## APPENDIX II: Press Release (Content unit 1ecuea2023002)

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### Overview
- Meeting: IMF Executive Board discussed the Ex-Post Evaluation (EPE) of Ecuador’s Exceptional Access Under the 2020 Extended Fund Facility (EFF) on November 29, 2023.
- Arrangement approved: 27-month EFF approved on September 30, 2020 (Press release No. 20/302).
- Prior context:
  - Earlier EFF arrangement approved March 2019 was canceled in May 2020.
  - Fund emergency support in May 2020 included a Rapid Financing Instrument (RFI) purchase of US$643 million (67.3 percent of quota).
- Access and exceptional access trigger:
  - 2020 EFF total access: US$6.5 billion.
  - Cumulative access including outstanding obligations: 897 percent of quota (triggering exceptional access and requirement for an EPE).
- Arrangement conclusion: EFF concluded on December 14, 2022, after five purchases (instead of eight originally planned) with some reviews combined.

### Program objectives and design
- Primary aims:
  - Stabilize the economy during the COVID-19 crisis and restore macroeconomic stability.
  - Restore fiscal sustainability and reduce public debt via fiscal consolidation and debt restructuring.
  - Strengthen domestic institutions, including Central Bank independence and governance.
  - Expand social assistance and protect lives and livelihoods.
- Design features:
  - Heavy frontloading of purchases: five installments (61 percent of total access to be disbursed in the first four months of the program).
  - Emphasis on fiscal structural reforms, transparency, anti-corruption, and governance.
  - Supported by technical assistance, especially in fiscal accounting.
- Fiscal strategy and conditionality:
  - Short-term support: COVID-19 related measures estimated at 0.8 percent of 2020 GDP.
  - Medium-term strategy: backloaded fiscal consolidation of 5.5 percent of GDP over five years (initially), COPLAFIP reform, clearing domestic payment arrears, COMYF passage.
  - Quantitative conditionality included a QPC on the overall balance of the central government and CFDD, floor on NFPS deposits at the Central Bank, prohibition on external payment arrears and Central Bank financing of the government (continuous PCs).
  - Indicative targets included a floor on the non-oil primary balance including subsidies (NOPBS), floor on the overall balance of the NFPS, floor on net international reserves, and floor on social spending coverage.
  - Structural conditionality at program request: 5 prior actions (PA) and 13 structural benchmarks (SB); cumulative total reached 33 SB by the end of the Sixth Review.

### Key findings and program outcomes
- Macroeconomic stabilization:
  - Program achieved primary objective of restoring macroeconomic stability amid historic downturn.
  - Economic growth: 2020 contraction of 7.8 percent compared to 11 percent expected at program request.
  - Current account: 2020 surplus of about 2.5 percent of GDP compared to a projected deficit of 2 percent of GDP at program request.
- Fiscal and debt outcomes:
  - Government debt to GDP: 57.7 percent at end-2022 (close to COPLAFIP envisaged 57 percent by 2025).
  - Reduction in debt levels between 2020 and 2022: 3.5 percentage points of GDP (excluding the 2021 SDR allocation), slightly more than the 3.2 percentage points expected.
  - Cumulative improvement in overall balance between 2019 and 2022: 3.5 percent of GDP (0.3 percent of GDP less than envisaged).
  - NOPBS deteriorated by 0.2 percent of GDP between 2019 and 2022 instead of the 3.7 percent of GDP improvement originally envisaged.
  - NFPS deposits: declined to about US$3.5 billion in summer 2020 (less than half 2019 peak after 2019 EFF purchases); NFPS deposits stood at US$6.7 billion as of December 2022.
- Social protection and inequality:
  - Social safety net expanded considerably: beneficiaries increased from about US$650 million (0.7 percent of GDP) in 2019 budget to about US$1.2 billion (1.1 percent of GDP) in 2022 budget.
  - Coverage of low-income beneficiaries of cash transfers rose from 37 percent of families in bottom three deciles to 80 percent by end-2021 (more than 8 out of 10 by Sixth Review).
- Structural and institutional reforms:
  - Passage of COMYF reform strengthening Central Bank independence and dollarization regime (passed in April 2021, implemented with delay).
  - COPLAFIP reforms promulgated July 2020; secondary legislation and full implementation ongoing.
  - Technical assistance strengthened fiscal statistics and revealed misreporting issues allowing corrections.
- Shortcomings and vulnerabilities:
  - Market access not restored due to political uncertainty and fiscal vulnerabilities; oil revenues account for about 35 percent of fiscal revenue and goods exports.
  - Low non-oil revenues remained a critical vulnerability; authorities abandoned planned VAT increase after 2021 election and shifted consolidation toward expenditure cuts.
  - Suspension of fuel subsidy reform following social unrest and redesign of tax reform hindered consolidation.
  - Accumulated buffers began to erode in 2022 with deposit drawdown and fiscal slippages.

### Debt restructuring and financing outcomes
- Bond exchange:
  - Authorities reached agreement for voluntary bond exchange targeting US$17.4 billion in outstanding international bonds; exchange concluded on August 31, 2020.
  - Exchange provided interest savings of US$5.7 billion over 2020-25 and additional savings of US$5.6 billion in amortizations over 2022-25.
  - Market haircuts were 41 percent; over 98 percent of creditors consented, resulting in 100 percent participation after use of CACs.
- Chinese creditor reprofilings and other relief:
  - Prior reprofiling with China Development Bank (CDB) and China Eximbank generated cumulative cash flow relief of about US$513 million over 2020-22 (examples elsewhere list US$272 million and US$103 million/US$169 million in specific windows).
  - Further reprofilings after Fourth and Fifth Reviews reduced debt service by US$1.1 billion in 2022-24 and secured favorable modifications to linked oil sale contracts.
- IMF financing share and safeguards:
  - Planned purchases for 2020 accounted for 45 percent of total identified external financing at program request; Fund’s share projected to decline to 19.5 percent in 2021 and 11.5 percent in 2022.
  - Program required authorities to build deposits, rather than raise the fiscal deficit, with any additional financing.

### Exceptional access assessment and program risks
- Exceptional access details:
  - Ecuador’s 2020 EFF involved exceptional access with access equivalent to 661 percent of quota; Ecuador had credit outstanding from previous arrangements amounting to 236 percent of quota.
  - Under the 2016-updated Exceptional Access Framework (EAF), four EACs applied: EAC1 (exceptional BOP pressures), EAC2 (debt sustainability), EAC3 (prospects of regaining market access), EAC4 (program success prospects and capacity).
- EAC assessments and evolution:
  - EAC1: clearly met at program approval; assessment remained but justification became more difficult in latter reviews as current account outturns improved due to oil prices.
  - EAC2: met in all reviews after successful bond exchange; debt assessed sustainable with high probability.
  - EAC3: assessed satisfied in reviews but market conditions deteriorated in mid-2022; staff expected market access in 2024 by Sixth Review.
  - EAC4: initially met given political assurances and capacity development, but assessments became more challenging amid policy reversals and misreporting incidents.
- Risks and safeguards:
  - Risks elevated due to heavily frontloaded access and high uncertainty about pandemic and international oil prices; "61 percent of total access set to be disbursed in the first four months of the program."
  - Required safeguards assessments conducted; ORM involved in risk assessment and reviews of misreporting cases.
  - Lending into arrears policy complied with; outstanding small claims (US$52 million) addressed via public redemption procedure.

### Conditionality, implementation, and structural benchmarks
- Conditionality focus:
  - Of 29 new structural benchmarks (excluding reformulations), 16 (55 percent) focused on fiscal institutions and policy, 9 (31 percent) on transparency and anti-corruption.
  - Transparency measures accounted for 5 out of 13 new prior actions.
- Implementation record:
  - Of 25 structural benchmarks in two key areas (fiscal institutions and transparency), 20 were eventually met; only 8 implemented within original schedule; 12 delayed or modified; 5 never met (including audits of Petroecuador and Petroamazonas, legislation on conflicts of interest, broadening social assistance coverage, and full SNC coordination).
  - Cumulative implementation by review: examples include Implemented: 0 (1st Review), 4 (2nd-3rd Review), 5 (4th-5th Review), 8 (6th Review).
- Tangible institutional outcomes:
  - COPLAFIP established a comprehensive fiscal framework with expenditure growth rule and debt coverage aligned with international statistical standards; implementation ongoing.
  - MTDS published; monthly financial plans prepared; contingency reserve allocation not yet implemented.
  - Fiscal statistics capacity substantially increased; STA technical assistance detected and helped correct misreporting (e.g., pension transfers to IESS).
  - Social transfers: cash transfer program coverage rose from 3 out of 10 households in bottom three deciles in 2020 to more than 8 out of 10 by Sixth Review; beneficiary families rose to 1.2 million.
  - Anti-corruption and transparency measures implemented including publication of procurement contracts and asset declarations; audits of COVID-19 spending published.

### Central Bank (COMYF) reform and financial sector outcomes
- COMYF reform actions and governance:
  - COMYF reform aimed to strengthen BCE independence, ban new direct or indirect BCE lending to the public sector, prohibit quasi-fiscal operations, and establish an independent Board of Directors.
  - COMYF reform passed in April 2021 (implemented with delay); recapitalization measures included transfer of public bank shares worth US$2.4 billion back to the MEF with government commitment to repay BCE in equal installments in 2027-35.
  - Four-reserve balance scheme restored with expectation full coverage by 2035; first balance covered by end-2021; first and second balances more than fully covered by end-2022.
  - BCE adopted IFRS in 2022 though some reporting deviations remained.
- Financial sector resilience:
  - FSAP (late 2022 and April-May 2023) found sector resilient though vulnerabilities remain.
  - Banks’ average capital ratios around 15 percent of risk-weighted assets as of end December 2022 (regulatory minimum 9 percent).
  - Public banks exhibited significantly higher NPLs; AQR revealed gaps in loan classification and provisioning in one bank.
  - Recommendation: promptly recognize loan losses and implement AQR provisioning recommendations.

### Macroeconomic and reserve outcomes and drivers
- Macro outturns exceeded program expectations at onset due to multiple factors: stabilization of fiscal accounts, successful vaccination campaign, higher-than-expected oil prices (US$62 in 2021 and US$86 in 2022 vs earlier projections), and social safety net expansion.
- Current account improvements: current account outturns reduced deficits cumulatively by US$10.6 billion from 2020 to 2021 relative to projections.
- Reserve and deposit dynamics:
  - NFPS deposits between August 2022 and December 2022 declined by about US$2 billion.
  - For entire 2022, NFPS deposits increased by US$947 million vs expected annual increase of US$2.7 billion at Sixth Review.
  - Contributors to lower outturn in 2022: lower fiscal balance by about US$1 billion (pipeline technical problems reducing export volumes) and shortfall in domestic debt issuance by about US$900 million.
  - International reserves increased from US$2.5 billion at program approval to US$7.7 billion by program completion (versus US$5 billion expected at approval).

### Lessons, implications, and staff recommendations
- Program design and sequencing:
  - Contingency planning and clearer sequencing of reforms important when political uncertainty is high.
  - Frontloading financing can be necessary in crises but sequencing and timing of conditionality matter for sustainability.
  - Suggested recalibration at Sixth Review: extend EFF from 27 months to at least 36 months and rephase remaining purchase through third quarter of 2023 to allow more time for reforms and financing.
- Fiscal strategy:
  - Reliance on volatile oil revenues highlights need to raise non-oil revenues and improve composition and quality of consolidation.
  - Program lacked QPCs on quality and composition of consolidation; stronger emphasis on non-oil revenue targets recommended.
  - Protecting reform momentum and institutional capacity is key for fiscal structural reforms.
- Exceptional Access application and governance:
  - Application of EAF required difficult judgements as conditions evolved; periodic downside scenario evaluations and clearer guidance on changing EAC assessments recommended.
  - Use of prior actions to bolster EAC4 assessments in volatile political contexts suggested.
- Social protection and communication:
  - Align timing of social protection expansion with subsidy reform and improve communication strategy to enhance public acceptance.
  - Replace blanket subsidies with targeted transfers to protect vulnerable groups.
- Capacity development and collaboration:
  - Intensive collaboration with TA (FAD, STA, others) strengthened fiscal accounting and program monitoring; such integration should continue.
- Financial sector reforms:
  - Implement FSAP recommendations: improve supervision, reinforce safety nets, recognize loan losses, and address provisioning gaps in public banks.

### Executive Board and authorities’ views
- Executive Board assessment:
  - Directors welcomed the EPE, noting frontloaded financing instrumental during COVID-19, catalyzed financing from other IFIs, and supported successful debt restructuring.
  - Directors welcomed reforms to boost fiscal resilience and strengthen institutions, including COMYF.
  - Directors emphasized remaining vulnerabilities and need for more reforms to restore market access, contingency planning, and political assurances to protect against policy reversals.
  - Some Directors noted conditionality could have placed greater emphasis on quality and composition of consolidation; staff suggested an extended program could have aided implementation though Directors generally agreed frontloading disbursements was necessary.
- Authorities’ views (Appendix I and statements):
  - Authorities agree main objectives were successfully met: program restored macroeconomic stability and laid institutional foundations.
  - Emphasized political constraints (two administrations with weak legislative support) and that tax reform passage represented commitment despite limited legislative backing.
  - Argued against suggestion to extend the program; noted all QPCs were met and many SBs implemented.
  - Highlighted costs of concentrated repayment schedule to BCE and preference for smoother repayment sequencing.
  - Raised concerns about institutional design creating two separate monetary and financial boards; advocated a single strong board given dollarization context.
  - Reiterated commitment to safeguarding achievements and continuing engagement with IMF and development partners.

### Selected key statistics and dates (exact figures preserved)
- Arrangement duration: 27-month EFF.
- Total access under 2020 EFF: US$6.5 billion.
- Cumulative access including outstanding obligations from 2019 EFF and RFI: 897 percent of quota.
- RFI purchase: US$643 million (67.3 percent of quota).
- Purchases under 2020 EFF: five purchases (instead of eight originally planned).
- Arrangement expiration / conclusion: December 14, 2022.
- Oil revenues: about 35 percent of fiscal revenue and goods exports.
- GDP shock: 2020Q2 quarterly GDP declined by 12 percent during COVID-19 shock.
- Public-sector deposits: declined to about US$3.5 billion in summer 2020; NFPS deposits stood at US$6.7 billion as of December 2022.
- Economic growth: 2020 contraction of 7.8 percent (vs 11 percent expected).
- Current account: 2020 surplus about 2.5 percent of GDP (vs projected deficit of 2 percent).
- Government debt to GDP: 57.7 percent at end-2022.
- Debt reduction 2020–2022: 3.5 percentage points of GDP (excluding 2021 SDR allocation).
- COPLAFIP debt anchor: 40 percent of GDP by 2032 with intermediate limits 57 percent by 2025 and 45 percent by 2030.
- Initial consolidation objective: 5.5 percent of GDP over five years (revised down to 4.5 percent at Second and Third Reviews).
- Bond exchange target: US$17.4 billion outstanding international bonds; interest savings US$5.7 billion over 2020-25; amortization savings US$5.6 billion over 2022-25.
- Oil prices actuals: US$62 in 2021; US$86 in 2022 (vs earlier projections).
- Exceptional access measure cited: access equivalent to 661 percent of quota (program included exceptional access determination).
- NFPS deposits change 2022: increase by US$947 million (vs expected US$2.7 billion at Sixth Review).
- Spreads: EMBI spreads rose above 1,100 basis points before combined Fourth and Fifth Review; almost reached 2,000 basis points after June 2022 protests; noted as over 1,900 basis points as of November 10, 2023.

_Italic: IMF Executive Board press release and Ex-Post Evaluation summary, November 29, 2023; Executive Summary dated November 14, 2023 (content unit 1ecuea2023002)._

### APPENDIX II: Press Release

### APPENDIX II: Press Release

### Overview
- Meeting: IMF Executive Board discussed the Ex-Post Evaluation (EPE) of Ecuador’s Exceptional Access Under the 2020 Extended Fund Facility (EFF) on November 29, 2023.
- Arrangement approved: 27-month EFF approved by the Executive Board on September 30, 2020 (Press release No. 20/302).
- Context prior to 2020 EFF:
  - Earlier EFF arrangement approved March 2019 was canceled in May 2020.
  - Fund emergency support in May 2020 included a Rapid Financing Instrument (RFI) purchase of US$643 million (67.3 percent of quota).
- Total access and exceptional access trigger:
  - 2020 EFF total access: US$6.5 billion.
  - Cumulative access including outstanding obligations: 897 percent of quota, triggering exceptional access and the requirement for an EPE.
- Arrangement conclusion: EFF concluded on December 14, 2022, after five purchases and with some reviews combined.

### Program objectives and design
- Primary aims of the 2020 EFF:
  - Stabilize the economy during the COVID-19 crisis and restore macroeconomic stability.
  - Restore fiscal sustainability and reduce public debt via fiscal consolidation and debt restructuring.
  - Strengthen domestic institutions, including Central Bank independence and governance.
  - Expand social assistance and protect lives and livelihoods.
- Program features:
  - Heavy frontloading of purchases due to large initial financing needs and lack of alternative funding.
  - Emphasis on fiscal structural reforms, transparency, anti-corruption, and governance reforms.
  - Supported and complemented by technical assistance, especially in fiscal accounting.
- Financing and sequencing:
  - Purchases under the 2020 EFF were heavily frontloaded; arrangement had purchases in five installments instead of eight as originally planned.
  - Debt restructuring with external bondholders conducted successfully during program period.

### Key findings from the EPE
- Program outcomes and performance:
  - The EFF achieved its primary objective of restoring macroeconomic stability against a historic economic downturn.
  - Most program conditionality was eventually implemented, despite delays to fiscal and structural reforms.
  - Fiscal buffers were strengthened, aided by higher oil prices.
  - Debt target under the program was achieved ahead of schedule, supported by stronger than expected nominal GDP growth and higher oil prices.
  - Social safety net expansion: The social safety net was expanded considerably; poverty and inequality indicators improved.
  - Structural reforms: Landmark structural reforms were implemented, including passage of COMYF reform to strengthen Central Bank independence and the dollarization regime.
  - Capacity building: Extensive technical assistance helped strengthen capacity in critical areas, especially fiscal accounting.
- Remaining vulnerabilities and shortcomings:
  - Market access has not been restored due to political uncertainty and remaining large fiscal vulnerabilities, including strong reliance of government revenues on volatile oil prices (oil revenues account for about 35 percent of fiscal revenue and goods exports).
  - Low non-oil revenues remain a critical vulnerability owing to changes in the program’s fiscal strategy in response to political realities.
  - Authorities abandoned planned increase in VAT after the 2021 presidential election and shifted consolidation toward expenditure cuts.
  - Suspension of the fuel subsidy reform following social unrest and redesign of tax reform during the program hindered consolidation.
  - Improvement in overall fiscal balance was close to program objectives but primarily reflected higher oil balance; indicators of underlying fiscal consolidation underperformed initial program targets.
  - Accumulated buffers have started to erode.
- Application of Fund policies:
  - Fund policies and procedures for financing under exceptional access were followed.
  - The Exceptional Access Framework (EAF) was applied in line with Fund practices.
  - Assessment of some exceptional access criteria, particularly market access and implementation capacity, became increasingly difficult during the program; staff judgement was applied.
  - Program-related risk management included contingency planning, a safeguards assessment, a fiscal safeguards review, and support from ORM.

### Executive Board assessment and views
- General Board view:
  - Executive Directors welcomed the EPE and noted the large and frontloaded financing was instrumental during COVID-19, stabilizing the economy and supporting health and social protection spending.
  - Directors welcomed catalyzation of financing from other international financial institutions and a successful debt restructuring.
- Policy implementation and reforms:
  - Directors considered policy implementation broadly in line with program objectives and welcomed reforms to boost fiscal resilience and strengthen institutions.
  - Notable achievement: amendments to monetary and financial code (COMYF reform) strengthening Central Bank independence and dollarization regime.
- Concerns and recommended emphases:
  - Vulnerabilities persist; more reforms needed to restore market access.
  - Importance of contingency planning in initial program design when uncertainty is high, and appropriate political assurances to protect against policy reversals.
  - Some Directors noted conditionality could have placed greater emphasis on quality and composition of fiscal consolidation.
  - Observations that disbursements were significantly frontloaded and conditionality backloaded, pushing some fiscal consolidation beyond program duration; staff assessment suggested reform implementation could have benefited from extending the program, though Directors generally agreed frontloading disbursements was necessary.
  - Need for more careful sequencing of reforms and clearer communication about social measures to offset impacts of fuel subsidy reform.
- Institutional collaboration:
  - Directors noted the program was a good example of integrating capacity development and program design and encouraged continued collaboration between the authorities and the Fund.
- Input for future policy:
  - EPE findings should provide valuable input for future implementation of the Exceptional Access framework; Directors looked forward to outcomes of the ongoing IEO evaluation.

### Macroeconomic and fiscal outcomes (selected statistics and facts)
- Duration: 27-month EFF.
- Total access: US$6.5 billion.
- Cumulative access including outstanding obligations from 2019 EFF and RFI: 897 percent of quota.
- RFI purchase: US$643 million (67.3 percent of quota).
- Purchases under 2020 EFF: five purchases (instead of eight originally planned); some reviews combined.
- Arrangement expiration: December 2022; EFF concluded on December 14, 2022.
- Oil revenue importance: oil revenues account for about 35 percent of fiscal revenue and goods exports.
- Economic shock: 2020Q2 quarterly GDP declined by 12 percent during the COVID-19 shock.
- Public-sector deposits: declined to about US$3.5 billion in the summer of 2020, less than half their 2019 peak after the 2019 EFF purchases.

### Lessons and implications
- Program design and sequencing:
  - Contingency planning and clearer sequencing of reforms are important when political uncertainty is high.
  - Frontloading financing can be necessary to secure program success in crisis contexts, but sequencing and timing of conditionality matter for sustainability of consolidation.
- Fiscal strategy:
  - Reliance on volatile oil revenue highlights the need to raise non-oil revenues and improve composition and quality of consolidation.
  - Protecting reform momentum and institutional capacity is key for successful implementation of fiscal structural reforms.
- Institutional and capacity building:
  - Technical assistance can be effectively integrated into program design to strengthen fiscal accounting and institutional capacity.
- Exceptional access application:
  - Application of the Exceptional Access Framework can require difficult judgments over time as conditions evolve; EPE findings can inform refinements to assessment approaches.

*IMF Executive Board press release and Ex-Post Evaluation summary, November 29, 2023; Executive Summary dated November 14, 2023.*

### 7.      The 2020 EFF arrangement aimed to i) mitigate the crisis by protecting lives and

### 7.      The 2020 EFF arrangement aimed to i) mitigate the crisis by protecting lives and 

### Program objectives and design
- Two overarching objectives:
  - i) mitigate the crisis by protecting lives and livelihoods and restore macroeconomic stability.
  - ii) ensure the sustainability of public finances and strengthen domestic institutions to lay the foundations for strong, job-rich, and long-lasting growth (IMF, 2020a).
- Short-term support measures:
  - Provide sufficient financing to maintain government operations amid revenue collapse.
  - Support COVID-19 related measures estimated at 0.8 percent of 2020 GDP.
  - Expand the social safety net to lay foundations for an inclusive recovery.
- Medium-term strategy:
  - Relatively ambitious and backloaded fiscal consolidation of 5.5 percent of GDP over five years.
  - Comprehensive reform of the organic budget code (COPLAFIP).
  - Clearing of domestic payment arrears, strengthening public procurement and transparency.
  - Passage of the monetary and financial code (COMYF) to strengthen Central Bank independence, governance, and revamp its balance sheet.

### Role of macro framework and financing constraints
- Context and constraints:
  - Program request made at the outset of the COVID-19 pandemic with very pessimistic macroeconomic forecasts; growth forecasts judged broadly appropriate given exceptional uncertainties.
  - Low oil prices and recent external bond debt restructuring limited fiscal space.
- Design implications:
  - Frontloaded purchase with relatively backloaded consolidation to allow space to mitigate human and economic costs.
  - External financing gap projections described as realistic given low projected growth and backloaded consolidation.

### Quantitative and structural conditionality
- Quantitative conditionality:
  - Key fiscal quantitative performance criterion (QPC) set on the overall balance of the central government and CFDD, a narrower but more reliable and timelier concept than the non-financial public sector balance (NFPS).
  - Floor for accumulation of NFPS deposits at the Central Bank (proxy for reserves accumulation).
  - Prohibition on accumulating external payment arrears and Central Bank financing of the government (continuous performance criteria).
  - Complementary indicative targets (ITs):
    - (i) floor on the non-oil primary balance including subsidies (NOPBS) of the NFPS,
    - (ii) floor on the overall balance of the NFPS,
    - (iii) floor on net international reserves,
    - (iv) floor on social spending measured as the coverage of lower income households by cash transfer programs.
  - At each review, targets for overall balance and deposits of the NFPS (ITs) were adjusted upward to save part of the projected oil windfall toward rebuilding policy buffer.
- Structural conditionality:
  - Total at program request: 5 prior actions (PA) and 13 structural benchmarks (SB) covering fiscal institutions (8 SB and 1 PA) and transparency, anti-corruption and governance (3 SB and PA).
  - Cumulative total reached 33 SB by the end of the Sixth Review due to additions and revisions.
  - 2020 EFF relied on significantly more SB (around 15 per year) compared with an average of 11 per year in other EA programs (see IMF (2022)).
  - Structural agenda included stepwise implementation of big reforms and corrective actions addressing a misreporting case.

### Program reviews, timing, and adjustments
- Original plan: seven reviews with test dates every four months (end of April, August, and December throughout program duration).
- Actual sequence and adjustments:
  - First Review completed as planned (end-September 2020 test date); 61.5 percent of total financing disbursed by then.
  - Second and Third Reviews grouped with purchases based on end-April 2021 QPCs (accounting for 12.3 percent of total financing).
  - Fourth and Fifth Reviews grouped with purchases based on end-December 2021 QPCs (accounting for 15.3 percent of financing) following suspension of fuel subsidy reform and fiscal data misreporting.
  - Seventh Review cancelled; Sixth Review (based on end-August 2022 QPCs) made the last review.

### Debt restructuring and financing outcomes
- Debt restructuring:
  - Authorities reached agreement for voluntary bond exchange targeting US$17.4 billion in outstanding international bonds; exchange concluded on August 31, 2020 after a Staff Level Agreement on the 2020 EFF.
  - Exchange provided interest savings of US$5.7 billion over 2020-25 and additional savings of US$5.6 billion in amortizations over 2022-25, exceeding new Fund financing of US$6.5 billion.
  - Prior to program approval, reprofiling of credit lines with China Development Bank (CDB) and China Eximbank generated cumulative cash flow relief of about US$513 million over 2020-22.
  - Further reprofiling with CDB and Eximbank after the Fourth and Fifth Reviews reduced debt service by US$1.1 billion in 2022-24 and secured a favorable modification to linked oil sale contracts to Petrochina (see Annex IV of the Sixth Review Staff Report).
- Notes on restructuring mechanics (Box 1):
  - Consent solicitation requested on ten bonds outstanding under New York law; nine had enhanced CACs.
  - Market haircuts were 41 percent and over 98 percent of creditors consented to the Ecuador exchange, resulting in 100 percent participation after the use of CACs.
  - The exchange offer was contingent on a Staff Level Agreement; authorities reached SLA on August 28, 2020; bond exchange effective on August 31, 2020.
  - China Eximbank reprofiled debt service providing liquidity relief of US$169 million over 2020:Q4-2022:Q4; CDB provided liquidity relief of US$103 million over 2020:Q4-2022:Q4.

### Program financing share and safeguards
- IMF financing role:
  - Planned purchases for 2020 accounted for 45 percent of the total identified external financing at program request.
  - Fund’s share projected to decline to 19.5 percent in 2021 and 11.5 percent in 2022.
- Safeguard:
  - Program required authorities to build deposits, rather than raise the fiscal deficit, with any additional financing that may become available, including from the World Bank and other creditors.

### Macroeconomic performance during the EFF
- General assessment:
  - Program stabilized macroeconomy amid unprecedented downturn; IMF financing helped government perform key functions and provide COVID-19 relief.
  - Macroeconomic outturns during the EFF generally exceeded expectations at program onset.
  - Contributing factors: stabilization of fiscal accounts, successful vaccination campaign, higher-than-expected oil prices, 2020 COVID-19 social spending, and expansion of social safety net.
  - Competitiveness challenges remained, notably high labor market rigidities and a relatively high minimum wage that was raised twice during the EFF.
- Key macro outcomes and exact figures:
  - Economic growth:
    - 2020 contraction of 7.8 percent compared to 11 percent expected at program request.
  - Current account:
    - 2020 surplus of about 2.5 percent of GDP compared to a projected deficit of 2 percent of GDP at program request.
  - Public sector deposits:
    - Significant overperformance of deposit accumulation in 2021; deposits significantly exceeded programmed levels.
    - Sizeable fiscal deterioration toward end-2022 and first half of 2023 led to a sharp drawdown of deposits.
  - Employment and inequality:
    - Unemployment, poverty and inequality indicators improved during the EFF program, recovering and in some cases surpassing pre-crisis levels.
    - Conditionality on expanding social safety net likely contributed to reduction in inequality.

### Fiscal policy and social protection objectives
- Fiscal anchor and consolidation target:
  - COPLAFIP required fiscal consolidation to achieve primary surpluses and set a public debt anchor of 40 percent of GDP to be achieved by 2032 with intermediate debt limits of 57 and 45 percent of GDP to be reached by 2025 and 2030 respectively.
  - Program envisaged achieving debt target of 57 percent of GDP by 2025 through NFPS fiscal consolidation of 5.5 percent of GDP over five years.
- Consolidation composition:
  - Measured by improvement in the non-oil primary balance including fuel subsidies (NOPBS).
  - At program request, consolidation expected to split roughly equally between revenue increases and expenditure reductions.
  - Comparable magnitude to 2019 EFF consolidation of 5.0 percent of GDP; 2019 plan was more expenditure based with 4.3 percent of GDP from expenditure reduction.
- Social protection expansion:
  - Program aimed to more than double coverage of low-income beneficiaries of cash transfers from 37 percent of families in the bottom three deciles of the income distribution to 80 percent by end-2021.
  - Expansion to be financed by savings from planned fuel subsidy reform.
  - Consolidation plans were backloaded to avoid exacerbating the COVID recession and to accommodate pandemic-related spending.

_Source: 1ecuea2023002 - 7.      The 2020 EFF arrangement aimed to i) mitigate the crisis by protecting lives and_

### 2.6 percent of GDP in 2020 with subsequent improvements by 3.3 percent of GDP in 2021 (through

### 1ecuea2023002 - 2.6 percent of GDP in 2020 with subsequent improvements by 3.3 percent of GDP in 2021 (through

### Fiscal adjustment design, composition, and timing
- Program anchored on achieving a certain debt target by 2025; fiscal plans defined over a five-year horizon though program scheduled to expire in 2022.
- Initial envisaged adjustment: 5.5 percent of GDP total, with 3.7 of the 5.5 percent to be implemented during the program horizon (in 2021 and 2022), split equally between revenues and expenditure.
- Adjustment revised down at Second and Third Reviews (2021Q3):
  - Planned adjustment lowered from 5.5 to 4.5 percent of GDP.
  - Composition shifted toward expenditure cuts, especially goods and services and the wage bill.
  - Backloading of adjustment: 2.5 of the required 4.5 percent to be achieved after end of program at Second and Third Reviews, rising to 3.1 percent by the Fourth and Fifth Reviews.
- Fiscal targets for 2021 aimed to balance accommodating one-off spending pressures, supporting recovery, and saving oil windfall revenues.

### Changes in policy that prompted deviations from program request
- Presidential administration change led to an expenditure-led consolidation and narrowed tax reform scope:
  - Abandonment of previously planned VAT rate increase.
  - Revised tax reform focused on narrowing PIT and CIT deductions plus administrative and temporary measures.
  - Expected yield of tax reform lowered from 2.5 to 0.8 percent of GDP.
  - Program assumed a decline in the non-oil revenue to GDP ratio between 2019 and 2022; other revenue changes expected to offset impact of tax reform.
  - Authorities committed to additional expenditure cuts to preserve overall consolidation path.
- Suspension of fuel subsidy reform in October 2021 in response to social unrest:
  - Reform had begun in July 2020 with an automatic fuel pricing formula and gradual price increases.
  - Suspension increased the fuel subsidy bill; cost to be offset with additional spending cuts.

### Program outcomes: debt and balances
- Government debt to GDP: 57.7 percent at end-2022, close to the 57 percent of GDP COPLAFIP debt limit envisaged by 2025.
- Reduction in debt levels between 2020 and 2022: 3.5 percentage points of GDP (excluding the 2021 SDR allocation), slightly more than the 3.2 percentage points of GDP expected at program request.
- Improvement drivers:
  - Stronger nominal GDP growth than expected when COPLAFIP targets set.
  - Economic contraction and fiscal deficit in 2020 smaller than expected: actual debt to GDP 60.9 percent vs projected 68.9 percent.
  - Higher oil prices in 2022 raised nominal GDP via a higher deflator.
- Overall balance:
  - Cumulative improvement in overall balance between 2019 and 2022: 3.5 percent of GDP, 0.3 percent of GDP less than envisaged in program request.
  - NOPBS (non-oil primary balance) outcomes:
    - NOPBS deteriorated by 0.2 percent of GDP between 2019 and 2022 instead of the 3.7 percent of GDP improvement originally envisaged.
    - Of the 3.9 percent of GDP gap between objective and outturn, 2.9 percent is due to higher-than-expected fuel subsidies owing to higher import prices of oil derivatives in 2021 and especially 2022; suspension of subsidy reform contributed further.
    - Non-oil fiscal consolidation (improvement in non-oil primary balance) was 1 percent of GDP smaller than program request.
  - Authorities saved a significant part of the higher-than-expected oil windfall, which helped overall balance despite weaker underlying NOPBS consolidation.

### 2020–2022 specific fiscal changes (selected reported figures)
- NOPBS cumulative change (program Request / Second & Third Review / Fourth & Fifth Review / Sixth Review) excerpts:
  - Cumulative change in the NOPBS: 3.7 / 1.7 / 5.5 / 2.1 / 2.5 / 4.5 / 1.3 / 3.1 / 4.5 / 0.8 / 3.5 / 4.3 (as reported in table format).
- Of which, increase in revenues (examples from table): 1.9 / 0.7 / 2.6 / -0.3 / 0.5 / 0.2 / -0.6 / 0.7 / 0.2 / -0.6 / 0.9 / 0.2.
- Of which, reduction in expenditures (examples from table): 1.9 / 1.0 / 2.9 / 2.3 / 2.0 / 4.2 / 1.8 / 2.5 / 4.3 / 1.4 / 2.7 / 4.0.
- Fuel subsidies (table highlights):
  - Fuel subsidies contributed materially to outturn variance; reported fuel subsidies (percent GDP) and changes include values such as -1.1, -1.1, -0.1, 1.0, 0.1, 1.9, -1.1, 1.8 in different columns/periods.
- 2022 fiscal outturn vs Sixth Review (percent GDP, change from 2021):
  - Overall Balance: Sixth Review 2.6; Outturn 1.7; Difference -1.0.
  - Primary Balance: Sixth Review 2.8; Outturn 2.0; Difference -0.8.
  - Oil: Sixth Review 0.1; Outturn -0.4; Difference -0.5.
  - Non-oil (A): Sixth Review 2.7; Outturn 2.3; Difference -0.4.
  - Revenue: Sixth Review 0.0; Outturn 0.8; Difference 0.8.
  - Expenditure: Sixth Review 2.7; Outturn 1.5; Difference -1.1.
  - Fuel subsidies (B): Sixth Review 1.3; Outturn 1.9; Difference 0.6.
  - NOPBS (C = A - B): Sixth Review 1.4; Outturn 0.4; Difference -1.0.

### Drivers of 2022 deterioration and reserve changes
- 2022 deterioration compared to Sixth Review driven by:
  - Large current expenditure overruns, notably non-oil goods and services by local governments.
  - Wages and salaries overruns contributing an additional 0.3 percent of GDP in overruns (partly reflecting bringing forward public sector hiring and wage increases).
  - Persistence of higher import prices for refined oil products after the Russian invasion of Ukraine, increasing fuel subsidies and causing underperformance of NOPBS by 1 percent of GDP vs Sixth Review forecast.
- NFPS deposits and buffers:
  - Between August 2022 (last EFF test date) and December 2022, NFPS deposits declined by about US$2 billion.
  - For entire 2022, NFPS deposits increased by US$947 million, less than expected annual increase of US$2.7 billion forecasted at EFF Sixth Review.
  - Contributors to lower outturn: lower fiscal balance by about US$1 billion (mostly underperformance in oil balance due to export volumes falling short because of pipeline technical problems) and shortfall in domestic debt issuance by about US$900 million.
  - NFPS deposits stood at US$6.7 billion as of December 2022, compared with US$3.5 billion in September 2020.

### Structural fiscal and institutional reforms (objectives and progress)
- Program objectives for fiscal institutions:
  - Operationalize COPLAFIP.
  - Improve cash and debt management.
  - Put in place framework to prevent domestic arrears.
  - Increase public spending efficiency.
  - Build and retain technical capacity in statistics.
- Organic budget code reform:
  - Reform predated the 2020 EFF; aimed to strengthen legal framework for public financial management and fiscal rules.
  - Revised version promulgated in July 2020; issuance of necessary secondary legislation became conditionality for 2020 EFF.
- Domestic arrears and cash management:
  - Program conditionality included preparing detailed monthly forecasts of revenues, expenditures, and financing (prior action for program request) and an arrears clearance strategy.
- Procurement and efficiency:
  - Enhancing competitive procedures, consolidating procurement, and improving electronic procurement expected to generate savings of 0.7 percent of GDP by 2025.
  - Structural benchmarks on procurement introduced during combined Second and Third Reviews, including introduction of the National Control Subsystem to fight corruption in procurement, publication of procurement contracts including legal ownership and beneficial ownership of entities awarded contracts, and issuance of procurement guidelines.

### Remaining vulnerabilities and fiscal profile by 2022
- By end of program:
  - Fiscal position significantly stronger than historical average, but vulnerabilities to oil shocks remained large.
  - Non-oil revenues in 2022 were 0.9 percent of GDP lower than 2013-18 average; tax revenues still 1.2 percent of GDP lower than historical average.
  - Revenues from VAT and excise taxes 0.8 percent of GDP lower than 2013-18.
  - Larger part of spending reductions occurred in capital spending (3 out of 4.3 percent of GDP), largely before 2020.
  - Program efforts reduced spending on wages and goods and services below historical averages; capital spending cuts accounted for majority of expenditure reduction.

_ECUADOR — INTERNATIONAL MONETARY FUND (content unit 1ecuea2023002)_

### 28.      Most of the program conditionality focused on strengthening fiscal institutions and

### 28.      Most of the program conditionality focused on strengthening fiscal institutions and advancing the transparency and anti-corruption agenda.

### Conditionality focus and design
- Of the 29 new (excluding those that were reformulations of earlier ones) structural benchmarks introduced during the program, 16 (55 percent) focused on fiscal institutions and policy (especially on reforming fiscal framework and cash management) and 9 (31 percent) focused on transparency and anti-corruption reforms.
- Transparency measures also accounted for 5 out of 13 new prior actions.
- Reforms under the program included:
  - asset declarations of public officials,
  - enacting anticorruption legislation,
  - auditing COVID-19 related spending,
  - strengthening procurement procedures,
  - conducting various audits.
- The program’s focus on transparency, governance and anti-corruption was an example of the application of the newly adopted 2018 Framework for Enhanced Fund Engagement on Governance.
- Most of the structural benchmarks were introduced during the program request and the combined Second and Third Reviews.
- Conditionality introduced at the combined Fourth and Fifth Reviews addressed consequences of the second misreporting incident (concerning PGE pension and healthcare transfers to the IESS) and focused on:
  - conducting audits of healthcare expenditure,
  - publishing corrected data for the PGE overall balance,
  - estimating the stock of potential obligations of the PGE to the IESS.

### Depth and timing of conditionality
- The distribution of depth for program conditionality was bimodal, with almost half the benchmarks aimed at producing lasting institutional change.
- From 29 structural benchmarks and 13 prior actions in the program, 18 were of high depth (equally split between fiscal issues, transparency agenda and other measures mostly focused on BCE).
- Examples of high depth measures: enacting anticorruption legislation, adopting regulations implementing COPLAFIP, broadening the coverage of the social safety net.
- Most conditionality was introduced when there was sufficient time to set new conditionality (program request and Second and Third Reviews); conditionality on independent audits of Petroecuador and Petroamazonas was introduced then but ultimately not implemented.

### Execution and outcomes of fiscal and transparency conditionality
- Execution was challenging due to a difficult political environment and institutional capacity constraints.
- Of the structural benchmarks in the two key areas, most were eventually met:
  - 20 out of 25 structural benchmarks in the two key areas were eventually met.
  - Only 8 of these were implemented within the original schedule.
  - 12 were either delayed or required some modifications (reformulation or rescheduling) or implemented as prior actions for subsequent reviews.
- Five benchmarks were not met:
  1. legislation to strengthen the framework for preventing and managing conflicts of interest in the public sector,
  2. two benchmarks on results of audits of Petroecuador and Petroamazonas,
  3. broadening the coverage of the social assistance program,
  4. ensuring the ability of the National Control Subsystem to coordinate different entities controlling public procurement.
- The authorities passed a tax reform during the Second and Third reviews meeting the corresponding SB, but it was partially reversed after program conclusion.
- The program did not arrest the trend of declining tax revenues or raise non-oil revenues to make fiscal policy less procyclical.

- Implementation status (cumulative number of structural benchmarks since program request):
  - Implemented: 0 (1st Review), 4 (2nd-3rd Review), 5 (4th-5th Review), 8 (6th Review)
  - Implemented with delay and / or modification: 1 (1st Review), 2 (2nd-3rd Review), 6 (4th-5th Review), 8 (6th Review)
  - Implemented after converting to prior action: 0 (1st Review), 1 (2nd-3rd Review), 3 (4th-5th Review), 4 (6th Review)
  - Never met: 1/ (1st Review) 0, 0, 2, 5 (cumulative)
  - Total cumulative by review: 1st Review 17, 2nd-3rd Review 16, 4th-5th Review 25

### Tangible institutional and social outcomes
- COPLAFIP reform:
  - Completion established a comprehensive and prudent fiscal framework.
  - The new law introduced an expenditure growth rule and appropriately defined coverage of public debt in line with international statistical standards.
  - Strengthened the role of the Ministry of Economy and Finance in control over budget execution and fiscal risks.
  - As of 2023, changes brought by the law are still being implemented in line with recommendations of the Fiscal Safeguards Review (FSR) completed in February 2021.
  - Authorities published the Medium-Term Fiscal Framework report in April ahead of budget preparation and are preparing monthly financial plans.
  - Contingency reserve allocation not yet implemented.
  - A published medium-term debt management strategy (MTDS) introduced a more structured policy framework for managing public debt.
- Cash management, arrears, and fiscal controls:
  - Efforts to improve cash forecasting and management and stronger controls over budget execution helped reduce the amount of arrears.
  - Preparation of the arrears clearance strategy was another FSR recommendation.
  - Arrears within the public sector have been on the rise again lately, reflecting difficulties with healthcare spending audits and government liquidity constraints, although monitoring improved with help from a long-term FAD expert.
- Fiscal statistics capacity:
  - Substantial increase in fiscal statistics capacity.
  - Discovery of the second misreporting incident in early 2022 was a direct result of substantial technical assistance provided by STA, enabling production of consistent fiscal data across subsectors.
  - Close engagement ongoing with a long-term expert working with the revamped statistics office at the Ministry of Finance to adopt best practices for data collection, verification and coordination.
  - Room remains for improving fiscal statistics, including data collection and production for COPLAFIP implementation.
- Social protection:
  - Coverage and spending on social protection increased closer to peer country levels.
  - Expansion introduced floors to both (i) the overall dollar amount spent on cash transfers (bonos sociales) and (ii) the share of low-income families reached by the program in each province.
  - While in 2020 only 3 out of 10 households in the bottom three deciles received support, by the time of the Sixth Review more than 8 out of 10 did.
  - The new cash transfers program increased the social safety net size during the EFF from US$650 million (0.7 percent of GDP) in the 2019 budget to about US$1.2 billion (1.1 percent of GDP) in the 2022 budget.
- Anti-corruption and transparency progress:
  - Authorities completed and published audits of COVID-19 related expenditure.
  - Published procurement contracts including information on the ultimate beneficiary ownership of entities awarded public procurement contracts.
  - Enhanced online publication of asset declarations of high-level public officials.
  - Began work on the National Control Subsystem (SNC) to ensure better coordination among supervisory agencies and strengthened risk-based monitoring of public procurement.
  - Greater reliance on purchases from catalogs helped generate savings (e.g., procurement of medicines).
  - The legal framework for criminalizing corruption (organic penal code COIP) was amended to be in line with international standards and good practices.
  - Authorities adopted new legislation to prevent and manage conflicts of interest in the public sector.
  - Audit of financial statements of Petroecuador and Petroamazonas was not finalized as envisaged because authorities were unable to recruit auditors for this task; authorities are working with the IDB and launched a new tender in September 2023.

### Strengthening the Central Bank and safeguarding financial stability
- Historical context and objective:
  - Starting in 2009, amendments to BCE regulation allowed the Central Bank to lend to state-owned banks; such loans peaked at US$2.9 billion (3 percent of GDP) around mid-2014.
  - COMYF enacted later in 2014 allowed the BCE to finance the central government directly.
  - With credit to the government reaching about 7 percent of GDP in 2017, the BCE balance sheet was severely weakened, and reserve coverage of banks’ deposits at the Central Bank fell below 40 percent (from above 100 percent in the early 2010s), raising doubts about the sustainability of the dollarization regime.
- COMYF reform aims and provisions:
  - The COMYF reform aimed to strengthen BCE independence, clearly define its objectives and improve its governance.
  - Reform banned any new direct or indirect BCE lending to the public sector, prohibited quasi-fiscal operations by the BCE, and established an independent Board of Directors with fiduciary responsibilities to the Central Bank.
  - COMYF introduced a provision on the BCE’s institutional autonomy and strengthened accountability.
  - Board members to be qualified individuals proposed by the President and appointed by the National Assembly; removal of Board members at the request of the President for reasons specified in the code became a prerogative of the National Assembly; limited set of objective dismissal grounds introduced.
  - Bill streamlined objectives of the Central Bank: maintain a stable monetary system and manage its balance sheet to preserve dollarization and promote financial stability.
  - The bill was not passed in the first half of 2020 partly due to the onset of the pandemic; authorities committed to passing the legislation by end-January 2021 (structural benchmark); reform was passed in April 2021 and the structural benchmark was implemented with a delay.
- Financial sector conditionality and measures:
  - Besides the COMYF reform and anticipating a post-program FSAP, there was no additional conditionality in this area at program request.
  - In the immediate aftermath of COVID-19, contribution rate to the Liquidity Fund was reduced from 8 to 5 percent of deposits (freeing up US$950 million in liquid assets) and private credit obligations were deferred.
  - Temporary crisis measures for banks were originally scheduled to expire at end-2021, then extended to end-June 2022 and then to end-December 2022.
  - In 2023 authorities intended to harmonize the regulatory framework between banks and cooperatives.
- Asset quality reviews and cooperative reforms:
  - Authorities conducted asset quality reviews (AQRs) for all four public banks (introduced at the Second and Third Review).
  - Authorities introduced minimum capital requirements for cooperatives and strengthened their institutional setup (e.g., requiring compliance with money laundering regulations, and stronger provisioning).

_Italic: Source: 1ecuea2023002 - 28.      Most of the program conditionality focused on strengthening fiscal institutions and advancing the transparency and anti-corruption agenda._

### 37.      The COMYF reform was a major overhaul that reinforced the foundation of the

### 1ecuea2023002 - 37.      The COMYF reform was a major overhaul that reinforced the foundation of the

### COMYF reform and Central Bank (BCE) balance-sheet measures
- COMYF reform actions:
  - Recapitalization of the Central Bank.
  - Transfer of shares of public banks worth US$2.4 billion that the Central Bank acquired from the Ministry of Finance (MEF) in 2017, back to the MEF, with the government committing to repay the BCE in equal installments in 2027-35.
  - Repayment of other maturing Treasury securities through 2026 helped strengthen BCE finances, though a concentrated maturity profile may create near-term liquidity pressures for the government.
  - Creation of a special unit to remove from the Central Bank balance sheet the legacy assets from the 1999 banking crisis.
- Four-reserve balance scheme:
  - Restored to ensure full coverage of Central Bank liabilities using international reserves, with expectation that the four balances would be fully covered by 2035.
  - First balance covered by end-2021.
  - First and second balances more than fully covered by end-2022.
- Governance and safeguards:
  - Central Bank audit committee appointed; audited BCE financial statements published.
  - Creation of a Monetary Policy and Regulation Board to strengthen BCE decision-making.
  - By program end, some gaps remained compared to full adoption of International Financial Reporting Standards (IFRS) and need to be addressed; all other safeguards recommendations were adopted.
  - New members of the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board (3 members each) nominated by the President in August 2021 and appointed by the National Assembly in October 2021.

### Financial sector resilience and FSAP findings
- Overall resilience and vulnerabilities:
  - FSAP mission (late 2022 and April-May 2023) concluded Ecuador’s financial sector has been resilient to the crisis though vulnerabilities remain.
  - Banks’ average capital ratios were at around 15 percent of risk-weighted assets as of end December 2022, above the 9 percent regulatory minimum.
  - COVID-era acceleration of credit growth mechanically diluted NPL ratios; more recently credit growth slowed and liquidity conditions tightened considerably.
  - Higher funding costs combined with inflexible caps on lending rates have weighed on system profitability.
  - Some institutions would be vulnerable under stress test scenarios performed in the recent FSAP (IMF 2023b).

### Public banks, AQR, and provisioning issues
- FSAP and program AQR findings:
  - Public banks have significantly higher NPLs.
  - The AQR performed under the program revealed substantial and persistent gaps in loan classification and provisioning in one bank, where loan quality is expected to deteriorate further as loans mature.
  - Findings have not yet been fully addressed.
  - While public banks have capital ratios above 30 percent, absorption of the estimated provision deficits would trigger supervisory action in one bank.
- FSAP recommendation:
  - Promptly recognize loan losses and implement AQR provisioning recommendations among other steps to address the problem (IMF, 2023b).

### Structural reforms — objectives and outcomes
- Objectives highlighted in programs:
  - Need for labor market reforms: allow less rigid labor contracts and reduce hiring and firing costs.
  - 2019 EFF set only one structural benchmark in this area by end-2019 (preparing an action plan to strengthen efficiency and quality of primary education and health spending), proposed to be rescheduled and not taken up subsequently.
  - 2020 EFF focused on transparency and anti-corruption agenda to improve business environment, private investment, and job creation.
  - Staff recommendations (2021 Article IV) included: enhance labor market flexibility, streamline regulations and licenses, reduce informality, lower barriers to formalization, income tax policy that does not unduly discourage formal job creation, and schemes to improve employee-employer matching; adhere to mechanism tying minimum wage changes to macro parameters such as inflation and productivity.
- Outcomes:
  - Authorities prepared a law to increase work arrangement flexibility, reduce rigidity in part-time work and temporary contracts, and improve labor-market equity, and committed to applying the mechanism for setting the minimum wage tied to inflation and productivity; the law was not submitted to the National Assembly due to strong opposition.
  - Minimum wage increases remain entirely discretionary, weighing on external competitiveness.
  - End-of-program measures to encourage investment included:
    - Lowering tariffs on many inputs for the industrial sector;
    - Fostering greater private sector participation in oil and gas via participation contracts;
    - Gradually reducing the tax on transfers abroad (ISD) from 5 to 4 percent over 2022.

### Financing: external financing needs, IMF support, and outcomes
- Pandemic impact and projections:
  - External financing needs projected to increase in 2020 due to pandemic and lower international oil prices.
  - Staff expected a dramatic deterioration in private capital inflows in 2020 (by US$4.1 billion, almost exactly the size of two EFF purchases received in 2020).
  - Due to ongoing debt operation, Ecuador lacked market access and was expected to rely on multilateral and bilateral creditors for financing in 2020.
- IMF role and program disbursements:
  - Combined RFI and EFF purchases would account for 53 percent of identified external financing at program approval.
  - 2020 EFF approved in September 2020 made US$2 billion available immediately to address balance of payments needs and channeled to the budget, and an equal amount available in December upon completion of the First Review.
  - Fund financing share expected to decline over time: around 20 percent of external financing sources in 2021 and 12 percent in 2022; by 2022 private sector flows expected to be main source (two-thirds of total).
- Actual outturns and reserve accumulation:
  - Current account outturns exceeded program expectations, lowering the current account deficit by a cumulative US$10.6 billion from 2020 to 2021.
  - This improvement offset a shortfall in other IFI and bilateral creditor disbursements (US$1.1 billion lower than projected over 2020-2022), lack of market access originally expected in 2022 (US$0.5 billion), and a more significant shortfall in private sector flows (US$6.3 billion lower than projected over 2020-2022).
  - Better current account outturns put reserves on a much higher trajectory in 2020, though in 2021-2022 they were not enough to offset the impact of shortfalls in private flows.
- Fiscal and financing dynamics:
  - Making EFF purchases available to the budget helped alleviate tight liquidity constraints; public sector financing needs were expected to increase by almost US$4 billion in 2020 compared to 2019.
  - Outturn for deposits was very close to projected, with unexpected shortfall in external financing offset by a lower fiscal deficit.
  - In 2021 and 2022, delays in IMF disbursement (mirrored by delays for other IFIs) were more than compensated by a much lower deficit and higher domestic financing, enabling significant deposit accumulation.
- Balance of financing and burden sharing:
  - Fiscal adjustment (overall balance of the non-financial public sector) over 2020-22 was 3.4 percent of GDP, very close to program request envisaged 3.8 percent of GDP.
  - The fiscal adjustment, aided largely by high oil prices, was more than half of the financing provided by the Fund under the EFF.
  - Fund provided 47 percent of external financing provided by multilaterals in 2020-22 (higher share at beginning of EFF); remaining 53 percent mainly provided by IDB and World Bank.
  - Largest shortfall in bilateral financing: financing assurances for US$2.4 billion of new loans from China did not materialize in 2020-21 as expected; CDB provided budget support of only US$183 million in early 2021.
  - Shortfalls were offset with fiscal adjustment, drawdown of buffers, and alternative domestic and external financing; part of 2021 shortfall temporarily covered by 2021 SDR allocation.
- SDR allocation treatment and effects:
  - SDR allocation recorded as an increase in government deposits at the Central Bank, partly used for cash management operations in late 2021 until more financing became available.
  - Allocation recorded in central government balance sheet as increase in Treasury Single Account (TSA) and as an increase in debt liabilities.
  - Central Bank recorded allocation as increase in reserves (gross and net) and as increase in obligations with the central government (deposit).
  - Ministry of Finance and BCE signed Memorandum of Understanding stating any interest cost or exchange rate risk from SDR allocation lied with central government.
  - Public debt increased by about 1 percent of GDP from the SDR allocation.
- Oil prices, program recalibration, and timing:
  - Oil price projections and actuals:
    - When RFI approved in May 2020, projected oil mix prices were US$32 and US$34.6 per barrel for 2021 and 2022 respectively.
    - In October (at EFF approval), projections increased to US$39.8 and US$41 respectively.
    - Actual prices ended up being US$62 in 2021 (56 percent higher than expected at program request) and US$86 in 2022 (more than double).
    - With oil prices rising steadily in late 2020, a higher-than-anticipated oil price scenario was visible in early 2021; in first half of 2021, oil prices were about 70 percent higher than the same period the previous year.
  - Given higher oil prices in 2021-22 and additional financing from 2021 SDR allocation, a program extension and rephasing of access could have been pursued at the time of the Sixth Review.
  - Suggested recalibration: extend EFF from the 27-month approved to at least 36 months (typical EFF duration), and rephase remaining purchase through third quarter of 2023 to allow more time to implement reforms and seek financing from other sources.
  - Note: maximum duration for an EFF is 48 months; most recent exceptional access EFFs durations referenced were 36 months (Portugal 2011, Ireland 2010) and 48 months (Greece 2012, Ukraine 2015).

### Consistency with Fund policies and procedures (brief)
- Exceptional access and access-limit context:
  - April 2020: Executive Board temporarily increased access limits under RFI from 50 to 100 percent of quota annual limit and from 100 to 150 percent cumulative access.
  - Annual access limit in the GRA was at 145 percent.
  - July 2020: Executive Board supported increase in normal annual access limits (NAAL) in the GRA from 145 to 245 percent of quota; normal cumulative access limit (NCAL) kept at 435 percent of quota.
  - Access beyond NAAL or NCAL entails exceptional access subject to the exceptional access policy.

*Source: Excerpt from IMF staff report (1ecuea2023002), chapter on COMYF reform, financial sector, structural reforms, and financing.*

### 51.      With access equivalent to 661 percent of quota, Ecuador’s 2020 EFF comprised

### 51.      With access equivalent to 661 percent of quota, Ecuador’s 2020 EFF comprised

### Exceptional access and overall Fund exposure
- Ecuador’s 2020 EFF involved exceptional access with access equivalent to 661 percent of quota.
- Ecuador had credit outstanding with the Fund from previous arrangements amounting to 236 percent of quota.
  - Almost two-thirds of that 236 percent corresponded to the amount drawn under the 2019 EFF (SDR 1.012 billion; 145 percent of quota).
  - The rest corresponded to the 2020 RFI plus the amount outstanding on the 2016 RFI (repayment period extended through August 2021).
- Access above US$1.2 billion in 2020 or over US$2 billion cumulatively would have already triggered exceptional access.

### Exceptional Access Framework (Box 2) — criteria to be met
- Under the 2016-updated Exceptional Access Framework (EAF), Ecuador had to meet all four exceptional access criteria (EAC):
  - EAC1. Exceptional balance of payments pressures on the current account or the capital account resulting in a need for Fund financing that cannot be met within the normal limits.
  - EAC2. A rigorous and systematic analysis indicates a high probability that the member’s public debt is sustainable in the medium term; if debt is unsustainable ex ante, exceptional access only if non‑Fund financing restores sustainability with a high probability; if sustainable but not with a high probability, exceptional access justified if non‑Fund financing improves sustainability and sufficiently enhances safeguards for Fund resources.
  - EAC3. Prospects of gaining or regaining access to private capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund.
  - EAC4. The member’s policy program provides a reasonably strong prospect of success, including institutional and political capacity to deliver adjustment.

### Assessment of EACs during the program
- EAC1 (exceptional BOP pressures)
  - EAC1 was clearly met at program approval stage due to significant balance of payments needs in mid-2020.
  - At program approval the overall external financing gap for 2020-22 was estimated at US$6.5 billion after envisaged fiscal consolidation, successful restructuring of global bonds, and support from IFIs and official bilateral creditors.
  - EAC1 was deemed met in all six reviews, though starting from the combined Second and Third Review the assessment could have been better justified.
  - With current account outturns significantly better than expected (largely due to higher oil prices since 2021), the BOP need shifted to lower private sector and official creditor inflows; reserve accumulation exceeded program targets. In latter reviews the case for EAC1 focused more on public sector financing need.

- EAC2 (debt sustainability)
  - After a satisfactory conclusion of the bond exchange, Ecuador’s debt was assessed to be sustainable with high probability, satisfying EAC2.
  - Following the May 2020 RFI disbursement when debt was assessed knife-edge sustainable, debt was later assessed as unsustainable after continued macro deterioration.
  - Successful restructuring of international bonds, financing assurances from official bilateral creditors, support from IFIs, and planned fiscal improvement restored debt sustainability with high probability.
  - At arrangement approval public debt was expected to peak at 69 percent of GDP by end-2020 and decline to 56 percent of GDP by 2025, anchored on COPLAFIP limits.
  - Actual public debt outcomes: reached 60.9 percent of GDP by end-2020, peaked at 62.3 percent in 2021, and declined to around 58 percent of GDP by end-2022.
  - Given favorable evolution, EAC2 was assessed as met in all reviews.

- EAC3 (prospects of regaining market access)
  - At program request, staff judged Ecuador would regain market access during the program, satisfying EAC3.
  - Historical context: in the six years prior to the 2020 EFF, Ecuador had placed international bonds every year with annual issuances peaking at more than US$5 billion in 2017 and surpassing US$4 billion in 2019.
  - Post-restructuring, EMBI spreads declined consistently below 1,000 basis points after peaking at 6,000 basis points at pandemic onset.
  - Staff judged Ecuador would tap markets in 2022 for US$500 million (later revised to US$1 billion at the combined Second and Third Review).
  - EAC3 was assessed as satisfied in all program reviews, but market conditions deteriorated in mid-2022:
    - Spreads rose from slightly less than 800 basis points in early June to above 1,100 basis points before the combined Fourth and Fifth Review.
    - After June 2022 protests and political uncertainty, EMBI spreads almost reached 2,000 basis points and Ecuador was unable to tap private markets as expected.
    - By the Sixth Review (December 2022), staff and authorities expected Ecuador would not regain market access until after 2023; staff assessed Ecuador would regain market access in 2024 in time before repayments to the Fund were expected to start, and judged EAC3 as met given manageable financing needs and other supportive factors (reprofiling with China, conversion of IDB guarantee into budget support, decline in spreads to about 1,250 basis points by end-2022).

- EAC4 (prospect of program success and political/institutional capacity)
  - EAC4 was deemed met at arrangement request: broad political support from the prevailing government and Parliament and steps to improve institutional capacity.
  - Presidential elections scheduled for early 2021 made political assurances a key component; the President provided a letter of support and the National Assembly provided a letter of support of program objectives.
  - Corrective actions were implemented to address deficiencies that led to misreporting under the previous EFF in early 2020.
  - By First Review (December 2020), staff sought political assurances ahead of elections; two of three leading presidential candidates expressed desire to renegotiate the program and all three opposed the VAT hike.
  - Staff mitigated political risk with prior actions on Central Bank and anticorruption laws and commitment to open dialogue; program design sought inputs from broader political groups.
  - Political environment remained challenging: fragmented National Assembly with the President’s party holding only 12 out of 137 seats (elected in 2021); the President narrowly survived an impeachment attempt in June 2022.
  - The new administration (from May 2021) sought to continue implementation but fragmentation made reforms more challenging; most structural conditionality was eventually implemented, but deviations occurred:
    - Fiscal consolidation became more spending-based (Second and Third Review).
    - Fuel price increases were suspended after October 2021 and reduced around the combined Fourth and Fifth Review (June 2022) amid strong social unrest.
    - Two major reform priorities — passing of the COMYF and anti-corruption reforms — were carried out, albeit with some delays.
  - By the Fourth and Fifth Review the continuously challenging political environment and program slippages raised questions about continued satisfaction of EAC4.

### Capacity to repay the Fund
- Ecuador’s capacity to repay remained adequate throughout the program despite postponement of market access.
- Peak Fund credit outstanding in percent of quota and indicators of peak obligations to the Fund were below the median for comparator GRA exceptional access cases.
- Capacity to repay was contingent on full program implementation and financing from other creditors.
- As the program evolved, capacity to repay improved due to better fiscal outturns and considerably higher oil prices.
- Indicators of capacity to repay improved with peak obligations to the Fund declining:
  - From 15.3 percent of gross international reserves (5.1 percent of exports) at program request
  - To 7.2 percent of reserves (4.1 percent of exports) in the combined Fourth and Fifth Review.
- By program end, inability to re-access capital markets as expected (US$ 1 billion) was offset by:
  - Reprofiling of debt with Chinese banks,
  - Conversion of an IDB guarantee into budget support,
  - Additional financing from domestic banks.

### Misreporting — context and corrective actions
- Context
  - Misreporting during the previous 2019 EFF was discussed by the Board on May 1, 2020.
  - Ecuadorian authorities, with technical assistance from IMF’s Statistics Department (STA), addressed institutional and technical weaknesses in compiling, verifying, and reconciling public finance statistics. These actions were instrumental for the 2020 EFF discussions and for assessing EAC4 despite prior misreporting.

- Capacity development in the 2020 EFF
  - Program included two structural benchmarks:
    - (i) correct and publish the historical fiscal data, both above- and below-the-line, back to 2012;
    - (ii) prepare a compilation guide, in consultation with IMF TA, and disseminate it to data providers across the NFPS through a workshop.
  - An STA short-term expert began working in September 2020.
  - The 2021 Article IV report lists three GFS missions (September 2020, April 2021 and July 2021).
  - Capacity development efforts continued thereafter to fill data reporting gaps.

- Cause and detection of misreporting
  - Misreporting stemmed from inaccurate measurement of PGE pension transfers to the IESS.
  - PGE transfers were not recorded on an accrual basis as required by the TMU.
  - Significant delays in pension and healthcare transfer obligations to IESS led to inaccurate measurement of the PGE overall balance.
  - An STA TA mission in March 2022 detected that transfers recorded on a cash basis were lower than accrued amounts by around US$240 million (0.2 percent of GDP) per year.
  - Following STA TA recommendation and the TMU, authorities revised historical pension transfers in line with amounts verified by the Fiscal Relations Department of the Ministry of Economy and Finance (MEF).
  - This revision increased arrears of PGE with IESS and caused a downward shift in the PGE overall balance, resulting in non-observance of the end-April 2021 PC that controlled completion of the Second and Third Reviews with an associated non-complying purchase.

- Role of program perimeter and fiscal anchor
  - Misreporting arose from inconsistency in measurement of flows between the central government and NFPS units.
  - After correction, only the overall balance of the central government was revised; the overall balance of NFPS was unaffected due to consolidation.
  - The choice of program anchor (QPC defined on central government overall balance and CFDD) was consequential — had the QPC been defined on NFPS perimeter, there would have been no misreporting.
  - Improved GFS compilation facilitated staff analysis of subsectors and helped detect the issue; anchoring on the narrower perimeter unveiled problems in reporting flows from NFPS to central government that might not have been detected with a broader perimeter.

- Revision in interest income
  - There was an unrelated downward data revision to the NOPBS of the NFPS for all test dates under the 2019 and 2020 EFF arrangements to properly account for the treatment of interest income.
  - NOPBS of the NFPS was a QPC in the 2019 EFF and became an IT under the 2020 EFF. The revision resulted in a downward shift in NOPBS but did not amount to misreporting.

*Source: IMF staff report excerpt on Ecuador’s 2020 EFF (program documentation).*

### 66.      Relevance with previous misreporting case: Ecuador had a misreporting case in 2019 that

### Relevance with previous misreporting case: Ecuador had a misreporting case in 2019 that

### Misreporting incident and remedial actions
- 2019 misreporting case resulted in a non-compliant purchase owing to a misreporting in NOPB.
- The immediate corrective actions from the 2019 case were geared towards statistics and reporting of the non-financial public sector (NFPS).
- The misreporting incident during the 2020 EFF occurred owing to an inaccurate measurement of flows between the PGE and NFPS.
- Authorities have since taken remedial measures to remove the gaps identified; the Board provided a waiver on the non-complying purchase on the basis of:
  - corrective actions taken by the authorities, and
  - remedial measures committed by them, including policy measures appropriate to achieve the accurate reporting of the overall balance of PGE.
- Note: There was another unrelated misreporting that affected overall balance of NFPS.

### Misreporting policies compliance and IMF actions
- Appropriate Fund policies were followed after detection of the misreporting and the non-complying purchase.
- The Managing Director promptly wrote a letter to the Minister of Economy and Finance informing him about the misreporting.
- The Minister confirmed the presence of the misreporting incident and explained the reasons.
- The MD submitted a report to the Executive Board with recommendations; based on these recommendations, the Executive Board granted a waiver.

### Assessment of data availability and TMU clarification
- Staff did not treat certain revisions as misreporting given:
  - (i) the unavailability of relevant data through the Fall of 2021,
  - (ii) staff’s own calculations of NOPBS,
  - (iii) ambiguity in the TMU.
- Staff and the authorities revised the TMU to clarify the assessment of the NOPBS IT excluding interest income.

### Risks to the Fund from the program
- Risks were elevated due to heavily frontloaded access and high uncertainty about the pandemic and international oil prices.
- Access was heavily frontloaded in 2020 because of large projected BOP needs; "61 percent of total access set to be disbursed in the first four months of the program, before the end of 2020."
- The arrangement significantly increased the Fund’s exposure to Ecuador, with the country becoming the sixth-largest borrower after the purchase at the completion of the First Review.
- Assessment of capacity to repay was judged adequate contingent on program implementation and creditor support; capacity to repay improved later owing to higher oil prices and better fiscal outturns.

### Safeguards, risk assessment, and ORM involvement
- Required safeguards assessments were conducted; a full-fledged risk assessment was conducted at program request with contributions from the Office of Risk Management (ORM).
- Safeguards assessment of the Central Bank finalized in June 2019 (from the 2019 EFF request); no updated assessment required at the 2020 EFF request.
- Two prior actions were included to address recommendations from the 2019 assessment on external and internal audit structures; by the First Review five recommendations from 2019 had been implemented.
- Transition to IFRS was in progress; COMYF reform approved in April 2021 with some delay; BCE adopted IFRS in 2022 but the financial reporting framework still deviated from international standards in some respects and needs further alignment to IFRS.
- Fiscal safeguards review conducted in February 2021 recommended, among other items:
  - implement a risk-based approach to internal and external audits,
  - establish an internal working group to oversee COPLAFIP reform implementation,
  - ensure smooth and timely transition to the new transactional digital platform (SINAFIP).
- ORM reviewed the 2022 case of misreporting and remedial measures, noting the relevance of capacity development on statistics and data reporting to mitigate risks to the Fund.
- Early contingency measures were discussed with authorities, including fiscal, external, and financing measures; authorities identified short- and medium-term contingency policies starting in 2021.

### Lending into arrears and debt limits
- Authorities complied with the lending into arrears policy by making good faith efforts to settle old claims from the 2008-2009 default.
- Most obligations were repurchased, but US$52 million remained outstanding for individual creditors the authorities could not identify; a public procedure was established for redemption requests.
- Staff judged that good faith efforts were made and authorities committed to monitor relations with remaining creditors; lending into arrears policy applied during all reviews since arrears remained outstanding at program end.
- Program documentation complied with the Debt Limits Policy (PR 20/337) by including the required debt holders profile table and debt service table.
- As a market access country, Ecuador was not subject to setting conditionality (QPC/IT) on debt.

### Summary of assessment: program objectives, outcomes, and vulnerabilities
- The 2020 EFF aimed to address COVID-19 consequences amid long-standing imbalances and to continue the 2019 EFF reform agenda; assessment must consider prior lack of Fund and MDB engagement (no regular Article IV consultations between 2008 and 2014).
- The 2019 reopening of the Resident Representative Office and the 2019 EFF request represented a renewed attempt to support comprehensive reforms after fragmented contacts.
- The first misreporting incident and the pandemic disruption necessitated the 2020 EFF, which built on the 2019 program foundations; initial objectives were set amid unprecedented uncertainty persisting into 2021.
- The 2020 EFF successfully stabilized the economy; frontloaded purchases alleviated severe 2020 financing shortfalls and catalyzed financing from other IFIs and a successful debt restructuring of international bonds.
- Macroeconomic outcomes were better than envisaged at program request, partly due to favorable oil prices; authorities rebuilt fiscal and external buffers but these came under pressure in 2022 due to weaker fiscal adjustment and policy reversal on subsidy reform.
- Market access remains elusive due to skepticism about durability of fiscal consolidation, institutional reform weaknesses, and rising political uncertainty:
  - Spreads on outstanding bonds increased to over 1,900 basis points (as of November 10, 2023) from about 730 basis points in 2022H2.
- The unusually short program duration and frontloaded purchases were conditioned by COVID-19 but added implementation risks; hindsight suggests at least a marginal extension to capture full year of 2022 would have been preferable given significant deviation in 2022 fiscal outcomes from Sixth Review projections and rapid decline in NFPS deposit buffers.

### Fiscal anchors, conditionality, and program design lessons
- Choice of QPC and IT was appropriate given institutional constraints but limited ability to track broader fiscal consolidation:
  - Original fiscal anchor: overall balance of the Central Government (CG) including the derivatives account (CFDD), chosen following the 2019 misreporting incident.
  - A broader anchor to the overall balance of NFPS was originally envisaged but did not materialize due to capacity constraints.
  - IT comprising NOPBS of the NFPS broadened the perimeter and prevented oil revenue volatility from affecting the program target; efforts to curb oil subsidies would improve performance under this anchor.
  - Ideally, the NOPBS metric would have been a QPC rather than an IT to instill more discipline and reduce reliance on oil price windfalls.
  - The program lacked quantitative conditionality for the quality and composition of fiscal adjustment (for example, a quantitative target for revenue collection), allowing shifts from revenue reforms to expenditure cuts.
  - NFPS deposits at the Central Bank served as an appropriate quasi-fiscal anchor to monitor above-the-line fiscal performance and external buffers in a dollarized economy; to enhance rationale, NFPS deposits target could be anchored around a function of government expenditure or another adequacy metric.
- Most QPCs and ITs were met at all six program reviews, often with sizeable margins, even though underlying fiscal consolidation (NOPBS or NOPB) underperformed relative to program request and some subsequent reviews.
- During the program, authorities strengthened fiscal buffers using higher oil prices and expenditure cuts of uncertain durability; debt reduction targets were reached ahead of schedule, driven by favorable external circumstances and contractionary expenditure measures.
- Program fiscal strategy changes at the Second and Third Reviews reflected political realities and efforts to tackle inefficient spending, but shifting burden to spending cuts raises sustainability concerns.
- Post-program vulnerabilities include worsening security-related spending pressures and potential El Niño impacts.
- The abandonment of a planned VAT increase and suspension of fuel subsidy reform left the budget dependent on volatile oil revenues and with elevated gross financing needs; raising non-oil revenue in a growth-friendly manner remains a critical reform priority.
- The rising fuel subsidy bill is highlighted as a major drain on resources that could otherwise build larger buffers.
- Stronger emphasis on the quality and composition of fiscal consolidation throughout the program could have made short-term improvements more durable and supported long-term fiscal sustainability and growth potential.

*Source: Excerpt from IMF staff report (ECUADOR).*

### 79.      Staff decision to continue program engagement despite very significant policy

### Staff decision to continue program engagement despite very significant policy reversals during the program

### Continuation of engagement and program judgment
- Staff decided to continue program engagement despite very significant policy reversals, reflecting a difficult balancing act amid an increasingly challenging socio-political environment.
- Multiple delays in reviews signaled that staff urged authorities to stick to initial commitments on a sizeable tax reform and fuel subsidy reform.
- Factors prompting some flexibility:
  - change in government,
  - the still very tangible impact of the pandemic in 2021,
  - social unrest episodes in 2021 and 2022.
- The trade-off peaked during completion of the Sixth Review when important objectives had been achieved but evidence of policy reversals (e.g., a fuel price reduction) began to emerge.
- Staff weighed weakening policy commitment against:
  - reputational risk of not completing or delaying the review for the Fund,
  - implications for Ecuador’s market access prospects.
- On balance, continuing engagement was judged appropriate to safeguard institutional reforms and ensure macroeconomic stability, although much work remains to address long-standing vulnerabilities.
- Authorities’ willingness to offer compensatory measures for abandoned reforms was crucial for maintaining engagement, though such measures were often temporary and of lesser quality.
- Subsequent events suggested that extending the program might have better balanced these considerations.

### Application of the Exceptional Access (EA) framework and EAC criteria
- The exceptional access policy was applied in line with Fund practices, but meeting some EA criteria became increasingly challenging over the program.
- EAC1: As the macro framework and oil prices turned out better than envisaged at the beginning, BOP needs shifted to being driven by some shortfall in official financing, and the goal to build buffers beyond program expectations amid increased uncertainty.
- EAC3: Market access remained elusive; spreads started to rise at the time of the Sixth Review, signaling elevated obstacles towards accessing market financing.
- EAC4: Evaluating political and institutional capacity to undertake reforms was the most challenging criterion:
  - arguments for meeting EAC4 weakened after policy reversals and the case of a misreporting incident (second time within less than 2 years).
  - Staff judged political capacity to implement required policies as met given authorities’ commitment to overall key objectives and continued close engagement, even as political challenges intensified.
  - Despite misreporting, institutional capacity to implement the program was judged met given authorities’ willingness to embrace wide-ranging TA support from the Fund and other CD partners.

### Social protection and communication
- Expansion of social protection was an important element of the program but its effectiveness could be enhanced.
- The social spending anchor—an IT set on the number of families receiving social assistance—was an important innovation to the 2020 EFF conditionality.
- Shortcomings noted:
  - Unclear whether the expansion was perceived by the public as a complement to adjustment efforts.
  - Social spending was small relative to the fuel subsidies.
  - Intensifying social unrest and opposition to the fuel subsidy reform suggest the public did not perceive sufficient buffers.
- Recommendations:
  - Better alignment in timing of social protection expansion with fuel subsidy reform could have enhanced perception of compensation for the poor.
  - A more effective and targeted communication strategy with the public could have been adopted, possibly anchored by a structural benchmark and linked with overall program objectives.

### Fuel subsidy reform progress and challenges
- The 2019 and 2020 EFF provided valuable experience in introducing an automatic fuel pricing mechanism, even if its operation remains suspended.
- Achievements noted:
  - Prices of subsidized fuel products were almost doubled during the EFF program, even though they remain well below market prices and more so after the oil price surge following the invasion of Ukraine.
  - Authorities abolished diesel subsidies to large shrimp farms.
- Going forward:
  - Continue reducing the fuel subsidy bill.
  - Replace blanket subsidies with targeted transfers to protect the vulnerable.
  - Build a broader coalition in support of subsidy removal and compensation, requiring a stronger, more disciplined communications strategy.

### Fiscal structural, governance, and central bank reforms
- Fiscal framework reforms:
  - The landmark reform of the organic budget code (completed as a prior action to the 2020 EFF program approval) established foundations for budget planning, expenditure discipline, and fiscal risk management.
  - Strong effort to gradually eliminate domestic arrears: largely successful for suppliers, but more work remains within the public sector.
  - Successful implementation depends on building and retaining institutional capacity.
- Anti-corruption and transparency:
  - Program focus on these areas was appropriate given governance vulnerabilities and helped improve spending efficiency and anti-corruption efforts.
- COMYF reform:
  - Passing the COMYF reform was a major achievement to strengthen Central Bank independence and the dollarization regime.
  - Key COMYF features:
    - banned Central Bank financing to the public sector,
    - established an independent Board of Directors with clear appointment/dismissal rules,
    - streamlined BCE objectives to preserve the integrity of the dollarization regime and promote financial stability,
    - strengthened the Central Bank balance sheet by returning shares of public banks to the central government (Minister of Finance would repay the BCE),
    - removed legacy assets from the 1999 financial crisis,
    - restored the four-reserve balance scheme to ensure full coverage of Central Bank liabilities with international reserves.
  - Areas for fine-tuning:
    - clearer powers of the Central Bank over the JPRF on setting interest rates and conducting macroprudential policy,
    - clarify BCE autonomy from the Ministry of Finance in budget preparation,
    - clarify responsibilities and powers of supervisory agencies,
    - overhaul the bank resolution legal framework.

### Remaining structural reform agenda
- While boosting fiscal resilience and strengthening institutions were correct priorities during COVID-19, broader reforms are needed in financial sector and labor and product markets.
- The 2020 EFF focused on restoring fiscal sustainability and improving institutions rather than a broader structural reform agenda due to urgent priorities and political/capacity constraints amid the pandemic and political challenges.
- The recently concluded FSAP outlined a comprehensive reform agenda authorities should pursue to:
  - improve financial sector supervision,
  - reinforce financial sector safety nets,
  - gradually reduce financial repression.
- The 2021 Article IV made important labor market reform recommendations; staff continuously urged the authorities to abandon discretionary minimum wage increases.

### Lessons from the 2020 EFF: design, contingency, and political credibility
- Clarity on main goals is essential when designing an exceptional access program amid political difficulty and limited capacity:
  - Program design might have benefited from more granular ex-ante elaboration of goals (e.g., making increasing non-oil revenues a first order goal).
  - Conditionality on tax reform could have been more granular and stronger in preferring one reform design over another.
- Early assessment and quick decisions on debt vulnerabilities and debt treatment are crucial for EA programs in high-debt countries:
  - Ecuador achieved rapid agreement with private debt holders and closed the debt operation quickly, enabling exceptional access.
  - The authorities’ transparent engagement facilitated high creditor participation in the exchange.
- Program duration and phasing:
  - A re-calibrated duration (e.g., extended up to 36 months) with more backloaded phasing could have allowed the final test date to encompass the whole fiscal year 2022 and maintained momentum when financing pressures abated.
  - More granular program conditionality (e.g., QPCs on non-oil revenues) could have strengthened policy commitment.
  - Enforcing more discipline could conflict with securing authorities’ ownership—an inherent trade-off.
- Contingency planning:
  - Programs with ambitious reforms may merit contingency plans against policy reversals early on.
  - Example: searching for alternative savings in case subsidy reform failed would have been useful ex-ante.
  - Timing matters since interrupting a program after approval carries financial and reputational costs.
- Political assurances:
  - Common practices to secure political assurances may be insufficient; before the 2021 elections staff obtained only broad statements of support from candidates.
  - Options to boost credibility of assurances:
    - ask for written assurances from candidates (privately or publicly),
    - request a formal letter to the Executive Board if a new government abandons prior commitments,
    - pass legislation on difficult measures early with delayed effective dates.
- Strengthening EA framework guidance:
  - Implementation of the EA framework could be improved by developing uniform guidance on how to proceed if assessment changes over the program.
  - Example gaps: when to require comprehensive justification for assuming market access (EAC3) or when EAC4 cannot be assessed as met.
  - In volatile socio-political contexts, Fund programs might rely more on Prior Actions to support EAC4 assessments.
  - The ongoing IEO evaluation of the Fund’s EA Policy offers an opportunity to assess the policy across EA cases (IEO, 2023).
- Periodic downside scenario evaluations:
  - Given upfront risks, the program could have benefited from periodic quantitative evaluations of downside scenarios on Ecuador’s capacity to repay in all program reviews.
  - Such assessments would transparently show how partial policy implementation and delayed market access affect capacity to repay.
- Collaboration with capacity development (CD) departments:
  - Ecuador’s EFF demonstrates the importance of intensive collaboration with CD departments.
  - TA workstreams (with long-term experts from FAD and STA) strengthened capacity in fiscal accounting and program tracking.
  - Cooperation helped formulate structural conditionality (transparency and anti-corruption) and assisted with the COMYF reform.
  - Intensive TA collaboration led to uncovering misreporting incidents and ensuing corrective actions, improving transparency and data collection across government fiscal accounts.

*Source: IMF staff review of Ecuador 2020 EFF program content unit*

### 1. Overall balance of the budgetary central government and CFDD (

### 1. Overall balance of the budgetary central government and CFDD (

### Performance criteria — Overall balance of the budgetary central government and CFDD (floor)
- End-Sept. 2020: Target -2,883; Outcome -1,378; Status Met
- End-Dec. 2020: Target -3,893; Outcome -4,297; Status Not Met
- End-Mar. 2021: Target -305; Outcome -419; Status Not Met
- End-Jun. 2021: Target -2,253; Outcome -1,675; Status Met
- End-Sept. 2021: Target -4,071; Outcome -4,300; Status Not Met
- End-Dec. 2021: Target -1,455; Outcome 338; Status Met

### Performance criteria — Accumulation of NFPS deposits at the central bank (floor)
- End-Sept. 2020: Target -1,989; Outcome -227; Status Met
- End-Dec. 2020: Target 487; Outcome 1,293; Status Met
- End-Mar. 2021: Target 22; Outcome -55; Status Not Met
- End-Jun. 2021: Target -161; Outcome 1,095; Status Met
- End-Sept. 2021: Target 223; Outcome 1,357; Status Met
- End-Dec. 2021: Target 1,264; Outcome 2,270; Status Met

### Continuous performance criteria — External payments arrears and net credit to government from the central bank
- Non-accumulation of external payments arrears (continuous PC):
  - All reported dates: Target 0; Outcome 0; Status Met
- (No new) Net credit to government from the central bank (continuous PC):
  - All reported dates: Target 0; Outcome 0; Status Met

### Indicative targets — Selected fiscal and social indicators
- Non-oil primary balance of the NFPS (including fuel subsidies) (floor):
  - End-Sept. 2020: Target -2,539; Outcome -996; Status Met
  - End-Dec. 2020: Target -5,355; Outcome -4,072; Status Met
  - End-Mar. 2021: Target -636; Outcome -90; Status Met
  - End-Jun. 2021: Target -3,475; Outcome -4,068; Status Not Met
  - End-Sept. 2021: Target -6,218; Outcome -7,432; Status Not Met
  - End-Dec. 2021: Target -4,495; Outcome -3,762; Status Met

- Overall balance of the NFPS (floor):
  - End-Sept. 2020: Target -2,699; Outcome -1,333; Status Met
  - End-Dec. 2020: Target -5,544; Outcome -4,334; Status Met
  - End-Mar. 2021: Target -337; Outcome 842; Status Met
  - End-Jun. 2021: Target -525; Outcome 366; Status Met
  - End-Sept. 2021: Target -2,372; Outcome -1,579; Status Met
  - End-Dec. 2021: Target 555; Outcome 1,966; Status Met

- Change in the stock of NIR - program definition (floor):
  - End-Sept. 2020: Target -2,193; Outcome 40; Status Met
  - End-Dec. 2020: Target -4,041; Outcome -2,357; Status Met
  - End-Mar. 2021: Target -110; Outcome 542; Status Met
  - End-Jun. 2021: Target -222; Outcome 1,704; Status Met
  - End-Sept. 2021: Target 261; Outcome 1,498; Status Met
  - End-Dec. 2021: Target 790; Outcome 2,031; Status Met

- Coverage of the cash transfer programs for lower income families - number of families (floor):
  - End-Sept. 2020: Target 62,240; Outcome 63,764; Status Met
  - End-Dec. 2020: Target 226,000; Outcome 271,668; Status Met
  - End-Mar. 2021: Target 384,600; Outcome 443,619; Status Met
  - End-Jun. 2021: Target 452,799; Outcome Not Met (no outcome number provided)
  - End-Sep. 2021: Target 549,819; Outcome Met (no outcome number provided)

- Number of families in the first income decile nationwide covered by cash transfer programs (floor):
  - Target/outcome presented as single value: 385782; Status Met

- Number of families in the lowest three income deciles by province covered by cash transfer programs (floor):
  - Outcome presented as single value: 1,181,777; Status Not Met

Notes on adjustments and definitions contained in the table
- 1/ Adjusted for oil prices as per the TMU.
- 2/ Adjusted for oil prices, for extra disbursements relative to baseline from multilateral institutions and other external sources as per the TMU.
- 3/ For 2020 targets, cumulative change from July 1, 2020.
- 4/ For 2021 targets, cumulative change from January 1, 2021.
- 5/ For 2022 targets, cumulative change from January 1, 2022.

### Timing references reported in the source
- End-Sept. 2020
- End-Dec. 2020
- End-Mar. 2021
- End-Jun. 2021
- End-Sept. 2021
- End-Dec. 2021
- Additional timeline labels in the document: End-August 2022; End-Apr. 2021 (appear elsewhere in the source)

### Prior actions and structural benchmarks (selected implementation status highlights)
- Multiple prior actions and structural benchmarks under the 2020 EFF are listed with implementation statuses including "Met", "Not met", "Implemented with delay", "Partially implemented", "Was met as a PA", and schedule adjustments (e.g., moved to MEFP commitments or reformulated). Examples include:
  - Adopt a regulation to implement July 2020 COPLAFIP amendments — Program Request — Met
  - Enact/amend regulation mandating publication of public procurement contracts with beneficial owner information — Program Request — Met
  - Deliver to IMF staff a PGE financial plan with detailed monthly forecast for 2020 — Program Request — Met
  - Pass a JPRF resolution allowing BCE to adopt an external auditor selection and rotation policy — Program Request — Met
  - The office of the President to receive approved law amending COIP to criminalize acts of corruption in line with UNCAC Articles 15–30 — First Review — Met
  - Adopt presidential decrees for public procurement framework, optimization of public expenditure, and publication of MTFF/fiscal targets — Combined Fourth and Fifth Review — Met
  - Publish revised historical NFPS data back to 2013 — Combined Fourth and Fifth Review — End-Sep 2022 — Met
  - Submit a 2023 Budget in line with program and MTFF commitments — Combined Fourth and Fifth Review — End-Oct 2022 — Met
  - Several SBs/PAs were not met on original timing and were implemented with delay or reformulated (examples across 2020–2022 timelines).

*Source: 1ecuea2023002 - 1. Overall balance of the budgetary central government and CFDD (PDF).*

### Appendix I. Authorities’ Views

### Appendix I. Authorities’ Views

### Context
- The authorities agree the main objectives established at the outset of the EFF were successfully met: the program restored macroeconomic stability against the backdrop of a historic economic downturn and laid some institutional foundations for sustainable growth.
- The prolonged period of unsustainable fiscal expansions, institutional deterioration, and limited Fund engagement prior to the 2019 EFF meant Ecuador had accumulated deep macroeconomic imbalances and structural vulnerabilities before the pandemic.
- The pandemic compounded pre-existing vulnerabilities; any assessment of program outcomes must consider both the pandemic and underlying fragilities.
- Given the significant increase in financing needs in 2020, the lack of market access, and the absence of buffers, the 2020 EFF was instrumental in helping Ecuador overcome one of the most economically challenging moments in its history; under these circumstances, the Fund acted as an effective and timely lender of last resort and the program worked as an important policy anchor.
- The authorities emphasize that recognizing the political context—implementation by two consecutive administrations, both with weak legislative support and significant political limitations—would have enhanced the External Performance Evaluation (EPE).
- Ecuador’s fiscal achievements (overall fiscal balance improvement of 3.5 percent of GDP between 2020 and 2022) should be analyzed in light of the very challenging global environment and widespread expansionary fiscal and monetary policies elsewhere; Ecuador continued fiscal consolidation under the 2020 EFF while many economies adopted expansionary policies.

### Program Design
- General view: program design was mostly appropriate, but the report focuses on deviations from initial design and omits some critical design lessons.
- Political feasibility of fiscal consolidation and tax reform:
  - The size and timeframe of the fiscal consolidation efforts initially envisaged, particularly the ambitious tax reform, were not consistent with the fragmented political environment and vulnerable social conditions.
  - The expected initial revenue from the tax reform was considered excessively ambitious both socially and politically, and was backloaded in a manner that relied on implementation by a successive administration.
  - The enacted tax reform yielded less revenue than expected at program approval; however, the authorities note the reform was passed despite marginal legislative support (the governing party had 12 legislators out of a total of 137) and strong public opposition, and represented a clear demonstration of commitment to fiscal discipline.
  - Authorities argue that while Ecuador may need to continue mobilizing more domestic revenues, any future increases must have social and political support to be sustainable.
- Expenditure-focused consolidation:
  - Authorities consider rebalancing consolidation towards lower expenditures appropriate given historical spending patterns: general government expenditures historically around 21 percent of GDP, rising to 24 percent in 2007, 35 percent in 2008, peaking at 47 percent of GDP in 2013, and decreasing to 40 percent of GDP in 2019.
  - Despite legal and structural challenges (legal provisions limiting local government consolidation, relatively high public wages, composition rigidity), expenditures were further reduced during program implementation.
  - The report’s observation that consolidation relied increasingly on expenditure cuts should be complemented with the political constraints to raise taxes and the prior trend of surging and unsustainable expenditures during 2007–2014.
- Central Bank balance-sheet and debt repayment profile:
  - Repayment of government and public banks’ debt to the Central Bank amounted to US$8.3 billion in total claims to be addressed; US$2.4 billion were repaid over 2021-2023 (equivalent to more than 35 percent of the total disbursements under the EFF), with over US$1 billion repaid only in 2023.
  - While these repayments strengthened the Central Bank balance sheet and decreased Ecuador’s public debt-to-GDP ratio, they caused a monetary contraction during a period of weak economic activity and low inflation and increased liquidity stress in fiscal accounts.
  - The repayment schedule remains concentrated and bumpy in coming years; in hindsight, a smoother but sustainable repayment schedule would have been preferable to avoid undue economic and fiscal pressures and erosion of public support.
- Institutional design for monetary and financial governance:
  - The planned establishment of two separate monetary and financial regulation boards (Monetary Policy and Regulation Board and Financial Policy and Regulation Board) was not referenced in the report; authorities raised objections to creating two separate boards due to gray areas, overlapping responsibilities, potential coordination issues, financial and operational challenges of creating a new regulatory body, and a more convoluted crisis management framework.
  - Given the limited functions of the Central Bank in a dollarized economy, authorities favored one strong board for monetary and financial regulation but accepted Fund staff’s position to avoid delaying program approval.
  - In practice, overlapping functions and gray zones have arisen between the two boards, complicating liquidity and crisis management and making the nomination process for technically suitable and independent members harder in a fragmented legislative environment.
  - There is broad consensus among current and former authorities, financial market participants, and independent economists in Ecuador that a single monetary and financial board would have been more effective and created fewer risks than the two-board arrangement.
  - Authorities recommend the Fund reflect on its internal decision-making and checks and balances when advocating such institutional setups in program design.

### Program Performance
- Overall assessment:
  - Program objectives were achieved; Ecuador concluded the EFF in a much stronger position than expected at program approval.
  - All quantitative performance criteria were met, including public debt reduction and international reserve accumulation, with significant overperformance.
  - Structural reforms in fiscal, monetary, governance, and anti-corruption areas strengthened an institutional framework that was opaque and weak at program approval.
  - Many meaningful structural reforms were adopted despite weak political support in the National Assembly and low public approval.
- Role of oil prices:
  - The EPE repeatedly notes better-than-expected outturns resulted from higher oil prices; authorities agree higher oil prices helped achieve certain targets but caution the EPE focuses only on revenue effects and misses expenditure consequences and historical dynamics.
  - Higher oil prices also mean higher fuel subsidies; in previous episodes higher oil prices led to higher government expenditures beyond fuel subsidies, but in this program a significant part of the oil windfall was saved.
  - Program outturns were the result of higher-than-expected oil prices and deliberate policy actions implemented under challenging conditions.
- Fiscal targets and conditionality:
  - Authorities disagree with the report’s view that the non-oil primary balance including fuel subsidies should ideally have been a QPC instead of an IT.
  - The non-oil primary balance consolidated by 1.6 percent of GDP during the program; when including fuel subsidies, that consolidation was of only 0.2 percent of GDP.
  - Fuel subsidies increased dramatically during implementation mainly due to the significant increase in oil prices; the non-oil primary balance including subsidies is dependent on external factors beyond authorities’ control and treats oil prices asymmetrically (excludes oil revenues but keeps oil subsidy outlays).
- Fuel subsidy reform and social protection:
  - Ecuador made historical progress in reducing fuel subsidies despite political sensitivity and fierce opposition; suspension of the automatic fuel pricing formula in October 2021 and a marginal increase in fuel subsidies in July 2022 affected the pace of expenditure decline relative to program expectations.
  - Authorities highlight prior episodes of violent social protests (including October 2019) when attempts were made to cut fuel subsidies, underscoring political risks.
  - A targeted measure in December 2022 aimed at the shrimp sector was expected to yield an annual fiscal expenditure reduction of around US$170 million.
  - Expansion of the social safety net and increased coverage of low-income beneficiaries of cash transfers were crucial to protect the most vulnerable during the pandemic and fiscal consolidation, but authorities note the expanded cash transfers did not effectively compensate the more vocal groups most affected by fuel subsidy reductions because beneficiaries were not the same population segments.
  - Authorities suggest the Fund and other IFIs could provide technical assistance on gradual, piecemeal approaches to reducing fuel subsidies and emphasize compensation mechanisms should target the population most affected by subsidy reductions.

### Financing
- Authorities view financing and disbursement design as appropriate given the circumstances.
- Front-loaded purchases were crucial in alleviating severe financing shortfalls in 2020 and relied on strong commitment to the program; the authorities fully corresponded to this commitment throughout the 27 months of implementation.

*Source: Appendix I. Authorities’ Views (Extract).*

### 16.      While the program catalyzed relevant financing from other IFIs, coordination among

### 1ecuea2023002 - 16.      While the program catalyzed relevant financing from other IFIs, coordination among

### Coordination among IFIs
- The program unlocked additional budget support loans from multilateral development banks that were "vital to satisfy our pressing financing needs."
- Some proposed loan projects were "not consistent with the program’s objectives," specifically by envisaging "non-trivial fiscal expansions" and "higher permanent current expenditures."
- Lesson: "Enhancing coordination among IFIs, particularly in terms of maintaining broad fiscal objectives," could improve outcomes.

### Debt restructurings catalyzed by the EFF
- In the summer of 2020, an agreement was reached for a voluntary exchange of outstanding international bonds, contingent on reaching Staff Level Agreement on the EFF.
- The bond exchange produced:
  - "interest savings of US$5.7 billion over 2020-2025"
  - "additional savings of US$5.6 billion in amortizations over 2022-2025"
  - These savings "considerably exceed[ed] the program’s total financing of US$6.5 billion."
- Use of enhanced CACs: "this was the first time enhanced CACs were used in a debt restructuring agreement."
- Chinese creditor reprofilings:
  - Shortly before program approval: cumulative cash flow relief of "US$272 million over 2020-2022" from two Chinese state-owned banks.
  - In September 2022: reprofiling with two Chinese state-owned banks reduced debt service by "US$687 million over 2022-2024," plus other favorable modifications.
- Assessment: The report "duly notes these restructurings and their positive impact on Ecuador’s debt sustainability."

### Exceptional Access Framework
- The application of the exceptional access criteria "can be discretionary" and "should be revised" in the authorities' view.
- While staff applied the policy "in line with IMF practices," the report acknowledges "it is challenging to evaluate some of the exceptional access criteria."
- Concern: Staff judgment appears discretionary; criteria must "really add relevant safeguards to IMF and avoid creating room for lack of evenhandedness in Fund decisions."

### Misreporting and statistical capacity
- The misreporting case exposed "long-standing institutional and technical capacity weaknesses."
- The EFF helped authorities address "legacy institutional failures, including in the quality of statistics."
- Without the program, "lingering failures in public finance statistics would not have been identified and resolved."
- The case was treated as an opportunity to identify gaps and resolve them with "valuable technical assistance from the Fund."

### Assessment of the EPE and program extension disagreement
- The authorities "mostly agree with the EPE’s assessment" but "do not endorse the reference to a presumably desirable extension of the program."
- Rationale:
  - They "met all quantitative performance criteria, including some with overperformance."
  - They met "most of the significant number of structural benchmarks."
  - "The exceptional benchmarks that we were unable to fulfill were for reasons beyond our control."
  - Therefore, "before the completion of the program there was no reason for us to request any extension."
  - The Executive Board "approved the Sixth and final Review of the program without any objection."

### Concluding appraisal and remaining vulnerabilities
- Agreement with main findings: the program "successfully stabilized the economy against the backdrop of a historic downturn with significant downside risks" and "strengthened key fiscal, monetary, and anti-corruption institutions."
- Caveat: "vulnerabilities persist, and market access remains elusive."
- Commitment: authorities remain "committed to safeguarding our achievements under the EFF and to continue working closely with the IMF and other development partners."

### Specific disagreements and policy constraints
- Disagreement with the suggestion an extension "would have been preferable."
- Fiscal accomplishments emphasized:
  - "The progress that Ecuador made in reducing fuel subsidies was a historical accomplishment."
  - "The price of subsidized fuel was almost doubled during the EFF."
  - Fuel subsidy reform "was not part of the program’s conditionality" and faced "a fierce social and political backlash."
- Tax reform regarded as "a significant accomplishment given the political circumstances and the economic cycle."
- Disagreement with staff view that "the non-oil primary balance including fuel subsidies should have been a QPC" on grounds that the parameter "is asymmetrical and was impacted considerably by external factors that did not reflect policy decisions."

### Debt repayment profile lesson
- Observation: concentrated bond maturity profile created "contractionary effects and the liquidity stress" on the economy.
- Lesson: a "smoother but sustainable repayment schedule" from the government to the Central Bank would have "ensured institutional strengthening without creating undue economic and fiscal constraints and social opposition."

### Institutional arrangements and Fund process
- Concern about the process that led to establishing "separate monetary and financial boards."
- Authorities accepted Fund staff’s position "because we could not afford delaying the approval of the programs."
- Result: the design "has multiple shortcomings" and has been "confirmed in practice."
- Recommendation: "the Fund should reflect upon its internal process" which produced "the current inefficient and cumbersome institutional setup."

### Importance of context
- Implementation context: "global economic circumstances and the domestic political environment were adverse."
- Specific contextual factors:
  - Program began amid "a severe macroeconomic downturn and with a presidential election within six months."
  - Two administrations implementing the program "had minimal legislative support and consistently low public support."
- Claim: context is essential to "understanding the reasons and constraints behind important decisions taken and policy measures implemented during the program."

### Ownership and implementation follow-up
- Authorities reiterate "ownership of the program and commitment to it, including to this date."
- Example of implementation difficulty: attempted audit of the state-owned oil company financed with an IDB loan—initial tender "ended without any bids."
- Follow-up: "After the conclusion of the program, we have made concrete progress," launching a new tender, "received bids," and "currently expect that the audit of the state-owned oil company’s financial statements will start in a few months."
- Recognition: "We want to recognize Fund staff for their very close engagement and their open and frank communication with us, which were essential for the success of the program."

*ECUADOR — INTERNATIONAL MONETARY FUND excerpt.*

### 27.      The program was instrumental in helping to establish a national policy agenda. It is

### Statement by Afonso Bevilaqua, Bernardo Acosta, and Pedro Miranda — November 29, 2023

### Background
- The program was instrumental in helping to establish a national policy agenda amid difficulty in reaching consensus on key fiscal and structural objectives in Ecuador.
- Pre-pandemic imbalances:
  - Public spending rose from an average of around 21 percent of GDP in the first half of the 2000s to 46 percent of GDP in 2014.
  - Central Bank credit outstanding reached 7 percent of GDP in 2017.
  - Public debt rose from 19 percent of GDP in 2009 to 51 percent of GDP in 2019.
  - Output grew 2.4 percent during 2015–2019 (anemic growth).
- Pandemic impact and program rationale:
  - At approval of the 2020 EFF, output was expected to contract by 11 percent in that year.
  - Actual GDP declined by 7.8 percent in 2020.
  - Ecuador met criteria for exceptional access due to the pandemic shock and lack of alternative financing.
  - The EFF enabled restructuring of international bonds with savings of US$5.7 billion in interest over 2020-2025 and US$5.6 billion in amortizations over 2022-2025, exceeding the US$6.5 billion financing provided by the EFF.
  - The program facilitated debt reprofiling with Chinese state-owned banks.

### Program Performance — Key findings and statistics
- Macroeconomic stabilization and fiscal outcomes:
  - Turned an overall fiscal deficit of 7.1 percent of GDP in 2020 into a small surplus in 2022 (first surplus since 2008).
  - Fiscal dependency on oil revenues diminished; a substantial part of the oil windfall was saved.
  - Non-oil primary deficit was markedly lower by program completion than in previous years.
- Structural reforms implemented:
  - Progressive tax reform enacted.
  - Legislation strengthened the fiscal framework, bolstered Central Bank governance and autonomy, and criminalized corruption.
- Public debt and reserves outcomes versus program expectations:
  - Public debt reached the 57 percent of GDP target in early 2023 (earlier than the 2025 target envisaged at program approval).
  - International reserves increased from US$2.5 billion at program approval to US$7.7 billion by program completion, versus the US$5 billion expected at approval.
- Program conditionality and implementation intensity:
  - The program included 33 structural benchmarks (around 15 per year), compared to an average of 11 per year in other exceptional access programs.
  - Authorities implemented most reforms despite heavy implementation burden.
- Tax reform and political context:
  - Progressive tax bill enacted in November 2021 despite a new administration that had publicly announced it would not raise taxes and had minimal legislative representation (12 legislators out of 137).
  - The reform increased income tax on the wealthier population; revenue increase as a percentage of GDP was less than expected when the program was designed.
- Fiscal governance and transparency:
  - Structural benchmarks completed included improvements in cash and debt management, fiscal statistics capacity, procurement procedures, and audits.
  - Greater transparency on central government obligations to the Social Security Fund; part of these obligations have since been repaid.
- Monetary and financial sector reforms:
  - Reforms strengthened Central Bank autonomy by establishing an independent Board of Directors and eliminating the possibility of monetary financing of the budget, including ensuring full repayment of the government’s debt to the Central Bank at maturity.
  - Reforms mandated repurchase by the central government of public bank shares from the Central Bank, removed legacy assets from the 1999 financial crisis, and restored the four-reserve balance scheme to ensure full coverage of Central Bank liabilities with international reserves.
- Social safety net expansion:
  - Share of households in need receiving cash transfers rose from 3 out of 10 to 8 out of 10 by program conclusion.
  - Beneficiary families expanded from about 550 thousand to 1.2 million.
- Fuel subsidy adjustments (not program conditionality):
  - Government gradually increased fuel prices at the pump during the first year of the EFF, reducing fiscal resources allocated to fuel subsidies.
  - Adjustments were suspended in October 2021; slight increase in fuel subsidies in June 2022 due to political and social pressures.
  - In December 2022, fuel subsidies were eliminated for the shrimp sector, except for the smallest farms.
  - The EPE notes fuel prices almost doubled during the program and comments on political difficulty of subsidy reduction.

### Assessment and Lessons from the EFF — Authorities’ views and recommendations
- Agreement with EPE overall assessment:
  - Authorities broadly agree with the EPE’s assessment that flexibility was needed to adapt to changing political, social, and economic circumstances to safeguard stabilization and institutional reform objectives.
- Disagreement on program extension:
  - Authorities reject the EPE’s suggestion that an extension of the program would have been preferable, noting Ecuador met all quantitative performance criteria and most structural benchmarks, and macroeconomic outturns generally exceeded expectations.
- Central Bank debt repayment sequencing:
  - Authorities believe a smoother profile of debt repayments from the government to the Central Bank should have been programmed.
  - Mandated full repayment at maturity strengthened the Central Bank balance sheet but increased liquidity stress in fiscal accounts and caused a monetary contraction during a period of weak economic activity and low inflation.
  - Repayment schedule remains concentrated and bumpy in coming years; a smoother schedule would have avoided undue economic and fiscal constraints and social opposition.
- Institutional design of monetary and financial governance:
  - Authorities argue the Fund should draw insights from Ecuador’s experience with two separate monetary and financial boards.
  - During program preparation authorities preferred one strong board for monetary and financial regulation given the limited functions of the Central Bank in a dollarized economy, but accepted two separate boards to avoid delaying program approval.
  - In practice, gray areas between boards’ functions produced coordination issues; the financial board faced significant operational challenges as a new regulatory body.
  - Liquidity and crisis management require a convoluted process under the dual-board arrangement.
  - Authorities recommend the Fund reflect on its decision-making and internal checks and balances when designing such institutional arrangements for future programs.

### Concluding remarks
- Overall assessment:
  - The EFF was instrumental in helping Ecuador overcome an extremely vulnerable period and laid foundations for sustainable economic growth.
  - During the 27-month period, two administrations made considerable progress in restoring macroeconomic stability, strengthening domestic institutions, and protecting the most vulnerable.
  - The mission team’s engagement was essential for program success.
- Remaining vulnerabilities and ongoing commitment:
  - Significant progress achieved, but vulnerabilities persist.
  - Authorities note Ecuador’s paradoxical recent history: imbalances developed when conditions were favorable and recovery occurred when conditions were adverse.
  - Two years after 2020, the country balanced public accounts and institutionalized legal frameworks strengthening sustainability and transparency.
  - Authorities remain mindful of persistent macroeconomic challenges and committed to continue addressing them, reiterating interest in remaining closely engaged with the Fund.

*Statement by Afonso Bevilaqua, Executive Director for Ecuador; Bernardo Acosta, Senior Advisor to Executive Director; and Pedro Miranda, Senior Advisor to Executive Director — November 29, 2023.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1ecuea2023002.pdf_