 — Met - 9. Number of families in the lowest three income deciles by province covered by cash transfer programs (floor)947,7131,181,777 — Not Met 4/ - Provincial outcomes (selected examples; status indicated per province as shown) - AZUAY 39,97444,859 — Met - BOLIVAR 24,25029,851 — Met - GALAPAGOS 14563 — Not Met - ORELLANA 16,27515,809 — Not Met - ZAMORA CHINCHIPE 10,2378,426 — Not Met - Note on target shortfall: Target met on aggregate but missed by a small margin in three provinces (Galapagos, Orellana, and Zamora Chinchipe) for a total of 2,359 families. - Sources: Ministry of Economy and Finance and IMF staff estimates. - Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU). - 1/ Cumulative change from January 1, 2022. - 2/ Staff report for the EFF Fourth and Fifth Reviews. - 3/ Adjusted for oil prices and disbursements from multilateral institutions. - 4/ Target met on aggregate but missed by a small margin in three provinces (Galapagos, Orellana, and Zamora Chinchipe) for a total of 2,359 families. - End-August 2022 ### Prior actions and structural benchmarks — selected reforms, objectives, due dates, and status (Table 2 highlights) - Fiscal transparency - Develop and share with Fund staff a time‑bound action plan/strategy to undertake legal reform and administrative actions aimed at strengthening the legal framework for the State obligations on the healthcare expenditure and related audits starting in 2023, such that obligations of PGE to IESS (if any) will be reported, recorded, and cleared in a timely and transparent way — Objective: Improve reliability of fiscal statistics, avoid accumulation of arrears — Status: (listed among Prior Actions) - Complete the 2020 and 2021 healthcare audits and share the results with Fund staff — Objective: Improve the quality and reliability of PGE fiscal data recording — Status: (listed among Prior Actions) - Fiscal framework - Adopt a regulation, in consultation with Fund staff, to implement the July 2020 amendments to COPLAFIP (multiple elements including public debt, MTFF, budget preparation and expenditure ceilings, fiscal strategy document, cash management, arrears) — Due Date: End-Nov. 2020 — Status: Implemented with delay - BCE (Central Bank) - JPRF to approve an internal audit charter aligned with international standards (mandate and independence, coverage of all BCE operations, risk-based approach, quality assessment program, reporting to independent oversight body) — Due Date: End-Nov. 2020 — Status: Met - Transparency and AML/CFT - Enhance online publication of asset declarations (searchable, timely access, itemized incomes/assets/liabilities) based on General Comptroller regulations — Due Date: End-Nov. 2020 — Status: Partially implemented; reformulated as a new SB for Aug. 2022 - Cash management - Deliver to IMF staff a PGE financial plan for 2021 approved by the Financial Committee — Due Date: Dec. 16, 2020 — Status: Met - Anti‑corruption legislation - Enact anticorruption legislation criminalizing acts of corruption in line with Articles 15 to 30 of the United Nations Convention Against Corruption — Due Date: End-Dec. 2020 — Status: Met - COMYF / Central Bank legal framework - Enact amendments to the Central Bank’s legal framework elaborated in consultation with Fund staff — Due Date: End-Jan. 2021 — Status: Not met. Implemented with delay in April - Debt management - Publish a Medium-Term Debt Management Strategy (MTDS) prepared with IMF TA — Due Date: End-Feb. 2021 — Status: Met - Multiple structural benchmarks and prior actions across fiscal statistics, transparency, procurement, financial sector audits, SOE audits, domestic arrears reporting, establishment of NFCC, AML/CFT legislation, social registry upgrades, and SOE audits — varied due dates in 2021–2022 with statuses including Met, Not met, Implemented with delay, Partially implemented, or Changed to MEFP commitment for 2023. (See table for detailed line items and dates.) ### Sixth review — completed prior action, MEF‑IESS agreement, and audit results (dates and figures) - Administrative agreement between MEF and IESS prepared to audit, verify, and settle healthcare obligations of the central government to IESS (prior action for Sixth and Final Review) — Agreement requires: - IESS to send MEF the approved and paid healthcare claims on a quarterly basis going forward. - MEF to make the necessary transfers to IESS within a maximum of 105 days. - The agreement establishes monthly transfers from MEF to IESS for the State’s pension obligations (beyond the scope of the prior action). - Completion and staff monitoring - The second and last prior action for the Sixth and Final Review has been completed (December 13, 2022). - Staff will monitor implementation in the context of the Post Financing Assessment and encourages close oversight to prevent capacity‑related issues. - Statement by the Staff Representative on Ecuador (December 14, 2022) — audit outcomes and implications: - The prior action on the healthcare audits of 2020 and 2021 has been met. The audits have been completed and their results shared with Fund staff. - Audit-identified central government healthcare obligations to the IESS: - $256 million for 2020. - $359 million for 2021. - These audit amounts are higher than the 50 percent estimate previously used by the authorities but remain within the range disclosed to the Executive Board at the time of the last review. - Revised misses of adjusted quantitative performance criteria (QPC) for prior dates (as compared to previously briefed estimates): - Previously briefed misses: up to $520 million and $196 million for end‑December 2020 and end‑April 2021, respectively. - Audit results indicate adjusted target misses of $452 million and $139 million, respectively. - End‑December 2021 target would be missed by $349 million. - End‑August 2022 target (assessed in the Sixth review) is still met by a margin of $1,720 million after assuming 73 percent rather than 50 percent of claims could be verified (in line with the audit results for 2021). - Projected implications for 2023: Healthcare obligations could be higher than assumed in the projected PGE OB for 2023 by some 0.1 percent of GDP. For fiscal outturns to remain within program goals, it will be important to closely monitor verified claims and activate compensatory measures if needed, as specified in the authorities’ Memorandum of Economic and Financial Policies (¶27). - Status of action plan prior action: The prior action on the action plan/strategy for strengthening the legal framework for State healthcare obligations and related audits is expected to be completed ahead of the December 14 Executive Board meeting; authorities are working on an inter‑institutional agreement between MEF and IESS to outline administrative audit, verification, and settlement actions. *Prepared by Western Hemisphere Department; December 13, 2022 and Statement by the Staff Representative on Ecuador, December 14, 2022.* ### 4. The President plans to veto the National Assembly’s decision to repeal the 2021 tax ### 4. The President plans to veto the National Assembly’s decision to repeal the 2021 tax reform ### Tax reform veto scenario and fiscal implications - On November 29, the National Assembly voted to repeal the tax bill enacted in November 2021. - The President has pledged to veto the repeal in December. - Two possible outcomes after the veto: - The repeal may be permanently rejected in early 2023. - The National Assembly could vote to overturn the veto only after a year has passed (i.e., in early 2024). - If the repeal is overturned after a year and becomes effective, tax collection starting in 2026 would decline by about 0.7 percent of GDP, requiring compensatory measures to keep fiscal policy on the authorities’ envisaged debt reduction path. - The enactment of the November 2021 tax bill was a structural benchmark under the EFF-supported program (combined Second and Third Reviews) and is described as an important measure underpinning the medium-term fiscal consolidation. - Constitutional note reported by authorities: only the President is entitled to submit bills that levy, amend, or eliminate taxes; even if overridden, the repeal would become effective only in 2025 due to the lengthy legal process. ### Diesel subsidy elimination for large shrimp producers - An Executive Decree issued on December 2 eliminated the diesel subsidy to large shrimp farms (more than 30 hectares). - Large farms accounted for about 80 percent of the diesel subsidy received by the shrimp industry. - The resulting annual average savings are expected to be about $160 million (about 0.1 percent of 2022 GDP). - Authorities characterize this as a step to reduce fuel subsidies and make them more targeted. ### Minimum wage increase and labor market implications - The monthly minimum wage was raised by $25 (about 6 percent) to $450. - A hike of the same amount was enacted last year. - Expected fiscal impact: - Minimal impact on the public sector wage bill, given that public sector salaries are above the minimum wage and there is no indexation. - Expected economic effects: - By adding to already high labor costs, the decision may compound labor market rigidities and weigh on Ecuador’s external competitiveness. - Note: The new minimum wage level is described as among the highest in the region. ### Program performance (statement by Executive Director and advisors) - Main achievements: - Ecuador restored macroeconomic stability, the economy recovered, and public finances improved significantly and are on a sustainable path. - Rigorous program implementation laid foundations for sustainable and inclusive economic growth. - Program implementation specifics: - Met with large margins the quantitative performance criteria and all but one indicative targets for the sixth EFF review. - Most structural benchmarks and corrective actions were met, albeit some with slight delays. - Public debt and reserves: - Public debt is on a declining path and is expected to reach the 57 percent of GDP target in 2023, as opposed to in 2025 as originally envisaged. - International reserves increased from US$2.5 billion at program approval to US$8.5 billion as of mid-October 2022, surpassing the US$5 billion expected for end-2022 when the EFF arrangement was approved. - Financing and market access: - Market access remains extremely difficult; revised financing strategy for 2023 does not rely on international capital markets. - Recent reprofiling of bilateral debt with China lowered debt service payments by an average of US$400 million per year over 2022-2024. - Conversion of a US$400 million bond guarantee from the IDB into a direct budget support disbursement of the same amount reduced near-term financing needs. - The 2023 budget remains fully financed, relying on multilateral and bilateral external funding, as well as domestic financing. ### Recent economic developments - Growth and inflation: - Economic downturn of 7.8 percent in 2020 (better than the 11 percent contraction projected at program approval). - Activity expanded by 4.2 percent in 2021. - Output growth forecast for the current year revised to 2.7 percent, 0.2 percent lower than expected in the fourth and fifth reviews. - Year-on-year inflation risen to 3.6 percent in November. - Fiscal consolidation outcomes: - Overall fiscal deficit of 7.1 percent of GDP in 2020 turned into a small surplus in 2022, the first surplus since 2008. - Non-oil primary deficit for the year expected to be 2.7 percent of GDP. - Fiscal dependency on oil revenues diminished; oil revenues increased without a corresponding increase in public expenditures. - Financial sector and reserves: - Reforms strengthened the autonomy of the central bank and eliminated monetary financing of the budget. - Full reserve coverage of private and public financial institutions’ deposits at the central bank restored. - Credit to the private sector has recently increased at a faster pace than deposits. - Financial system remains well-capitalized and non-performing loans remain low. - A recently started FSAP mission will help identify measures to further strengthen the financial system. ### Structural reforms and governance - Fiscal reforms: - The progressive tax bill approved in late 2021 increased the income tax on the wealthier population and made the tax system more equitable. - Tax administration strengthened with the creation of a large taxpayers’ unit. - Measures to contain the wage bill and to improve efficiency and transparency of public procurement adopted. - Fuel subsidy adjustments: - Government gradually increased fuel prices at the pump in the first year of the EFF, reducing fiscal resources allocated to fuel subsidies. - Further adjustments to gasoline price suspended in October 2021 and a slight increase in fuel subsidies occurred in June 2022 due to political and social pressures. - Fiscal governance and transparency: - Regulations to operationalize amendments to the organic budget code adopted to establish a prudent fiscal framework. - Enhanced technical capacity on fiscal statistics and recognition of government obligations to the Social Security Fund provide a clearer picture of the fiscal balance and underlying fiscal risks. - Approval of legislation criminalizing acts of corruption and other reforms increased trust in public institutions. - Authorities committed to further reforms including anti-money laundering and conflict of interest bills recently submitted to the National Assembly. - State-owned enterprises and audits: - Authorities attempted to contract a top-tier firm to audit the state-owned oil company’s financial statements; the tender process ended without bids. - Authorities are working with the IDB to identify the best way forward to hire an independent firm to perform these audits. - Central bank and monetary reforms: - Reforms to the organic monetary and financial code strengthened the central bank’s autonomy and governance framework. - Reforms cleared the central bank’s balance sheet of legacy assets from the 1999 banking crisis and supported auditing capacities. - Social assistance expansion: - Cash transfer coverage increased from about 3 out of 10 households in need to 8 out of 10. - Beneficiary families expanded from about 550 thousand to 1.2 million. - One indicative target on regional coverage was not met in three out of the country’s 24 provinces because the program prioritizes cash transfers to the poorest families nationwide. - Authorities launched and are increasingly implementing a conditional cash transfer program to address child malnutrition. - Data and statistical integrity: - Authorities published revised historical fiscal data back to 2013 and restructured the fiscal statistics office at the Ministry of Economy and Finance. - Obligations with the Social Security Fund were fully registered in both the 2023 budget and the medium-term fiscal framework. - A plan was developed to prevent future arrears of the government’s healthcare obligations to the Social Security Fund. ### Final remarks from authorities - The EFF program, over 27 months and two administrations, helped restore macroeconomic stability, ensure sustainability of public finances, and strengthen domestic institutions while protecting the most vulnerable. - Authorities reaffirm their unwavering commitment to sound economic policies and to work closely with the Fund after the current arrangement expires. - Continued support of the IMF and other IFIs is described as critical for Ecuador’s development. *Source: 1ecuea2022002 - 4. The President plans to veto the National Assembly’s decision to repeal the 2021 tax reform* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ecuea2022002.pdf_