## 1ecuea2024001

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### EXECUTIVE SUMMARY — context and program objectives
- Ecuador completed a 27-month Extended Fund Facility (EFF) arrangement in December 2022; subsequent political uncertainty, a security crisis, and exogenous shocks to oil revenue and interest rates led to sharp macroeconomic and fiscal deterioration after the 2020 EFF.
- Authorities requested a 48-month EFF arrangement of SDR 3 billion (about US$4 billion, 430 percent of quota) to support policy plans and advance a structural reform agenda.
- Staff estimates Fund resources are needed to close a financing gap of about US$4 billion during the program period after factoring in an ambitious fiscal plan, financial support from international financial institutions and official bilateral partners, and renewed access to international capital markets.
- Core objectives of the EFF-supported program:
  - strengthen fiscal sustainability, while protecting vulnerable groups;
  - safeguard dollarization and macroeconomic stability;
  - rebuild liquidity buffers;
  - enhance financial stability and integrity;
  - further advance the structural reform agenda to promote sustainable and inclusive growth.
- Exceptional access assessment: all four EA criteria met; existing Fund credit at SDR 5.8 billion (835 percent of quota) exceeds normal access, requiring exceptional access for additional support.

### RECENT MACROECONOMIC DEVELOPMENTS AND PROJECTIONS
- Growth and activity:
  - Real GDP growth: 6.2 percent (2022); 2.4 percent (2023); projected average 0.1 percent (2024) with gradual rise toward potential of 2½ percent in the medium term.
  - 2023Q4 real GDP contracted by 0.7 percent (y/y); 2023Q3 was +0.7 percent.
  - High-frequency indicators weak into 2024Q1; nationwide blackouts reappeared in April 2024.
- Labor and social indicators:
  - Informal employment at historically high rates; poverty started to increase again in 2023, notably in rural areas.
- Inflation:
  - Headline inflation peaked at 4.2 percent y/y in June 2022; April 2024 headline (core) inflation accelerated to 2.7 (2.0) percent (y/y), driven by the VAT rate hike.
  - Inflation projected to average 2.4 percent in 2024 and converge to around 1½ percent over the medium term.
- External sector and reserves:
  - Current account (CA) surplus: 1.8 percent (2022) → around 1.9 percent of GDP (2023); CA gap estimated at about -1.4 percent of GDP implying a REER gap ≈ 8 percent.
  - Gross international reserves: about US$8.5 billion (end-2022) → about US$4.5 billion (end-2023) → US$5.3 billion (end-March 2024).
  - International reserves cover deposits and reserves of private banks at the BCE but remain well below adequacy metrics.
- Key macro projections (selected exact figures):
  - Real GDP (percent change): 2024: 0.1; 2025: 1.2; 2026: 1.8; 2027: 2.4; 2028: 2.5.
  - Gross international reserves (US$ millions): 2024: 5,212; 2025: 6,724; 2026: 8,768; 2027: 10,991; 2028: 13,264.
  - Oil price Ecuador mix (US$ per barrel): 2024: 67.5; 2025: 63.7; 2026: 61.3.

### FISCAL DEVELOPMENTS, ONE-OFF REPROFILING, AND FISCAL PLAN
- 2023 fiscal outcomes:
  - NFPS fiscal balance: deficit of US$4.2 billion (3.6 percent of GDP) in 2023.
  - Non-oil primary balance (NOPB) deteriorated by 2.1 percent of GDP in 2023.
  - Fuel subsidies: 2.7 percent of GDP (2023).
  - Government deposits at the BCE declined by US$2.9 billion; NFPS deposits closed 2023 at US$3.8 billion.
  - Central government incurred about US$900 million in arrears to private suppliers and borrowed US$100 million in liquidity from public sector entities outside the NFPS perimeter.
- One-off reprofiling of public debt owed to the BCE:
  - December 2023 amendment allowed a one-off reprofiling to smooth the debt service profile.
  - Reprofiling reduced financing needs by about US$300 million in 2024 and about US$1 billion per year in 2025-26.
- 2024 fiscal measures and revenue:
  - Implemented a 3-percentage point hike in the VAT rate to 15 percent (April 2024) and other transitory revenue measures.
  - Measures implemented expected to yield a net increase of US$2.2 billion (1.8 percent of GDP) in non-oil revenue in 2024, of which 1.2 percent of GDP are transitory.
  - Authorities committed to gradually phasing out the ISD (tax on transfers abroad).
- Program consolidation targets:
  - Frontloaded improvement in NFPS NOPBS of 2.2 percent of GDP in 2024 and an additional 3.3 percent of GDP over 2025-28, totaling 5.5 percent of GDP over the program period.
  - NFPS overall deficit projected to narrow by 1.6 percent of GDP to US$2.4 billion (2 percent of GDP) in 2024 and turn into an overall surplus of 0.6 percent of GDP by 2028.
  - NFPS primary balance projected to turn into a surplus in 2025, increasing to 2 percent of GDP by 2028.
  - Public debt-to-GDP ratio projected to comply with COPLAFIP limit of 40 percent by 2032.

### FINANCING STRATEGY, GROSS FINANCING NEEDS, AND IMF ACCESS
- Program financing and assumptions:
  - Government assumed able to roll over all maturing domestic debt in 2024.
  - Remaining financing needs of US$5.2 billion (4.3 percent of GDP) to be covered by multilateral, official bilateral, and commercial creditors.
  - External market re-access assumed to start with US$1.5 billion in 2025, increasing to US$2 billion in 2026.
  - Staff estimates EFF arrangement will close Ecuador’s residual financing needs of about US$4 billion (SDR 3 billion, 430 percent of quota) during the program period.
- Gross Financing Needs (US$ million; selected rows):
  - Gross Financing Needs: 8,035 (2024), 7,849 (2025), 7,704 (2026), 7,640 (2027), 6,796 (2028).
  - NFPS Deficit: 2,442 (2024), 1,473 (2025), 314 (2026), 118 (2027), -832 (2028).
  - Amortization: 5,593 (2024), 6,375 (2025), 7,390 (2026), 7,522 (2027), 7,628 (2028).
    - Domestic amortization: 3,269 (2024), 3,221 (2025), 3,404 (2026), 3,080 (2027), 3,341 (2028).
    - External amortization: 2,325 (2024), 3,154 (2025), 3,986 (2026), 4,442 (2027), 4,287 (2028).
- Gross Financing Sources (US$ million; selected rows):
  - Domestic sources: 2,830 (2024), 2,209 (2025), 2,504 (2026), 2,490 (2027), 2,646 (2028).
    - T-bills: 2,166 (each year 2024-2028).
  - External sources: 5,205 (2024), 5,640 (2025), 5,200 (2026), 5,150 (2027), 4,150 (2028).
    - IMF: 1,500 (2024), 1,250 (2025), 500 (2026), 500 (2027), 250 (2028).
    - Multilateral (excl. IMF): 3,295 (2024), 1,900 (2025), 1,900 (2026), 1,900 (2027), 1,400 (2028).
    - Bilateral: 410 (2024), 990 (2025), 800 (2026), 750 (2027), 500 (2028).
    - Bonds (external market re-access): 0 (2024), 1,500 (2025), 2,000 (2026), 2,000 (2027), 2,000 (2028).
- EFF phasing and schedule:
  - Total access proposed at SDR 3 billion (US$4 billion), phased as:
    - SDR 1.1 billion (US$1.5 billion) in 2024,
    - SDR 0.9 billion (US$1.25 billion) in 2025,
    - SDR 0.4 billion (US$0.5 billion) in 2026 and 2027,
    - SDR 0.2 billion (US$0.25 billion) in 2028.
  - Program envisages triannual reviews during 2024-25 and semiannual reviews during 2026-28.
- Fund exposure and peak metrics:
  - Existing Fund credit: SDR 5.8 billion (835 percent of quota).
  - After initial purchase, Fund credit to Ecuador would increase to SDR 6.5 billion (935 percent of quota) by end-May 2024; GRA credit to Ecuador would peak in 2025 at 1,000 percent of quota.
  - Peak Fund obligations relative to gross international reserves would reach 25.8 percent in 2025 and decline to 3.9 percent in 2033.
  - External public debt projected to reach 956 percent of gross reserves in 2024; external debt service peaks in 2027 at 48.6 percent of projected exports of goods and services.

### FINANCIAL SECTOR, REPRESSION, AND REFORMS
- Financial soundness and liquidity:
  - Regulatory capital to risk-weighted assets: 15.8 (2021); 15.7 (2022); 15.1 (2023); Mar-24: 15.0.
  - Nonperforming loans to total gross loans: 3.7 (2021); 3.7 (2022); 4.6 (2023); Mar-24: 4.7.
  - Liquid assets to total assets: 20.7 (2021); 18.3 (2022); 15.2 (2023); Mar-24: 15.2.
  - A liquidity fund funded by financial institutions held external assets totaling US$3.5 billion (end-2023); BCE has access to about US$2.1 billion in liquidity facilities with the FRBNY, BIS, and FLAR.
- Financial repression and policy agenda:
  - Interest rate caps differentiated by credit type compress margins, distort credit supply, and restrict financial inclusion; 2023 FSSA recommended migrating rate caps to a usury rate.
  - Minimum requirement to maintain at least 60 percent of liquidity in Ecuador and minimum investments in sovereign bonds and securities by financial institutions.
  - Key policy actions: strengthen oversight and coordination; enhance prudential capital and liquidity framework; strengthen financial safety net; foster financial deepening and capital market development; gradual elimination of interest rate caps linked to development of domestic bond market and careful sequencing.
- Structural benchmarks and market infrastructure:
  - Establish Financial Stability Committee (end-September 2024).
  - Phased implementation of Liquidity Coverage Ratio (targeted gradual achievement).
  - Prepare regulations on systemic risk buffers (end-November 2024).
  - Sign contract to overhaul BCE’s central securities depository (DCV) (end-November 2024) and begin auctioning public securities at market-determined rates once systems are in place.
  - Prepare and share study of the system of interest rates with recommendations (end-March 2025).

### SOCIAL SAFETY NET AND INCLUSION
- Social registry and transfers:
  - Expanded social registry to cover families in the lowest three deciles; structural benchmark to complete the social registry (end-October 2024).
  - Plan to expand cash transfer programs by about 50,000 new families each year (about 200,000 families by end-2028).
  - Expansion expected to cost about US$300 million annually once all targeted families are covered.
  - Target: ensure all families in the lowest two deciles and a majority of families in the third decile are incorporated during the EFF-supported program.
- Protection guarantees:
  - Program conditionality includes a floor on coverage of cash transfer programs for lower income households and a floor on the NFPS non-oil primary balance including fuel subsidies.

### INSTITUTIONAL REFORMS, PFM, GOVERNANCE, AND CD
- Public financial management and transparency:
  - Structural benchmarks: publish MTFF and MTDS (end-October 2024); share plan to clear and prevent resurgence of domestic arrears (end-November 2024); publish fiscal risks report; implement multi-year expenditure ceilings; operationalize SNC (end-December 2024).
  - Revise mechanism to settle healthcare claims from IESS and pursue updated MEF/IESS agreement (end-October 2024); tender for auditor to review 2023–2024 healthcare obligations (end-December 2024).
  - Monthly dissemination of fiscal statistics and expanded public debt bulletin and database now accessible on MEF website.
- Anti-money laundering / financial integrity:
  - Draft Law to Suppress and Prevent Money Laundering and Financing of Terrorism submitted Oct-2022; new draft under discussion.
  - Authorities committed to enact new AML/CFT law in line with FATF standards (end-February 2025).
- Capacity development (CD) priorities:
  - IMF CD to align with EFF reforms: PFM, revenue administration, fiscal and debt management, financial stability, statistics, and forecasting.
  - Notable CD-driven improvements: MTDS publication (Feb-2021), debt registry (2023), LT experts supporting GFS, TADAT, PIMA recommendations.
  - Constraints: frequent staff turnover and recent government transition; mitigation: sequenced, digestible TA steps and close coordination with partners.

### RISKS, EXCEPTIONAL ACCESS ASSESSMENT, AND STAFF APPRAISAL
- Risks (baseline tilted to the downside):
  - Downside risks: further deterioration in security and/or electricity crisis; increased political fragmentation delaying reforms; unexpected declines in oil prices or disruptions to oil production; extreme climate events; tighter global financing conditions; deeper geoeconomic fragmentation and geopolitical tension.
  - Upside risks: stronger-than-expected global growth and higher oil prices; faster improvement of the security situation.
- Debt sustainability and program prospects:
  - Public debt-to-GDP: 55.3 percent (2023) → projected decline to about 40 percent by 2032 under program.
  - Staff judges public debt sustainable but not with high probability; assessment finely balanced and hinges on steadfast implementation of proposed reforms.
  - Fanchart and medium-term tools flag moderate overall risk with wide confidence intervals; probability of debt non-stabilization 25.8 percent (value).
- Exceptional access Box highlights:
  - Criterion 1: exceptional BoP pressures and an outstanding financing gap of US$4 billion in 2024-28 after planned consolidation and support.
  - Criterion 2: debt assessed sustainable but not with high probability; adequate safeguards in place contingent on reforms.
  - Criterion 3: prospects to regain market access with successful implementation and decline in sovereign spreads observed in early 2024.
  - Criterion 4: program provides a reasonably strong prospect of success given broad support and authorities’ commitment; risks include political fragmentation and elections.
- Staff recommendation:
  - Staff supports the authorities’ request for a 48-month EFF arrangement with exceptional access to bridge financing needs, catalyze external support, and help restore market confidence.

### PROGRAM CONDITIONALITY, MONITORING, AND ADJUSTORS (selected exact figures and deadlines)
- Quantitative performance criteria (cumulative change from January; US$ million unless indicated):
  - Nonoil primary balance of PGE (floor): -1,078 / -2,295 / -472 / -1,245 (test dates).
  - Overall balance of PGE and CFDD (floor): -2,200 / -4,213 / -753 / -2,377.
  - Accumulation of NFPS deposits at the central bank (floor): 200 / 360 / 50 / 150.
  - Continuous QPCs: non-accumulation of external payments arrears by the NFPS = 0 / 0 / 0 / 0; no new central bank direct and indirect financing to NFPS = 0 / 0 / 0 / 0.
- Indicative targets (selected, cumulative from January):
  - Overall balance of the NFPS (floor): -1,628 / -2,442 / -491 / -982.
  - NOPBS of the NFPS (floor): -4,100 / -6,528 / -1,500 / -3,400.
  - Change in the stock of NIR (floor): -200 / -310 / 116 / 382.
  - Stock of PGE arrears to domestic private sector (ceiling): 862 / 662 / 600 / 400.
  - Number of families in the first three income deciles covered by cash transfer programs (floor): 1,192,713 / 1,212,984 / 1,228,660 / 1,244,336.
- Prior actions (selected):
  - Prepare and share a projected monthly cash flow and financing plan for the budgetary central government for the remainder of 2024 (prior action).
  - Prepare a contingency plan to ensure compliance with program fiscal targets if revenues underperform (prior action).
- Structural benchmarks (selected due dates):
  - Publish MTFF and MTDS — End-October 2024.
  - Share updated plan to clear and prevent domestic arrears — End-November 2024.
  - Prepare plan to mobilize non-oil fiscal revenues — Mid-November 2024.
  - Establish Financial Stability Committee — End-September 2024.
  - Sign contract for BCE DCV platform — End-November 2024.
  - Prepare study of interest rate system with recommendations — End-March 2025.
  - Enact new AML/CFT legislation in line with FATF standards — End-February 2025.
- Adjustors and monitoring lags (selected exact mechanics and figures):
  - Ecuador mix crude oil price program assumption: 67.52 (US$ per barrel).
  - Oil-price adjustor per US$1: US$23.85 million (overall balance adjustor); alternative adjustor for NFPS deposits: US$11.93/US$23.85 million; adjustor cap at corresponding test dates: US$178.9 million.
  - Reporting lags: fiscal data for program monitoring provided within 45 days from each test date; preliminary monthly data within 30 days; NFPS deposits weekly within 5 business days; other specified lags include 60 days, 90 days, and monthly/day/weekly frequencies for detailed datasets as per TMU.

*IMF staff report: EXECUTIVE SUMMARY and selected chapters (content unit 1ecuea2024001).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Ecuador completed a 27-month Extended Fund Facility (EFF) arrangement in December 2022.
- Political uncertainty, a security crisis, and exogenous shocks to oil revenue and interest rates led to a sharp macroeconomic and fiscal deterioration after the 2020 EFF.
- The authorities implemented swift measures in early 2024 and requested a 48-month EFF arrangement of SDR 3 billion (about US$4 billion, 430 percent of quota) to support policy plans and advance a structural reform agenda.
- Staff estimates Fund resources are needed to close a financing gap of about US$4 billion during the program period, after factoring in an ambitious fiscal plan, financial support from international financial institutions and official bilateral partners, and renewed access to international capital markets.
- The baseline scenario under the program is subject to substantive risks from both external and domestic factors.

### Program Objectives and Modalities
- Core objectives of the EFF-supported program:
  - strengthen fiscal sustainability, while protecting vulnerable groups;
  - safeguard dollarization and macroeconomic stability;
  - rebuild liquidity buffers;
  - enhance financial stability and integrity;
  - further advance the structural reform agenda to promote sustainable and inclusive growth.
- The authorities are committed to implementing measures to safeguard macroeconomic stability, strengthen fiscal sustainability, rebuild liquidity buffers, and strengthen resilience and inclusive growth.

### Exceptional Access Policy
- All exceptional access criteria have been met:
  - Criterion 1: Balance of payments needs stemming from lower oil revenues and pressures on the financial account arising from external debt obligations.
  - Criterion 2: Public debt is assessed as sustainable but not with high probability; staff assessed that liquidity would be adequate to safeguard Fund resources should adverse shocks materialize. This assessment was finely balanced and hinged on steadfast implementation of proposed reforms.
  - Criterion 3: Successful implementation is expected to help further reduce sovereign spreads and facilitate regaining access to international capital markets.
  - Criterion 4: Staff assesses the policy program provides a reasonably strong prospect of success, with broad support to main objectives and strong commitment and capacity by the authorities.
- The proposed arrangement is subject to the exceptional access policy because existing Fund credit, at SDR 5.8 billion (835 percent of quota), already exceeds normal access levels.

### Recent Macroeconomic Developments
- Growth and activity:
  - Real GDP grew by 6.2 percent in 2022, then slowed to 2.4 percent in 2023.
  - In 2023Q4, real GDP contracted by 0.7 percent (y/y), down from +0.7 percent in 2023Q3.
  - High-frequency indicators (credit growth, local sales, and vehicle sales) remained weak into 2024Q1.
  - Nationwide blackouts reappeared in April 2024 due to energy shortages.
- Labor market and social indicators:
  - Inadequate employment remained above pre-pandemic levels in 2023.
  - Informal employment hovered at historically high rates.
  - Poverty started to increase again in 2023, notably in rural areas.
- Inflation:
  - Headline inflation peaked at 4.2 percent y/y in June 2022 and moderated thereafter.
  - In April 2024, headline (core) inflation accelerated to 2.7 (2.0) percent (y/y), driven by the VAT rate hike.

### External Sector and Reserves
- Current account:
  - CA surplus increased marginally from 1.8 percent in 2022 to around 1.9 percent of GDP in 2023 amid a sharp decline in oil-related exports and higher interest payments on external public debt.
  - The CA gap is estimated at about -1.4 percent of GDP, pointing to a real effective exchange rate gap of about 8 percent.
- Reserves and liquidity:
  - Gross international reserves dropped to about US$4.5 billion at end-2023, from US$8.5 billion at end-2022, before recovering to US$5.3 billion at end-March.
  - International reserves cover the deposits and reserves of private banks at the BCE, consistent with COMYF legal requirements, but remain well below adequacy metrics.

### Financial Sector and Liquidity Risks
- Financial soundness:
  - Average capital ratios have been declining but remain at 15 percent (as of end-March 2024), helped by mandatory earnings retention.
  - Asset quality deteriorated in 2023; there remains a material share of restructured and refinanced loans from the pandemic.
  - Loan quality is weak in small banks, public banks, and credit cooperatives; profitability is uneven with negative profits among small banks and anemic returns for credit cooperatives.
  - Lending margins have started to recover after revision of interest rate caps on corporate and commercial loans but remain compressed for lending to SMEs and micro enterprises.
- Liquidity arrangements and risks:
  - A liquidity fund, funded by financial institutions and holding external assets totaling US$3.5 billion as of end-2023, is available in the absence of a standard lender-of-last-resort regime.
  - The BCE has access to about US$2.1 billion in liquidity facilities with the FRBNY, BIS, and FLAR.
  - Managing liquidity risk remains a challenge due to cross holdings of certificates of deposits and a bulk of portfolio investments in government and other resident securities offering limited effective liquidity.

### Fiscal Developments and Government Liquidity
- Fiscal outcomes:
  - The NFPS fiscal balance worsened to a deficit of US$4.2 billion (3.6 percent of GDP) in 2023, reversing a small surplus at end-2022.
  - The deterioration contrasted with the 1.6 percent of GDP fiscal surplus expected at the final review of the 2020 EFF.
  - The non-oil primary balance (NOPB) deteriorated by 2.1 percent of GDP due to weak cyclical tax revenues and policy loosening driving a large increase in current expenditure in 2023.
  - Fuel subsidies remained sizeable at 2.7 percent of GDP in 2023 and added to fiscal pressures.
- Liquidity buffers:
  - Government deposits at the BCE declined by US$2.9 billion; NFPS deposits closed 2023 at US$3.8 billion, erasing the buildup of buffers from the 2020 EFF.
  - The central government incurred about US$900 million in arrears to private suppliers and borrowed US$100 million in liquidity from public sector entities outside the NFPS perimeter.

### Policy Actions in Early 2024 and Security Context
- Fiscal and administrative measures:
  - The government implemented a value added tax (VAT) rate hike of three percentage points in April 2024, alongside additional transitory revenue measures.
  - Introduced a limited set of tax incentives to stimulate growth and incentivize youth employment.
  - Announced intention to improve targeting of fuel subsidies while protecting the most vulnerable.
  - Increased the tax on transfers abroad (ISD) to stem the decline in FX reserves.
  - Announced a bill to allow electricity generation by private companies to help stem blackouts.
- Security measures:
  - A nationwide 60-day state of emergency was declared in early January 2024 (later extended for another 30 days) and an internal armed conflict was declared, including curfews and mobility restrictions.
  - The authorities took actions to bolster capability to fight crime, including enhancing the role of the military.
  - A referendum held in April received broad support for the authorities’ security agenda with nine questions related to security policies approved by a large margin; two economic initiatives in the referendum did not receive enough voter support.
- Market reaction:
  - Efforts in early 2024 contributed to a sharp decline in sovereign spreads, from over 2,000 basis points in early 2024 to below 1,200 basis points in April.

### Risks and Implementation
- The program baseline is exposed to substantive external and domestic risks, and the assessment of exceptional access was finely balanced and hinged on steadfast implementation of proposed reforms.
- Successful implementation of the EFF-supported program is expected to help reduce sovereign spreads and facilitate regaining access to international capital markets.
- Staff judges the policy program provides a reasonably strong prospect of success given broad support for main objectives and strong commitment and capacity by the authorities.

*IMF staff report: EXECUTIVE SUMMARY (1ecuea2024001)*

### 17.      A one-off reprofiling of public debt owed to the BCE provided relief to government

### 17. A one-off reprofiling of public debt owed to the BCE provided relief to government financing needs in the near term

### One-off reprofiling and immediate debt relief
- The 2021 COMYF reform prohibited new direct or indirect central bank financing of the government to protect dollarization, which left the government with large short-term debt amortizations.
- The authorities amended the COMYF legislation in December 2023 to allow a one-off reprofiling of these debt obligations to smooth the debt service profile.
- The reprofiling operation reduced financing needs by about US$300 million in 2024 and about US$1 billion per year in 2025-26.

### Public debt developments in 2023
- Public debt-to-GDP ratio declined to 55.3 percent in 2023 from 57 percent in 2022.
- Decline driven by difficulty accessing new financing and a successful debt-for-nature swap that reduced external bonds outstanding by US$970 million (0.8 percent of GDP).
- Public debt remains among the lowest in the Latin America and Caribbean region and among emerging market peers.
- Ecuador has not been able to access international capital markets since 2019 due to elevated sovereign spreads.

### Outlook and risks
- Growth projections:
  - Growth is projected to begin recovering in the second half of 2024 and increase gradually over the medium term.
  - Growth is projected to average 0.1 percent for 2024 as a whole.
  - Growth is projected to gradually rise towards its estimated potential rate of 2½ percent in the medium term.
- Key near-term headwinds described:
  - Challenging security situation, accumulation of government domestic arrears, a tighter fiscal policy stance, power outages, negative carry-over from 2023H2, and start of the planned unwinding of oil production in the Ishpingo-Tambococha-Tiputini (ITT) field.
- Inflation:
  - Inflation is projected to average 2.4 percent in 2024, reflecting mainly the effect of a higher VAT rate.
  - Inflation is projected to converge to around 1½ percent over the medium term, below levels projected in trading partners.
- Current account (CA) projections:
  - CA surplus projected to rise to about 2.1 percent of GDP in 2024.
  - CA surplus projected to gradually increase, reaching about 2.5 percent of GDP over the medium term.
- Balance of risks (tilted to the downside):
  - Downside risks: further deterioration in security and/or electricity crisis; increased political fragmentation delaying reforms; unexpected declines in oil prices or disruptions to oil production; extreme climate events; tighter global financing conditions; deeper geoeconomic fragmentation and geopolitical tension.
  - Upside risks: stronger-than-expected global growth and higher oil prices; faster improvement of the security situation.

### Objectives and policies under the Extended Fund Facility (EFF) arrangement
- Program aims:
  - (i) strengthen fiscal sustainability, while protecting vulnerable groups;
  - (ii) safeguard dollarization and macroeconomic stability;
  - (iii) rebuild liquidity buffers;
  - (iv) enhance financial stability and integrity;
  - (v) advance the structural reform agenda to promote sustainable and inclusive growth.
- Program will address key structural vulnerabilities, including lowering the volatility of public finances linked to oil prices, while preserving space for priority spending on security, social protection, and public investment.

### A. Strengthening fiscal sustainability — measures and targets
- Non-oil revenue mobilization:
  - Measures implemented expected to yield a net increase of US$2.2 billion (1.8 percent of GDP) in non-oil revenue in 2024.
  - Measures include: (i) a 3-percentage point hike in the VAT rate to 15 percent; and (ii) temporary taxes mostly in 2024 and 2025.
  - Additional sustained efforts needed after expiration of transitory tax measures; focus on permanent, high-quality measures on revenue and spending side.
- 2024 fiscal plan:
  - Contains spending in wages and goods and services while protecting targeted social support and priority investment projects.
  - Expenditure restraint via delaying non-essential hiring and purchases, protecting space for security spending.
- Program consolidation targets:
  - Target a frontloaded improvement in the NFPS non-oil primary balance including fuel subsidies (NOPBS) of 2.2 percent of GDP in 2024 and an additional 3.3 percent of GDP over 2025-28, totaling 5.5 percent of GDP over the program period.
  - Consolidation to rely on non-oil revenue mobilization, higher net oil revenue, and non-oil expenditure rationalization.

- Tax revenue measures and estimates:
  - Tax measures enacted in 2024 estimated to yield about 1.8 percent of GDP in 2024, of which 1.2 percent of GDP are transitory.
  - Additional permanent revenue of about 0.8 percent of GDP is expected over 2025-28.
  - Mid-November 2024 structural benchmark: prepare a plan to further mobilize non-oil fiscal revenues, including rationalizing inefficient tax expenditures and replacing transitory revenue measures with permanent high-quality ones.
  - Authorities committed to gradually phasing out the ISD (see ¶52 and Letter of Intent (LOI), ¶7).
- Other revenue mobilization:
  - Fuel subsidy elimination for large shrimp farms in 2023 generated about US$150 million in savings.
  - Plans to further improve targeting of fuel subsidies and promote energy transition with compensatory mechanisms.
  - Plans to increase oil revenues by gradually increasing production and enhancing refinery capacity.
- Expenditure consolidation and efficiency gains:
  - Improve efficiency of public employment by keeping wage growth in line with inflation.
  - Centralize procurement to exploit economies of scale.
  - Efficiency gains in state-owned enterprises (SOEs), especially hydrocarbon and electricity sectors.
  - Primary non-oil public expenditure rationalization projected to produce 1.8 percent of GDP in savings in 2024-28.

- Fiscal balance and debt trajectory:
  - NFPS overall deficit projected to narrow by 1.6 percent of GDP to US$2.4 billion (2 percent of GDP) in 2024 and turn into an overall surplus of 0.6 percent of GDP by 2028.
  - NFPS primary balance projected to turn into a surplus in 2025, increasing to 2 percent of GDP by 2028.
  - Public debt-to-GDP ratio aimed to comply with the COPLAFIP limit of 40 percent by 2032.
  - NFPS deposits expected to reach about US$8 billion by end-2028, up from US$3.8 billion in 2023.
  - Staff assessed public debt as sustainable but not with high probability under the program baseline (Annex II).
- Contingency and monitoring:
  - Authorities prepared a projected monthly financial plan including cashflows for the budgetary central government for the remainder of 2024 (prior action).
  - Authorities have outlined a contingency plan to ensure compliance with program targets (prior action).

### Financing strategy and gross financing needs (selected exact figures)
- Program assumptions:
  - Government able to roll over all maturing domestic debt in 2024.
  - Remaining financing needs of US$5.2 billion (4.3 percent of GDP) to be covered by multilateral, official bilateral, and commercial creditors.
  - External market re-access assumed to gradually start with US$1.5 billion in 2025, increasing to US$2 billion in 2026.
- Gross financing needs and sources (US$ million; selected rows):
  - Gross Financing Needs: 8,035 (2024), 7,849 (2025), 7,704 (2026), 7,640 (2027), 6,796 (2028).
  - NFPS Deficit: 2,442 (2024), 1,473 (2025), 314 (2026), 118 (2027), -832 (2028).
  - Amortization: 5,593 (2024), 6,375 (2025), 7,390 (2026), 7,522 (2027), 7,628 (2028).
    - Domestic amortization: 3,269 (2024), 3,221 (2025), 3,404 (2026), 3,080 (2027), 3,341 (2028).
    - External amortization: 2,325 (2024), 3,154 (2025), 3,986 (2026), 4,442 (2027), 4,287 (2028).
  - Gross Financing Sources: 8,035 (2024), 7,849 (2025), 7,704 (2026), 7,640 (2027), 6,796 (2028).
    - Domestic sources: 2,830 (2024), 2,209 (2025), 2,504 (2026), 2,490 (2027), 2,646 (2028).
      - NFPS deposits (- = accumulation): -360 (2024), -954 (2025), -939 (2026), -927 (2027), -1,031 (2028).
      - T-bills: 2,166 (each year 2024-2028).
      - Bonds: 1,024 (2024), 996 (2025), 1,277 (2026), 1,251 (2027), 1,510 (2028).
    - External sources: 5,205 (2024), 5,640 (2025), 5,200 (2026), 5,150 (2027), 4,150 (2028).
      - IMF: 1,500 (2024), 1,250 (2025), 500 (2026), 500 (2027), 250 (2028).
      - Multilateral (excl. IMF): 3,295 (2024), 1,900 (2025), 1,900 (2026), 1,900 (2027), 1,400 (2028).
      - Bilateral: 410 (2024), 990 (2025), 800 (2026), 750 (2027), 500 (2028).
      - Bonds (external market re-access): 0 (2024), 1,500 (2025), 2,000 (2026), 2,000 (2027), 2,000 (2028).

### B. Strengthening the social safety net
- Social registry and transfers:
  - Authorities expanded the social registry to cover families in the lowest three deciles.
  - Structural benchmark: develop a plan to complete the social registry (end-October 2024).
  - Plan to expand cash transfer programs by about 50,000 new families each year (about 200,000 families by the end of 2028).
  - Expansion expected to cost about US$300 million annually once all targeted families are covered.
  - Goal: ensure all families in the lowest two deciles and a majority of the families in the third decile are incorporated into the social safety net during the EFF-supported program.

### C. Enhancing institutional framework, governance, and transparency
- Public financial management (PFM):
  - Publish a Medium-Term Fiscal Framework (MTFF) and a Medium-Term Debt Management Strategy (MTDS) in line with program targets (end-October 2024 structural benchmarks).
  - Continue preparing and publishing a fiscal risks report, enhance oversight and monitoring of SOEs and PPPs, implement a multi-year expenditure ceiling per entity, and implement annual expenditure execution through quarterly commitment and monthly accrual quotas.
- Public procurement:
  - Fully operationalize the 2022 Procurement Law.
  - SERCOP to establish a timeline to operationalize the National Control Subsystem (SNC) (end-December 2024 structural benchmark).
  - SERCOP to continue regular publication of ultimate beneficiary ownership (UBO) of entities awarded procurement contracts.
- Fiscal governance and healthcare claims:
  - Revise mechanism to settle healthcare claims from the Ecuadorian Social Security Institute (IESS).
  - MEF to pursue an updated MEF/IESS agreement for settling and payment of healthcare obligations (end-October 2024 structural benchmark).
  - Based on the updated agreement, initiate tender to procure an auditor to review the 2023 and 2024 healthcare obligations to IESS (end-December 2024 structural benchmark).
- Revenue and customs administration:
  - Pursue reforms following the 2023 TADAT, modernize tax procedures code, improve management of large corporate taxpayers and high net worth individuals.
  - Enhance and modernize customs administration with IMF technical assistance: upgrade IT systems and simplify customs core processes.
- Public investment management:
  - Implement recommendations of the IMF 2023 Public Investment Management (PIMA) technical assistance: improve cross-institutional coordination, strengthen project appraisals, and enhance monitoring of public investment execution.

*Source: 1ecuea2024001 - 17. A one-off reprofiling of public debt owed to the BCE provided relief to government*

### 32.      Financial intermediation in Ecuador is affected by longstanding financial repression.

### 32. Financial intermediation in Ecuador is affected by longstanding financial repression.

### Financial repression, interest rate caps, and liquidity requirements
- Banks and credit cooperatives are subject to a complex system of ceilings on lending rates differentiated by credit type and, for commercial loans, also by borrower firm size.
- The 2023 FSSA noted that the caps on lending rates in the current higher interest rate environment have led to margin compression, distortions in credit supply, and restrictions to financial inclusion, and recommended migrating the rate caps to a usury rate.
- A recent update of the formulas to determine the interest rate caps on commercial and corporate loans led to marginal relief in these segments.
- Authorities have announced changes in the adjustment of caps on mortgage loans.
- Financial institutions are required to maintain at least 60 percent of their liquidity in Ecuador and face minimum required investments in sovereign bonds and securities issued by public companies.

### Financial policy agenda and sequencing
- Key areas for policy action:
  - (i) strengthening financial sector oversight and coordination among agencies involved;
  - (ii) enhancing the prudential framework governing capital and liquidity;
  - (iii) strengthening the financial safety net;
  - (iv) fostering financial deepening and capital market development, including by gradually eliminating interest rate caps and developing the sovereign bond market.
- Financial liberalization needs to be gradual and carefully sequenced; for example, transition to Basel III liquidity regulations would require the concurrent development of the domestic bond market.
- Dismantling financial repression mechanisms requires careful sequencing and transition plans to mitigate risks to financial stability.

### Implementation of FSSA recommendations and structural benchmarks
- Authorities’ actions underway or planned:
  - Plan to establish a Financial Stability Committee with participation of BCE, MEF, Monetary Board (JRPM), Financial Board (JRPF), Superintendency of Banks (SBs), SEPS, SCVs, and COSEDE (end-September 2024 structural benchmark).
  - Enhance stress testing capacity with Fund TA support.
  - Started transmitting BIESS credit data to the credit bureaus.
  - Steps to improve coordination and information sharing among supervisory agencies.
  - Phased implementation of the Liquidity Coverage Ratio, expected to be achieved gradually.
  - Preparation of regulations on systemic risk buffers (end-November 2024 structural benchmark).
  - Plan to assess the system of interest rate caps, with Fund staff support, and identify policy recommendations to reform the system in an orderly way (end-March 2025 structural benchmark).

### Domestic debt market and market infrastructure development
- The domestic debt market lacks liquidity and depth.
- Authorities have started to standardize government securities and aim to build a domestic yield curve.
- Planned actions to improve market infrastructure, with development partner TA:
  - Sign a contract to overhaul the BCE’s central securities depository (DCV), including settlement, liquidation, and custody functions in line with international standards (end-November 2024 structural benchmark).
  - Once systems are in place, intend to start auctioning public securities at market-determined rates.
  - Revamp the payments system to create a faster, more modern, and safer payments system, reducing transaction costs and supporting digital commerce and financial deepening.

### AML/CFT, financial integrity, and supervisory enhancements
- The EFF arrangement will support efforts to strengthen the AML/CFT framework to tackle illicit financial flows and organized crime financing and profitability.
- A Draft Law to Suppress and Prevent Money Laundering and Financing of Terrorism, elaborated with IMF technical assistance, was submitted to the National Assembly in October 2022; a new draft is under discussion.
- Authorities are committed to seeking approval and enactment of a new law to strengthen the AML/CFT framework in line with FATF international standards (end-February 2025 structural benchmark).
- Enhancing the independent supervisory role of the Economic and Financial Analysis Unit (UAFE) is important to tackle illicit financial flows.

### Competitiveness, growth potential, and structural reforms
- Longstanding constraints to growth include policy uncertainty, insecurity, labor market rigidities and informality, cumbersome regulations and licenses, limited trade integration, governance challenges (including in SOEs), and high borrowing costs.
- Policy priorities to raise growth potential:
  - Restore macroeconomic stability and secure fiscal sustainability to reduce sovereign risk and borrowing costs.
  - Institutional reforms to increase competitiveness and stimulate investment in sectors such as agriculture, tourism, mining, and renewable energy.
  - Leverage recently approved Free Trade Agreements, including with China and Costa Rica.
- Governance and anti-corruption:
  - A recently approved law on dominion extinction may help fight crime and corruption.
  - A Draft Law to Prevent Conflicts of Interest in Public Administration was submitted previously; approval would promote integrity and improve the business environment.
- Oil sector governance:
  - Authorities signed a contract in January with an international audit firm to audit Petroecuador and Petroamazonas (now merged), plan to complete the 2019 and 2020 audits and share results with IMF staff (end-March 2025 structural benchmark).
  - Initiatives to increase oil output include promoting private participation and enhancing refinery capacity.
- Electricity and climate resilience:
  - An electricity crisis that started in late 2023 re-emerged in April 2024, with nationwide blackouts used to ration supply.
  - Causes include climate trends, insufficient maintenance of hydroelectric plants, and supply constraints in neighboring electricity-exporting countries.
  - Priorities: maintain generation plants, unlock private renewable projects (solar, wind), and invest in climate-change adaptation and mitigation; explore climate financing including possible debt-for-nature swaps.
- Labor market reforms should increase flexibility and foster high-quality employment; constraints include rigid contracts, high separation costs, and high minimum wages.

### Program modalities, financing, and conditionality
- Financing needs and EFF support:
  - Staff estimates the EFF arrangement will close Ecuador’s residual financing needs of about US$4 billion (SDR 3 billion, 430 percent of quota) during the program period, after factoring in ambitious fiscal consolidation and support from IFIs and bilateral creditors.
  - Estimates assume Ecuador gradually regains access to international capital markets starting in 2025.
  - Fund financing is proposed to be made available to the budget.
- Arrangement type and phasing:
  - Authorities requested a 48-month EFF-supported program.
  - Program envisages triannual reviews during 2024-25 and semiannual reviews during 2026-28.
  - Total access proposed at SDR 3 billion (US$4 billion), phased as:
    - SDR 1.1 billion (US$1.5 billion) in 2024,
    - SDR 0.9 billion (US$1.25 billion) in 2025,
    - SDR 0.4 billion (US$0.5 billion) in 2026 and 2027,
    - SDR 0.2 billion (US$0.25 billion) in 2028.
- Prior actions:
  - (i) Preparation of a projected monthly cash flow and financial plan for the budgetary central government for the remainder of 2024.
  - (ii) Preparation of a contingency plan to ensure compliance with program fiscal targets if revenues underperform projected levels.
- Program conditionality—quantitative and continuous performance indicators:
  - QPCs on: (i) a floor on the NOPB of the PGE; (ii) a floor on the overall balance of the PGE and the oil derivatives financing account (Cuenta de Financiamiento de Derivados Deficitarios, CFDD); (iii) a floor on the accumulation of NFPS deposits at the BCE.
  - Continuous QPCs on: (i) non-accumulation of external payments arrears by the NFPS; (ii) no new direct/indirect BCE lending to the NFPS.
  - ITs on: (i) a floor on the NOPB including fuel subsidies (NOPBS) of the NFPS; (ii) a floor on the overall balance of the NFPS; (iii) a floor on the change in the stock of net international reserves (NIR); (iv) a ceiling on the stock of domestic arrears to private suppliers of the PGE; (v) a floor on the coverage of the cash transfer programs for lower income households.
- Structural benchmarks include strengthening PFM (MTFF and MTDS publication), restoring the chain of payments and clearing domestic arrears, strengthening non-oil tax collection, rationalizing public expenditure and launching the SNC, enhancing the social safety net and social registry, fostering financial intermediation and capital market development, developing domestic capital markets for primary placement of government bonds, improving fiscal governance through a healthcare obligations transfer agreement, and strengthening AML/CFT effectiveness.

### Capacity to repay, financing assurances, and safeguards
- Capacity to repay and debt dynamics:
  - Under the proposed arrangement, GRA credit to Ecuador will peak in 2025, reaching 1,000 percent of quota.
  - Ecuador’s external public debt will reach 956 percent of gross reserves in 2024.
  - External debt service will peak in 2027 to 48.6 percent of projected exports of goods and services.
  - Peak Fund obligations relative to gross international reserves would reach 25.8 percent in 2025 and decline steadily to 3.9 percent in 2033.
- Financing assurances:
  - Program is fully financed with firm financing commitments in place for the first 12 months.
  - Multilateral creditors (WB, IDB, CAF, and FLAR) committed to maintain or increase support.
  - Financing commitments for the first 12 months obtained from most official bilateral creditors and included in program financing.
  - Assumed financing for the remainder of the program is based on prospects of support from official creditors and assumptions of rollover of commercial borrowing and market access of about US$1.5 billion in 2025 and US$2 billion per year from 2026 onwards.
  - In the event of financing plan shortfalls, alternative sources or a contingent response would be required.
- Safeguards:
  - BCE made significant progress since the 2019 safeguards assessment, implementing all recommendations except for full alignment with International Financial Reporting Standards.
  - An update safeguards assessment will be required no later than the first review of the EFF-supported program.
  - An update of the fiscal safeguards review will also be required within the same timeframe.
- Lending into arrears:
  - Ecuador maintains a residual amount of arrears to international private bond holders from claims repudiated in 2008-09; US$52 million remain outstanding.
  - Authorities established a public procedure for holders requesting liquidation; staff judges authorities continue to make good faith efforts.
  - Financing assurances reviews will continue at each review until external arrears to private bondholders are cleared.

### Capital flow measure, enterprise risks, and program risks
- ISD rate and Article VIII/CFM:
  - In April 2024, the ISD rate was increased from 3.5 to 5 percent to address the sharp deterioration of the FX reserve position driven by net capital outflows.
  - The tax constitutes an outflow CFM and an exchange restriction subject to Fund approval under Article VIII Section 2(a).
  - Authorities are committed to gradually phasing out the ISD as stability is restored.
  - Authorities request Board approval for retention of the exchange restriction on the basis it is maintained for BOP reasons, temporary, and non-discriminatory.
- Enterprise and program risks:
  - Risks include uncertain economic outlook, weaknesses in institutional capacity, fragmented political landscape and forthcoming elections, which could lead to larger financing gaps.
  - Financial risks if implementation delays international support and market re-access.
  - Reputational risks exist for the Fund.
  - Risk mitigants: authorities’ commitment to implementation, upfront policy actions taken, commitment to honor external obligations, program protection of social spending, prior actions on PFM and contingency planning.
  - Risks remain elevated and should be weighed against the reputational risk of not supporting a member in severe challenges.

*Source: IMF country report chapter on Ecuador (content unit 1ecuea2024001).*

### Box 1. Assessment of Exceptional Access Criteria

### Box 1. Assessment of Exceptional Access Criteria

### Criterion 1 — Exceptional balance of payments pressures
- Ecuador faces a balance of payments (BoP) need from sharply slower growth, lower oil revenues, and pressures on the financial account due to large external debt obligations and loss of market access.
- The authorities’ recently approved fiscal measures are expected to help, but staff estimates an outstanding financing gap of US$4 billion in 2024-28 even after an ambitious fiscal consolidation plan and support from international financial institutions and official bilateral creditors.
- Ecuador’s IMF credit outstanding is SDR 5.8 billion (approximately US$8 billion, equivalent to 835 percent of quota), such that additional Fund support would require exceptional access.

### Criterion 2 — Debt sustainability prospects
- Staff judges that public debt is assessed to be sustainable but not with high probability (Annex II).
- Consistent with the Exceptional Access (EA) framework, staff assesses that adequate safeguards are in place to meet EA Criterion 2 (EA2) should adverse shocks materialize.
- This assessment is finely balanced and hinges on steadfast implementation of the proposed fiscal consolidation path and reforms; margins for maneuver are limited.

### Criterion 3 — Prospects for regaining market access
- External sovereign bonds trade at distressed levels, but sovereign debt spreads have declined steadily by over 900 basis points year-to-date due to policy measures undertaken by the authorities.
- The government has remained current on external debt obligations despite tight liquidity conditions.
- Expectations supporting re-access include: strong commitment to remain current on debt obligations, adherence to COPLAFIP’s debt ceilings, ambitious fiscal consolidation and reforms, and an expected decline in global interest rates.
- Ecuador had regularly accessed international capital markets until 2019, providing reasonable prospects for issuance of international bonds in a context of gradual macroeconomic improvement and robust policy reform implementation under the EFF arrangement.

### Criterion 4 — Program prospects for success and capacity to deliver
- Authorities are strongly committed to the program and have demonstrated capacity to undertake measures: between December 2023 and April 2024 the National Assembly approved 5 urgent economic laws, including several fiscal measures.
- Authorities increased the VAT rate to 15 percent and enacted other measures to address fiscal and liquidity challenges.
- Risks to program success include a fragmented National Assembly and forthcoming general elections in early 2025; however, staff’s discussions indicate broad support from several political parties for engagement with the Fund and for objectives of the envisaged EFF-supported program (strengthening fiscal sustainability, rebuilding buffers and preserving dollarization, protecting the most vulnerable, and boosting inclusive growth).

### Staff appraisal: key findings and policy recommendations
- Rapid policy response contained the fiscal deficit and improved near-term government liquidity by combining a VAT rate hike with transitory tax measures, aligning tax collection more with regional peers.
- The 2024 fiscal plan aims to contain public expenditure while addressing priority security, social, and investment needs, and includes limited fiscal incentives to promote investment and youth employment.
- Authorities commit to further ambitious fiscal efforts to ensure fiscal sustainability and put debt on a firm downward path:
  - Revenue-side: replace short-term transitory measures with permanent high-quality measures (e.g., rationalizing inefficient tax expenditures) to reduce oil dependence.
  - Expenditure-side: gradually streamline the wage bill, improve public procurement efficiency, protect fiscal space for essential social safety net and public investment, and improve targeting of fuel subsidies.
  - Anchor fiscal plan on reducing debt in line with COPLAFIP’s debt limits and rebuilding fiscal buffers to adequate levels to restore market confidence and reestablish access to international capital markets.
  - Reform domestic debt issuance and develop the domestic debt market to boost domestic financing for private and public sectors.
- Social protection:
  - Expand coverage of social assistance programs using the social registry to map vulnerable households, with the objective of gradually covering the most vulnerable families, prioritizing those in the lowest deciles of the income distribution.
- Transparency, PFM, governance, and AML/CFT:
  - Progress healthcare audits and prepare a new actionable agreement between the MEF and IESS to settle healthcare and pension obligations.
  - Map and clear arrears to rebuild liquidity and protect the chain of payments.
  - Improve treasury cash management to prevent cash shortfalls and accumulation of obligations.
  - Finalize pending audits of state-owned oil companies to improve transparency and accountability.
  - Strengthen the effectiveness of the AML/CFT framework to tackle illicit financial flows and organized crime financing.
- Financial stability:
  - Implement recommendations of the 2023 FSSA to address coordination issues among oversight agencies, improve crisis preparedness, boost capital and liquidity requirements, and promote financial deepening by phasing out financial repression measures.
  - Improve market infrastructure to develop the domestic debt market.
- Fund support recommendation:
  - Staff supports the authorities’ request for a 48-month EFF arrangement with exceptional access.
  - The EFF-supported economic plan is designed to phase the needed fiscal adjustment while balancing debt reduction and rebuilding buffers, preserving space for protecting the most vulnerable and urgent priority spending.
  - Swift fiscal actions taken before program approval, including the increase in the VAT rate by 3 percentage points, demonstrate authorities’ commitment to implement needed reforms.

*Source: Box 1. Assessment of Exceptional Access Criteria (IMF staff assessment).*

### 60.      Staff supports the authorities’ request for Board approval for the retention of the

### 1ecuea2024001 - 60.

### Exchange restriction request
- Staff supports the authorities’ request for Board approval for the retention of the exchange restriction arising from the ISD.
- Rationale: The exchange restriction is maintained for BoP reasons, temporary, and non-discriminatory.

### Recent economic developments
- Economic growth decelerated in 2023, with most sectors slowing.
- High-frequency indicators point to continued weakness.
- Employment has gradually recovered since the pandemic.
- Inflation developments:
  - Inflation declined since its peak in mid-2022.
  - Lower contributions to inflation from transportation were noted.
- Sources referenced: Ecuador’s Internal Revenue Service, Central Bank of Ecuador, and IMF staff calculations.

### Key macroeconomic projections and indicators (Table 1 highlights)
- Real GDP (percent change): 2021: 9.8; 2022: 6.2; 2023: 2.4; 2024: 0.1; 2025: 1.2; 2026: 1.8; 2027: 2.4; 2028: 2.5; 2029: 2.5.
- Consumer price index (period average): 2021: 0.1; 2022: 3.5; 2023: 2.2; 2024: 2.4; 2025: 2.2; 2026: 1.6; 2027: 1.5; 2028: 1.5; 2029: 1.5.
- Consumer price index (end-of-period): 2021: 1.9; 2022: 3.7; 2023: 1.3; 2024: 3.4; 2025: 1.7; 2026: 1.5; 2027: 1.5; 2028: 1.5; 2029: 1.5.
- Gross international reserves (US$ millions) (memorandum): 2021: 7,898; 2022: 8,459; 2023: 4,454; 2024: 5,212; 2025: 6,724; 2026: 8,768; 2027: 10,991; 2028: 13,264; 2029: 15,588.
- Oil price Ecuador mix (US$ per barrel) (memorandum): 2021: 62.0; 2022: 85.8; 2023: 68.0; 2024: 67.5; 2025: 63.7; 2026: 61.3; 2027: 59.3; 2028: 58.3; 2029: 58.0.
- NFPS public finances (percent of GDP): Revenue: 2021: 35.8; 2022: 38.7; 2023: 36.7; 2024: 38.5; 2025: 37.6; 2026: 37.7; 2027: 37.2; 2028: 36.9; 2029: 36.5.
- NFPS net lending (+) / net borrowing (-): 2021: -1.6; 2022: 0.0; 2023: -3.6; 2024: -2.0; 2025: -1.2; 2026: -0.2; 2027: -0.1; 2028: 0.6; 2029: 0.8.
- Public debt (percent of GDP) (NFPS gross debt): 2021: 61.6; 2022: 57.0; 2023: 55.3; 2024: 56.3; 2025: 56.4; 2026: 55.5; 2027: 54.2; 2028: 52.2; 2029: 49.7.

### Fiscal developments (Figures and Table 2 highlights)
- Fiscal balance: After improving in 2020-22, the fiscal balance weakened in 2023.
- Financing of the 2023 deficit: The deficit in 2023 was financed mainly through a drawdown in deposits and domestic arrears.
- Fiscal revenues contracted in 2023 due to lower oil production and prices, and a slowing economy; non-interest expenditure increased.
- Sovereign debt spreads narrowed in 2024 following announced measures to reduce the fiscal deficit.
- Table 2a (selected absolute amounts, US$ million):
  - Revenue (total): 2021: 38,443; 2022: 45,172; 2023: 43,574; 2024: 46,859; 2025: 47,352; 2026: 49,130; 2027: 50,298; 2028: 52,024; 2029: 53,440.
  - Oil revenue: 2021: 13,106; 2022: 16,854; 2023: 14,507; 2024: 14,505.
  - Nonoil revenue: 2021: 25,337; 2022: 28,318; 2023: 29,067; 2024: 32,354.
  - Expenditure (total): 2021: 40,145; 2022: 45,120; 2023: 47,796; 2024: 49,302.
  - Interest (total): 2021: 1,375; 2022: 1,788; 2023: 2,609; 2024: 3,000.
  - Net lending (+) / net borrowing (-) (NLB = 1-2): 2021: -1,701; 2022: 52; 2023: -4,223; 2024: -2,442.
  - NFPS gross debt (US$ million): 2021: 66,190; 2022: 66,431; 2023: 65,778; 2024: 68,580.
- Table 2b (percent of GDP): Nonoil primary balance (NOPB): 2021: -5.6; 2022: -3.4; 2023: -4.9; 2024: -3.1; 2025: -3.1; 2026: -2.6; 2027: -2.1; 2028: -1.5; 2029: -1.2.

### External sector developments (Figure 3 and Tables 4-5 highlights)
- Imports moderated in 2023 while oil exports declined, reducing the current account surplus.
- Current account balance (US$ million): 2021: 3,098; 2022: 2,133; 2023: 2,291; 2024: 2,537; 2025: 2,755; 2026: 3,023; 2027: 3,269; 2028: 3,552; 2029: 3,730.
- Trade balance (US$ million): 2021: 2,993; 2022: 2,544; 2023: 2,210; 2024: 2,991; 2025: 2,849; 2026: 3,204; 2027: 3,498; 2028: 3,799; 2029: 4,260.
- Exports, f.o.b. (US$ million): 2021: 26,968; 2022: 33,033; 2023: 31,484; 2024: 32,015.
  - Oil exports (US$ million): 2021: 8,607; 2022: 11,587; 2023: 8,952; 2024: 8,699.
  - Non-oil exports (US$ million): 2021: 18,360; 2022: 21,446; 2023: 22,532; 2024: 23,316.
- Imports, f.o.b. (US$ million): 2021: 23,975; 2022: 30,489; 2023: 29,274; 2024: 29,024.
- Financial account (US$ million): 2021: 2,771; 2022: 2,948; 2023: 5,224; 2024: 1,859.
- Overall balance (US$ million): 2021: 263; 2022: -1,063; 2023: -4,075; 2024: 757.
- Change in reserve assets (increase, -) (US$ million): 2021: -948; 2022: -568; 2023: 4,284; 2024: -757.
- Gross international reserves (US$ millions) (Table 4 memorandum): see macro projections section above.

### Financial system developments (Figure 4 and Table 6-7 highlights)
- Deposit and credit growth decelerated in 2023, with a significant slowdown in credit to businesses.
- Banks' liquidity declined; banks’ capital ratios are above the regulatory norm.
- NPLs returned to historical average levels following the lifting of COVID-19 credit relief measures.
- Interest rates increased, with margins (lending minus deposit rates) remaining broadly stable.
- Monetary and financial statistics (Table 6, selected series, US$ million):
  - Net foreign assets (Central Bank I): 2021: 8,969; 2022: 9,325; 2023: 5,976; 2024: 6,735.
  - Gross international reserves (US$ millions): 2021: 7,898; 2022: 8,459; 2023: 4,454; 2024: 5,212.
  - Credit to the private sector (percent change, yoy) (memorandum): 2021: 13.6; 2022: 13.9; 2023: 8.4; 2024: 4.0; 2025: 3.3; 2026: 3.3; 2027: 3.8; 2028: 4.0; 2029: 4.0.
  - Broad money (M2) (percent change, yoy): 2021: 9.8; 2022: 7.5; 2023: 6.7; 2024: 2.5; 2025: 3.4; 2026: 3.4; 2027: 3.9; 2028: 4.1; 2029: 4.1.
- Banking system financial soundness indicators (Table 7, selected, percent, end of period):
  - Regulatory capital to risk-weighted assets: 2021: 15.8; 2022: 15.7; 2023: 15.1; Mar-24: 15.0.
  - Nonperforming loans to total gross loans: 2021: 3.7; 2022: 3.7; 2023: 4.6; Mar-24: 4.7.
  - Return on assets: 2021: 0.7; 2022: 1.8; 2023: 2.2; Mar-24: 1.7.
  - Liquid assets to total assets: 2021: 20.7; 2022: 18.3; 2023: 15.2; Mar-24: 15.2.

### Nonfinancial Public Sector financing and gross financing needs (Table 3 highlights)
- Gross financing needs (US$ million): 2021: 7,053; 2022: 6,321; 2023: 9,815; 2024: 8,035; 2025: 7,849; 2026: 7,704; 2027: 7,640; 2028: 6,796; 2029: 6,797.
- Amortization (US$ million): 2023: 5,592; 2024: 5,593; 2025: 6,375; 2026: 7,390; 2027: 7,522; 2028: 7,628; 2029: 7,980.
- Domestic financing (gross) (US$ million): 2023: 6,776; 2024: 2,830; 2025: 2,209.
- External financing (gross) (US$ million): 2023: 2,626; 2024: 5,205; 2025: 5,640.
- Net financing (US$ million): 2021: 1,403; 2022: -5; 2023: 4,931; 2024: 2,442; 2025: 1,473.

### Balance of payments and external financing (Tables 4-5 highlights)
- Gross external financing requirements (US$ million): 2021: 3,198; 2022: 4,870; 2023: 4,811; 2024: 4,353; 2025: 5,099; 2026: 5,736; 2027: 6,013; 2028: 5,574; 2029: 5,410.
- Identified external financing (US$ million): 2021: 3,332; 2022: 5,664; 2023: 1,667; 2024: 4,998; 2025: 6,523; 2026: 7,688; 2027: 8,139; 2028: 7,742; 2029: 7,726.
- Change in reserve assets (US$ million): 2021: -948; 2022: -568; 2023: 4,284; 2024: -757; projected increases in reserve drawdown for program net international reserves detailed in Table 5.

### Fund credit, proposed reviews, and program schedule (Tables 8-10 highlights)
- Existing Fund credit (stock, end of period, US$/SDR figures shown in Table 8): Stock series indicate declining existing credit from 6,096.4 (2022) to lower projected end-period stocks through 2033 as prospective disbursements are scheduled.
- Stock of existing and prospective Fund credit (selected ratios):
  - In percent of quota: 2024: 953.1; 2025: 978.8; 2026: 918.4; 2027: 837.5.
  - In percent of GDP: 2024: 7.3; 2025: 7.2; 2026: 6.6; 2027: 5.8.
  - In percent of gross reserves: 2024: 169.6; 2025: 135.5; 2026: 97.6; 2027: 71.2.
- Proposed schedule of reviews and purchases (Table 9 / schedule summary):
  - Approval of arrangement (Availability Date May 31, 2024): Amount of purchase 752.9 (Millions of SDRs); Percent of Quota 107.9.
  - First review and end-August 2024 performance/continuous criteria (Availability Date November 15, 2024): Amount 375.9; Percent of Quota 53.9.
  - Second review and end-December 2024 performance/continuous criteria (Availability Date March 15, 2025): Amount 312.9; Percent of Quota 44.8.
  - Third review and end-April 2025 performance/continuous criteria (Availability Date July 15, 2025): Amount 312.9; Percent of Quota 44.8.
  - Fourth review and end-August 2025 performance/continuous criteria (Availability Date November 15, 2025): Amount 312.9; Percent of Quota 44.8.
  - Fifth review and end-December 2025 performance/continuous criteria (Availability Date March 15, 2026): Amount 186.9; Percent of Quota 26.8.
  - Sixth review and end-June 2026 performance/continuous criteria (Availability Date September 15, 2026): Amount 186.9; Percent of Quota 26.8.
  - Seventh review and end-December 2026 performance/continuous criteria (Availability Date March 15, 2027): Amount 186.9; Percent of Quota 26.8.
  - Eighth review and end-June 2027 performance/continuous criteria (Availability Date September 15, 2027): Amount 186.9; Percent of Quota 26.8.
  - Ninth review and end-December 2027 performance/continuous criteria (Availability Date March 15, 2028): Amount 184.9; Percent of Quota 26.5.
  - Total program purchases: 3,000.0 (Millions of SDRs); Total Percent of Quota: 430.0.
- Table 10 indicates quantitative performance criteria and indicative targets are set for 2024-25 (details appear in Table 10).

*Source: IMF staff report content as provided in the supplied PDF content unit.*

### 1. Nonoil primary balance of the budgetary central government (PGE) (

### 1. Nonoil primary balance of the budgetary central government (PGE) (

### Performance criteria and indicative targets (floors and ceilings)
- 1. Nonoil primary balance of the budgetary central government (PGE) (floor) 1/
  - -1,078
  - -2,295
  - -472
  - -1,245
- 2. Overall balance of the PGE and CFDD (floor) 1/
  - -2,200
  - -4,213
  - -753
  - -2,377
- 3. Accumulation of NFPS deposits at the central bank (floor) 1/
  - 200
  - 360
  - 50
  - 150
- 4. Non-accumulation of external payments arrears by the NFPS (continuous performance criterion)
  - 0
  - 0
  - 0
  - 0
- 5. (No new) Central bank direct and indirect financing to the NFPS (continuous performance criterion)
  - 0
  - 0
  - 0
  - 0

Indicative targets
- 6. Overall balance of the NFPS (floor) 1/
  - -1,628
  - -2,442
  - -491
  - -982
- 7. Nonoil primary balance including fuel subsidies (NOPBS) of the NFPS (floor) 1/
  - -4,100
  - -6,528
  - -1,500
  - -3,400
- 8. Change in the stock of NIR (floor) 1/
  - -200
  - -310
  - 116
  - 382
- 9. Stock of PGE arrears to the domestic private sector (ceiling)
  - 862
  - 662
  - 600
  - 400
- 10. Number of families in the first three income deciles nationwide covered by cash transfer programs (floor)
  - 1,192,713
  - 1,212,984
  - 1,228,660
  - 1,244,336

- Sources: Ministry of Economy and Finance and IMF staff estimates.
- Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
- 1/ Cumulative change from January of each year.
- (US$ million, unless otherwise indicated)

### Prior actions and structural benchmarks (selected objectives and due dates)
Proposed Prior Actions
- Public Financial Management
  - Prepare and share with the Fund a projected monthly cash flow and financing plan for the budgetary central government for the remainder of 2024.
  - Improve mechanisms to monitor real-time fiscal performance and take corrective action if needed to achieve program targets.
- Contingency Planning
  - Prepare a contingency plan to ensure compliance with program fiscal targets if revenues underperform.
  - Be ready to take corrective action if needed to achieve program targets.

Proposed Structural Benchmarks
- Public Financial Management
  - Publish an updated Medium-Term Fiscal Framework (MTFF) in line with program targets.
    - Objective: Strengthen fiscal planning and management.
    - Due Date: End-October 2024
  - Publish a Medium-Term Debt Management Strategy (MTDS) in line with program targets.
    - Objective: Strengthen fiscal planning and management.
    - Due Date: End-October 2024
- Domestic Arrears
  - Share with Fund staff an updated plan to clear and prevent the resurgence of domestic arrears of the budgetary central government (PGE), including obligations to the private sector and intra-public sector claims.
    - Objective: Strengthen the monitoring and reduce accumulation of payment arrears.
    - Due Date: End-November 2024
- Tax Reform
  - Prepare and share with the Fund a plan to mobilize non-oil fiscal revenues, including by streamlining inefficient tax expenditures and replacing transitory revenue measures with permanent high-quality ones.
    - Objective: Inform future efforts to broaden the tax base and streamline tax expenditures.
    - Due Date: Mid-November 2024
- Fiscal Strategy
  - Enact regulation on revenue and/or expenditure measures to ensure that the 2025 fiscal plan is in line with program and MTFF commitments.
    - Objective: Ensure fiscal consolidation.
    - Due Date: December 6, 2024
- Social Safety Net
  - Share with the Fund a plan to complete the social registry to cover families in the lowest three deciles of the income distribution throughout the country.
    - Objective: Enhance the social safety net
    - Due Date: End-October 2024
- Governance
  - Establish an updated agreement between the MEF and IESS on the transfer of healthcare obligations (including both internal and external providers), building on the December 2022 agreement. The updated agreement should include a decision about the 2022 healthcare audits.
    - Objective: Improve expenditure control.
    - Due Date: End-October 2024
  - Establish a timeline to operationalize the National Control Subsystem (SNC) to increase transparency in procurement.
    - Objective: Strengthen anticorruption framework and improve expenditure control.
    - Due Date: End-December 2024
- Transparency and Governance
  - Initiate the tender process to select an auditor to undertake the 2023 and 2024 healthcare audits (based on the updated MEF/IESS agreement).
    - Objective: Improve the quality and reliability of fiscal data.
    - Due Date: End-December 2024
  - Complete the audits of the 2019 and 2020 financial statements of Petroecuador and Petroamazonas and share the results with Fund staff.
    - Objective: Enhance transparency and governance in the oil sector.
    - Due Date: End-March 2025
- Anti-Money Laundering Framework
  - Enact new AML/CFT legislation to strengthen the AML/CFT framework in line with FATF standards.
    - Objective: Mitigate the risk of illicit flows including those related to organized crimes.
    - Due Date: End-February 2025
- Financial Sector
  - Establish a Financial Stability Committee in line with best international practices, comprising BCE, MEF, JPRF, JPRM, SB, SEPS, SCVS, and COSEDE.
    - Objective: Enhance coordination among agencies involved in financial sector oversight.
    - Due Date: End-September 2024
  - Issue macroprudential regulations on bank capital buffers, including surcharges on systemically important institutions and a countercyclical capital buffer.
    - Objective: Strengthen financial sector buffers.
    - Due Date: End-November 2024
  - Prepare and share with Fund staff a study of the system of interest rates, including recommendations to improve credit allocation, financial inclusion, and economic growth, while preserving financial stability.
    - Objective: Foster financial sector deepening and improve economy’s growth potential.
    - Due Date: End-March 2025
- Domestic Capital Market Development
  - Sign a contract to implement a new platform for the BCE’s central securities depository (DCV) to modernize the compensation, liquidation, and custody functions in line with international standards.
    - Objective: Foster domestic capital market development.
    - Due Date: End-November 2024

### External Sector Assessment — key findings and policy responses
- Overall Assessment:
  - The external position of Ecuador in 2023 was moderately weaker than the level implied by fundamentals and desirable policies.
  - The current account (CA) surplus remained broadly flat owing to a decline in oil exports and a wider deficit in the balance of services, with preliminary data showing some recovery in the trade balance in the first quarter of 2024.
  - Reserves continue to be below adequacy metrics.
- Potential Policy Responses:
  - The planned fiscal consolidation will allow to preserve external sustainability and rebuild reserve buffers.
  - Structural reforms under the IMF-supported program, including measures to enhance governance and improve the investment climate, will help attract foreign investment and improve competitiveness.

Foreign assets and liabilities: position and trajectory
- Background:
  - Between 2019 and 2022, the net international investment position (NIIP) increased gradually from -26.1 percent of GDP to -22.8 percent of GDP, driven by a progressive accumulation in debt assets.
  - The NIIP showed a further increase from -22.8 percent of GDP as of end-2022 to -19.8 percent of GDP as of end-2023, stemming from an increase in portfolio investment assets and a decline in debt liabilities.
  - Ecuador’s gross liabilities are dominated by public sector external debt.
- Assessment:
  - The planned fiscal consolidation supported by the EFF arrangement will help improve the external balance and rebuild reserve buffers, thereby limiting the build-up of NIIP vulnerabilities over the medium term.
- 2023 stock metrics (percent of GDP and descriptors):
  - NIIP: -19.8
  - Gross Assets: 54.6
  - Debt Assets: 50.9
  - Gross Liab.: -74.4
  - Debt Liab.: -55.4

Current account
- Background:
  - The CA surplus marginally increased from 1.8 percent of GDP in 2022 to 1.9 percent of GDP in 2023 driven by a narrower services deficit and stronger remittances, while the trade surplus declined due to lower oil exports.
  - The CA surplus is expected to rise moderately in 2024, mainly driven by higher non-oil exports and lower imports and despite lower oil exports and tourism receipts.
  - Over the medium term, the CA surplus is expected to progressively widen due to (i) an increase in exports and tourism; and (ii) the envisaged fiscal consolidation under the EFF-supported program, which would improve the public saving-investment balance.
- Assessment and model-based gaps:
  - The EBA-Lite CA model estimates a cyclically adjusted CA norm of 1.3 percent of GDP.
  - Compared to an adjusted CA deficit of 0.6 percent of GDP, this implies a CA gap of -0.7 percent.
  - The consumption model points to a CA gap of -1.4 percent of GDP; the REER model indicates -1.7 percent of GDP.
  - Staff relies on the consumption model for the assessment, with broadly similar gaps across models.
- Selected model outputs (EBA-Lite / REER / Consumption modules):
  - CA-Actual: 1.9 1.9
  - Cyclical contributions (from model): (-)0.3
  - Additional temporary/statistical factors: (-)0.0
  - Natural disasters and conflicts: (-)0.9
  - Adjusted CA: 0.6
  - CA Norm (from model) 1/: 1.3 3.3
  - Adjusted CA Norm: 1.3
  - CA Gap: -0.7 -1.7 -1.4
  - o/w Relative policy gap: 1.0
  - Elasticity: -0.2
  - REER Gap (in percent): 3.8 9.7 7.9
  - 2/ Cyclically adjusted, including multilateral consistency adjustments.
  - 1/ Based on the EBA-lite 3.0 methodology. The consumption module uses staff projections for 2029 as reference for the assessment.
  - (in percent of GDP)

Real exchange rate
- Background:
  - The real effective exchange rate (REER) depreciated by approximately 1.5 percent in 2023 on the back of lower inflation differentials relative to trading partners, bringing the REER level roughly in line with its 5-year average.
- Assessment:
  - The staff-estimated CA gap points to a REER overvaluation of around 7.9 percent for 2023.
  - The REER gap estimated by the REER model is 9.7 percent.

Capital and financial accounts: flows and policy measures
- Background:
  - Net capital flows fell in 2023, largely due to higher net external debt service and private capital outflows, including a contraction in net FDI to US$0.4 billion, from US$0.8 billion in 2022, as well as lower other private investment flows.
- Assessment:
  - Implementation of the fiscal consolidation and reforms under the EFF-supported program are expected to help regain access to international capital markets and attract higher net private capital flows, including by encouraging FDI and reducing private capital outflows.
- Capital flow management measures (CFMs):
  - Authorities enacted an increase in the ISD from 3.5 to 5 percent as a CFM on outflows under the Fund’s Institutional View on the Liberalization and Management of Capital Flows.
  - Authorities are committed to gradually phasing out this measure as macroeconomic and balance of payments stability are restored and the FX reserve position is strengthened.

FX intervention and reserves level
- Background:
  - Gross international reserves (GIR) declined by US$4 billion, totaling US$4.5 billion at end-2023.
  - Net international reserves declined to -US$8 billion at end-2023, from -US$6.2 billion at end-2022.
- Assessment:
  - GIR at end-2023 were below adequacy levels:
    - 18.2 percent of the IMF’s standard ARA metric (or 21.7 percent of the adjusted ARA metric for countries with CFMs),
    - 1.6 months of prospective imports,
    - 3.7 percent of GDP.
  - Including the financial system’s Liquidity Fund, gross reserves were equivalent to 32.3 percent of the ARA metric at end-2023.
  - BCE has access to about US$2.1 billion in liquidity facilities with the FRBNY, BIS, and FLAR.
  - Ecuador is fully dollarized; standard adequacy metrics are not directly comparable with other countries.

### Sovereign risk and Debt Sustainability Framework — summary findings
- Overall statement:
  - Ecuador’s public debt remains sustainable but not with high probability in the program forecast.
  - The realism assessment highlights the relatively large adjustment size required to keep debt on the desirable downward path, while the debt fanchart module flags a large confidence interval surrounding the debt projection.
  - Ecuador remains cut-off from international capital markets and steadfast implementation of the EFF-supported fiscal adjustment is needed to restore confidence.
- Background and recent developments:
  - Public debt-to-GDP ratio declined in 2023 driven by a debt-for-nature swap that lowered international bonds outstanding by US$970 million, coupled with insufficient financing that forced the government to draw down deposit buffers.
  - Political uncertainty and a sharply widening fiscal deficit fueled an increase in sovereign spreads, which peaked at over 2,100 bps in late 2023 before declining to below 1,200 basis points in April 2024 after fiscal reform measures.
  - Sovereign spreads are negatively correlated with oil prices.
- Baseline assumptions:
  - Fiscal and debt projections assume successful implementation of the proposed fiscal plan under the EFF-supported program.
  - Under the plan, the NFPS primary balance would turn into a surplus in 2025, increasing to about 2 percent of GDP in the medium term.
  - Public debt-to-GDP ratio forecasted to decline from 55.3 percent in 2023 to about 40 percent by 2032 in line with the COPLAFIP debt limit.
  - Gross financing needs (GFNs) forecasted to decline from 8 percent of GDP in 2023 to 6.6 percent in 2024, and then gradually to about 4.8 percent of GDP over the medium term.
- Public debt definition (SRDSF):
  - Consolidated liabilities of the NFPS: PGE, CFDD, social security funds, public nonfinancial corporations, and BEDE.
  - Instruments include loans, securities (bonds and treasury certificates), liabilities under oil related financing, central bank lending to the government, deposits at BEDE, and other accounts payable including arrears.
- Fiscal multiplier and growth:
  - Baseline assumes a fiscal multiplier of 0.5.
  - Fiscal adjustment expected to impact growth in the near term, mitigated by resolution of liquidity crisis, gradual clearance of arrears, reduction in uncertainty, and improved risk sentiment.
- Risks and realism:
  - Primary consolidation is ambitious relative to historical cross-country realizations but necessary to restore fiscal sustainability.
  - Under an adverse debt scenario the debt ratio could increase to large values, underscoring the need to implement the adjustment plan.
  - Downside risks: fiscal implementation capacity, growth underperformance, security-related disruptions reducing tax revenue, possible disruptions in oil production.
  - Mitigating factors: large share of multilateral and bilateral official debt with comparatively low rollover risk and long maturities, and relatively low GFNs in the projection.

Ecuador: Public Sector Gross Debt by Creditor (2023; US$ billion and Percent of GDP)
- Total Debt
  - 65.8
  - 55.3
- External Debt
  - 48.1
  - 40.5
- Multilateral
  - 24.6
  - 20.7
- Bilateral
  - 4.4
  - 3.7
- Banks
  - 1.6
  - 1.3
- Bonds
  - 16.0
  - 13.5
- Oil related financing
  - 0.3
  - 0.2
- SDRs
  - 1.3
  - 1.1
- Domestic Debt
  - 17.6
  - 14.8
- Loans
  - 3.1
  - 2.6
- Bonds MLT
  - 5.0
  - 4.2
- Treasury certificates
  - 2.2
  - 1.8
- Other liabilities
  - 7.4
  - 6.2
- Source: MEF.

Risk assessment highlights (summary)
- Overall risk of sovereign stress: Moderate.
- Debt stabilization in the baseline: Yes.
- DSA summary assessment: Debt is sustainable but not with high probability.
- Medium-term risks: Moderate; largest risk driver is the width of the debt fanchart (uncertainty around the baseline forecast).
- Long-term risks: Moderate; need to diversify fiscal revenue away from oil revenue remains.

*Source: IMF staff and Ministry of Economy and Finance (as presented in the provided document).*

### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther

### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther

### Coverage and subsectors
- Chosen coverage: Central government (CG).
- If central government, are non-central government entities insignificant? n.a.
- Subsectors captured in the baseline (Inclusion):
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): No
  - Social security funds (SSFs): Yes
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: Yes
  - Central bank: No
  - Other public financial corporations: No

### Reporting and accounting notes
- Debt consolidation across sectors: entries shown as zeros for holder/issuer consolidation table (all listed items: 0).
- Basis of recording / valuation terms referenced:
  - Non-cash basis 4/; Cash basis.
  - Valuation concepts defined: Nominal value 5/, Face value 6/, Market value 7/.
- Reporting on intra-government debt holdings, NFPS, CPS, and related comments: Not applicable / Noted as "Source: Fund staff."

*Source: Fund staff.*

### Key charts and structural indicators (Figure 3 notes)
- Perimeter shown is nonfinancial public sector.
- Public debt structure breakdowns include:
  - Debt by Currency (Percent of GDP)
  - Public Debt by Holder (Percent of GDP)
  - Public Debt by Governing Law, 2023 (percent)
  - Debt by Instruments (Percent of GDP)
  - Public Debt by Maturity (Percent of GDP)
- Residual maturity: 6. years (noted as "Residual maturity: 6. years" in chart label).

---

### Baseline projections and fiscal dynamics (Figure 4: Baseline Scenario)
- Public debt (Percent of GDP) — Actual and projections:
  - 2023: 55.3
  - 2024: 56.3
  - 2025: 56.4
  - 2026: 55.5
  - 2027: 54.2
  - 2028: 52.2
  - 2029: 49.7
  - 2030: 46.7
  - 2031: 43.4
  - 2032: 40.2
  - 2033: 37.5
  - 2034: 34.9

- Change in public debt (Percent of GDP):
  - 2023: -1.6
  - 2024: 1.0
  - 2025: 0.1
  - 2026: -0.9
  - 2027: -1.3
  - 2028: -2.0
  - 2029: -2.5
  - 2030: -3.0
  - 2031: -3.3
  - 2032: -3.2
  - 2033: -2.7
  - 2034: -2.6

- Contribution of identified flows (Percent of GDP):
  - 2023: -0.8
  - 2024: 0.8
  - 2025: 0.0
  - 2026: -0.8
  - 2027: -1.3
  - 2028: -2.0
  - 2029: -2.5
  - 2030: -2.9
  - 2031: -3.4
  - 2032: -3.2
  - 2033: -2.7
  - 2034: -2.6

- Primary deficit (Percent of GDP):
  - 2023: 2.7
  - 2024: 0.9
  - 2025: -0.1
  - 2026: -1.2
  - 2027: -1.3
  - 2028: -2.0
  - 2029: -2.2
  - 2030: -2.5
  - 2031: -2.8
  - 2032: -2.8
  - 2033: -2.9
  - 2034: -2.9

- Noninterest revenues (Percent of GDP):
  - 2023: 35.4
  - 2024: 37.1
  - 2025: 36.2
  - 2026: 36.4
  - 2027: 35.8
  - 2028: 35.6
  - 2029: 35.1
  - 2030: 35.1
  - 2031: 35.1
  - 2032: 34.9
  - 2033: 34.6
  - 2034: 34.3

- Noninterest expenditures (Percent of GDP):
  - 2023: 38.0
  - 2024: 38.0
  - 2025: 36.1
  - 2026: 35.2
  - 2027: 34.5
  - 2028: 33.5
  - 2029: 32.9
  - 2030: 32.6
  - 2031: 32.3
  - 2032: 32.0
  - 2033: 31.7
  - 2034: 31.5

- Automatic debt dynamics (Percent of GDP):
  - 2023: 1.1
  - 2024: 1.0
  - 2025: 0.8
  - 2026: 1.1
  - 2027: 0.7
  - 2028: 0.7
  - 2029: 0.7
  - 2030: 0.7
  - 2031: 0.6
  - 2032: 0.7
  - 2033: 0.6
  - 2034: 0.6

- Real interest rate and relative inflation (Percent):
  - 2023: 2.4
  - 2024: 1.0
  - 2025: 1.5
  - 2026: 2.0
  - 2027: 2.0
  - 2028: 2.0
  - 2029: 2.0
  - 2030: 1.9
  - 2031: 1.8
  - 2032: 1.7
  - 2033: 1.6
  - 2034: 1.5

- Real interest rate (Percent) — same series as above.
- Relative inflation (Percent): all years 0.0 (2023–2034).

- Real growth rate (Percent):
  - 2023: -1.3
  - 2024: -0.1
  - 2025: -0.7
  - 2026: -1.0
  - 2027: -1.3
  - 2028: -1.3
  - 2029: -1.3
  - 2030: -1.2
  - 2031: -1.1
  - 2032: -1.1
  - 2033: -1.0
  - 2034: -0.9

- Other identified flows (Percent of GDP):
  - 2023: -4.5
  - 2024: -1.1
  - 2025: -0.6
  - 2026: -0.7
  - 2027: -0.7
  - 2028: -0.6
  - 2029: -1.0
  - 2030: -1.1
  - 2031: -1.2
  - 2032: -1.0
  - 2033: -0.5
  - 2034: -0.3

- (minus) Interest Revenues (Percent of GDP):
  - 2023: -1.3
  - 2024: -1.4
  - 2025: -1.4
  - 2026: -1.4
  - 2027: -1.4
  - 2028: -1.3
  - 2029: -1.3
  - 2030: -1.3
  - 2031: -1.3
  - 2032: -1.3
  - 2033: -1.3
  - 2034: -1.3

- Other transactions (Percent of GDP):
  - 2023: -3.2
  - 2024: 0.3
  - 2025: 0.8
  - 2026: 0.7
  - 2027: 0.7
  - 2028: 0.7
  - 2029: 0.3
  - 2030: 0.2
  - 2031: 0.1
  - 2032: 0.3
  - 2033: 0.8
  - 2034: 1.0

- Contribution of residual (Percent of GDP):
  - 2023: -0.9
  - 2024: 0.1
  - 2025: 0.0
  - 2026: -0.1
  - 2027: 0.0
  - 2028: 0.0
  - 2029: 0.0
  - 2030: 0.0
  - 2031: 0.1
  - 2032: 0.0
  - 2033: 0.0
  - 2034: 0.0

- Gross financing needs (GFN) (Percent of GDP):
  - 2023: 8.3
  - 2024: 6.6
  - 2025: 6.2
  - 2026: 5.9
  - 2027: 5.6
  - 2028: 4.8
  - 2029: 4.7
  - 2030: 5.4
  - 2031: 5.3
  - 2032: 5.0
  - 2033: 4.7
  - 2034: 4.4

- Of which: debt service (Percent of GDP):
  - 2023: 6.9
  - 2024: 7.1
  - 2025: 7.7
  - 2026: 8.5
  - 2027: 8.3
  - 2028: 8.2
  - 2029: 8.2
  - 2030: 9.2
  - 2031: 9.5
  - 2032: 9.2
  - 2033: 8.9
  - 2034: 8.6

- Debt service by currency classification (Local currency / Foreign currency):
  - Local currency: same series as debt service above.
  - Foreign currency: 0.0 for all years 2023–2034.

Memo indicators:
- Real GDP growth (percent):
  - 2023: 2.4
  - 2024: 0.1
  - 2025: 1.2
  - 2026: 1.8
  - 2027: 2.4
  - 2028: 2.5
  - 2029: 2.5
  - 2030: 2.5
  - 2031: 2.5
  - 2032: 2.5
  - 2033: 2.5
  - 2034: 2.5

- Inflation (GDP deflator; percent):
  - 2023: -0.4
  - 2024: 2.6
  - 2025: 2.2
  - 2026: 1.4
  - 2027: 1.5
  - 2028: 1.5
  - 2029: 1.5
  - 2030: 1.5
  - 2031: 1.5
  - 2032: 1.5
  - 2033: 1.5
  - 2034: 1.5

- Nominal GDP growth (percent):
  - 2023: 1.9
  - 2024: 2.5
  - 2025: 3.4
  - 2026: 3.4
  - 2027: 3.9
  - 2028: 4.1
  - 2029: 4.1
  - 2030: 4.0
  - 2031: 4.0
  - 2032: 4.0
  - 2033: 4.0
  - 2034: 4.0

- Effective interest rate (percent):
  - 2023: 3.9
  - 2024: 4.6
  - 2025: 4.9
  - 2026: 5.1
  - 2027: 5.2
  - 2028: 5.4
  - 2029: 5.5
  - 2030: 5.5
  - 2031: 5.6
  - 2032: 5.6
  - 2033: 5.6
  - 2034: 5.7

Commentary summary:
- "Public debt would be on a downward path under the program."
- "The program fiscal plan features a large fiscal adjustment, which is large compared to historical and cross-country comparisons. To achieve the debt reduction goals specified in the plan it will be important to avoid policy slippages."

---

### Realism checks and historical comparators (Figure 5)
- Forecast track record and percentile comparators used: public debt to GDP, primary deficit, r - g, exchange rate depreciation, output gap revisions.
- Distributional comparisons and 3-year debt reduction/adjustment metrics shown; commentary notes:
  - The program fiscal plan features a large fiscal adjustment relative to historical and cross-country distributions.
  - "To achieve the debt reduction goals specified in the plan it will be important to avoid policy slippages."

---

### Medium-term risk assessment metrics (Figure 6)
- Debt fanchart module:
  - Fanchart width (percent of GDP): 84.7 (Value)
  - Contribution 1/: 1.2
  - Final Fanchart (Percent of GDP): reported values and decomposition shown.
- Probability of debt non-stabilization (percent): 25.8 (Value) with Contribution: 0.2
- Terminal debt-to-GDP x institutions index: 35.6 (Value) with Contribution: 0.8
- Debt fanchart index (DFI): 2.2
- Risk signal: 3/ — High (per thresholds described)
- Gross financing needs (GFN) module:
  - Average baseline GFN (percent of GDP): 5.6 (Value) with Contribution: 1.9
  - Initial Banks' claims on the general government (pct bank assets): 4.9 (Value) with Contribution: 1.6
  - Change in banks' claims in stress (pct banks' assets): 12.9 (Value) with Contribution: 4.3
  - GFN financeability index (GFI): 7.8
  - Risk signal: 4/ — Moderate
- Medium-term index (Index Number):
  - Debt fanchart index: 2.2 (Value; weight and contribution displayed)
  - GFN financeability index: 7.8 (Value; weight and contribution displayed)
  - Medium-term index: 0.3 (Value) — Moderate risk (final assessment).
- Final assessment and probabilities:
  - Final assessment: Moderate.
  - Prob. of missed crisis, 2024-2029, if stress not predicted: 18.2 pct.
  - Prob. of false alarms, 2024-2029, if stress predicted: 23.9 pct.

Notes on signal thresholds (from figure footnotes):
- Signal low/high cutoffs for DFI, GFI, and GFN financeability described in figure footnotes.

Commentary:
- "The two medium-term tools assess sovereign risk as moderate, mostly driven by the width of the confidence interval in the debt fanchart tool."

---

### Long-term modules and natural resources (Figures 7–8)
- Triggered long-term modules for Ecuador: Pensions; Health.
- Long-term risk assessment highlights "Large Amortization" scenarios and projections of GFN-to-GDP and Amortization-to-GDP ratios under:
  - Medium-term extrapolation
  - Baseline with t+5
  - Baseline with t+5 and DSPB
  - Historical 10-year average
- Natural Resources long-term module commentary:
  - "Ecuador does not face immediate pressures from depleting oil resources."
- Long-run projections charted for GFN-to-GDP Ratio and Total Public Debt-to-GDP Ratio through 2052 under alternative assumptions.

---

### Risk Assessment Matrix (Annex III) — key risks, likelihoods, impacts, and policy responses
- Conjunctural shocks and scenarios:
  - Intensification of regional conflicts
    - Relative Likelihood: High
    - Possible Impact: Medium
    - Policy Response:
      - Gradually reduce dependency on oil through economic diversification and promote private sector-led growth.
      - Continue to diversify export markets through new high standard regional FTAs.
  - Commodity price volatility
    - Relative Likelihood: High
    - Possible Impact: High
    - Policy Response:
      - Pursue fiscal consolidation to restore confidence and ensure debt and fiscal sustainability.
      - Gradually reduce dependency on oil through economic diversification and promote private sector-led growth.
      - Continue to closely monitor financial sector stability.
      - Work with international financial institutions and seek opportune times to re-access international markets.
  - Abrupt global slowdown or recession
    - Relative Likelihood: Medium
    - Possible Impact: High
    - Policy Response:
      - Diversify the economy to reduce dependency on commodity exports.
      - Continue to diversify export markets through new high standard regional FTAs.
  - Monetary policy miscalibration (major central banks)
    - Relative Likelihood: Medium
    - Possible Impact: Medium
    - Policy Response:
      - Continue to closely monitor financial sector stability.
      - Strengthen (financial) crisis preparedness and management.
      - Pursue fiscal consolidation to rebuild credibility with markets.
      - Work with international financial institutions and seek opportune times to re-access international markets.
  - Systemic financial instability
    - Relative Likelihood: Medium
    - Possible Impact: Medium
    - Policy Response:
      - Pursue fiscal consolidation to rebuild credibility.
      - Strengthen crisis preparedness and management.
      - Continue engaging international financial institutions to address financing needs.
  - Social discontent
    - Relative Likelihood: Medium
    - Possible Impact: High
    - Policy Response:
      - Implement policies to protect the poor and the most vulnerable.
      - Continue public engagement explaining reform benefits.
      - Prioritize social spending to achieve more inclusive growth.
      - Continue trade liberalization and improve business climate.

- Structural risks:
  - Deepening geoeconomic fragmentation
    - Relative Likelihood: High
    - Possible Impact: Medium
    - Policy Response:
      - Improve resilience of trading relationships, remove trade barriers, foster free trade agreements, limit policy uncertainty via medium-term frameworks.
      - If tensions reduce oil prices, implement fiscal contingency measures.
  - Extreme climate events
    - Relative Likelihood: Medium
    - Possible Impact: High
    - Policy Response:
      - Build resilience in infrastructure to natural disasters.
      - Invest to protect critical financial, transport, communication, and energy infrastructure.
      - Build precautionary savings buffers.

- Domestic risks:
  - Prolonged or deeper security crisis
    - Relative Likelihood: High
    - Possible Impact: High
    - Policy Response:
      - Ensure adequate fiscal spending on security through prioritization.
      - Implement contingency fiscal measures as needed.
      - Implement targeted measures to support the most vulnerable.
      - Advance governance, AML/CFT, and inclusive growth agenda.
  - Renewed political impasse
    - Relative Likelihood: High
    - Possible Impact: High
    - Policy Response:
      - Implement policies to protect the poor and the most vulnerable.
      - Continue engaging the broader public, explaining benefits of the reform program.
      - Prioritize social spending for inclusive growth.
  - Unexpected and large disruptions in oil production
    - Relative Likelihood: Medium
    - Possible Impact: High
    - Policy Response:
      - Invest in maintenance of oil infrastructure.
      - Advance diversification and SOE governance agenda.

Footnote on RAM:
- Relative likelihood definitions: "low" below 10 percent, "medium" between 10 and 30 percent, "high" between 30 and 50 percent.
- RAM time horizon: conjunctural shocks and scenarios typically 12 to 18 months; structural risks persist longer.

*Source: IMF staff (1ecuea2024001 - 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther).*

### Annex IV. Country CD Strategy Note

### Annex IV. Country CD Strategy Note

### Context
- IMF capacity development (CD) in Ecuador should align with reform objectives under the Extended Fund Facility (EFF), focusing on public financial management (PFM), revenue administration, and strengthening the financial system.
- Authorities’ engagement and ownership are solid, but absorption capacity is affected by frequent staff turnover and a recent government transition that delayed some CD plans.
- Close engagement with other bilateral and multilateral partners is critical given significant CD needs.

### CD Engagement and Effectiveness
- Since re-engagement after the 2015 Article IV, IMF CD intensified, expanding substantially after the 2018 request for a Fund-supported program.
- Areas of CD provided:
  - Fiscal: PFM, debt management and recording, fiscal rules, medium-term fiscal framework (MTFF), tax expenditure, revenue administration, government finance statistics (GFS).
  - Monetary and Financial: banks stress testing, financial supervision and regulation, Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), comprehensive Financial Sector Assessment Program (FSAP).
  - Other: governance (conflict of interest), macroeconomic statistics and modelling.
- Coordination with other CD partners includes World Bank (WB), UNDP, UNODC, US Treasury OTA, European Union, IDB, and CAF.
- Notable CD-driven improvements and reforms:
  - Debt Management and Statistics:
    - Publication of more transparent and timely debt statistics.
    - New fiscal rule introduced under the 2020 EFF.
    - Publication of a Medium-Term Debt Management Strategy (MTDS) in February 2021.
    - New public debt registry concluded in 2023 with support from OTA and UNCTAD.
  - Medium-Term Fiscal Framework (MTFF):
    - Implementation of new PFM framework following COPLAFIP reform.
    - Since 2022, publication of an MTFF with a top-down approach, fiscal rules, expenditure ceilings, and fiscal risk assessment.
  - Tax Revenue and Administration:
    - Creation of a Large Taxpayers’ Unit (LTU).
    - Legal incentives and mediation processes for taxpayers with tax debts; measures incorporated in tax reform enacted in November 2021.
  - Fiscal Statistics:
    - Improvements in timeliness, reliability, and consistency of fiscal statistics at different public sector levels, supported by STA CD and a long-term expert (LTX) during 2023.
    - More accurate recording of central government fiscal data from 2013 onwards and better recognition of contingent liabilities; revised data published on BCE and MEF websites.
  - Governance and Transparency:
    - COIP amended in 2020 to criminalize corruption.
    - Regulations adopted in 2020 to request ultimate beneficial ownership information in public contracts.
    - Asset declaration regime for high-level officials improved, extended, and declarations published.
    - Audits of COVID-related expenditures conducted and published.
    - Superintendency of Banks, Comptroller General’s Office, and UAFE received CD in AML and cybersecurity monitoring to support risk-based frameworks.
  - Macroeconomic Statistics and Forecasting:
    - STA-supported benchmark revisions to national accounts, conducted by the BCE and published in December 2023.
    - ICD missions on macroeconomic frameworks since 2023 to improve forecasting, policy analysis, and MEF–BCE coordination.

### CD Priorities
- Overall objective: support EFF reform areas—PFM, domestic arrears, revenue administration, and financial stability—through continued IMF CD.
- Strengthening PFM, Revenue Mobilization and Administration, Debt Management, and Fiscal Governance:
  - Fully implement COPLAFIP reform, address domestic arrears, and enhance revenues.
  - FAD’s LTX supporting fiscal risks, cash management planning, monitoring/accounting for domestic arrears, and MTFF preparation.
  - Resume TA in tax administration and customs; build on 2023 work such as TADAT and a tax gap analysis.
  - Continue work on recommendations from the 2023 Public Investment Management Assessment (PIMA) and the 2022 MTDS.
  - Increase efficiency and transparency of public expenditure, including full implementation and deepening of procurement framework reforms and support for the National System of Control (SNC) to achieve interoperability of databases and a risk-based framework.
- Supporting Financial Stability:
  - Implement FSAP (2023) recommendations—the first comprehensive evaluation of Ecuador’s financial system in almost 20 years—requiring extensive CD coordinated with the WB.
  - Priorities may include development of domestic debt markets, bank resolution tools and processes, risk-based supervision, liquidity and capital regulations, and reform of the interest rate system.
- Improving the Quality and Consistency of Statistics:
  - Continue STA support on GFS to align with the GFS Manual 2014 and build on 2023 LTX work with the MEF.
  - BCE to receive additional TA to improve external sector statistics coverage; CD committed for PPI and CPI rebasing and improving quarterly national accounts with reference year 2018—three missions planned for FY25.
  - BCE requested TA to compile Import and Export Price Indices to enhance national accounts volume measures.
- Improving Macroeconomic Forecasting and Policy Analysis:
  - Ongoing support in Financial Programming and Policies (FPP) for MEF and BCE staff to model inter-relationships across sectors and execute internally consistent policies.
  - Several ICD TA missions since 2023 with more expected in the coming months.

### Challenges and Mitigating Factors
- High engagement from authorities, and TA advice has been incorporated into program conditionality to support EFF performance.
- Constraints:
  - Capacity building is long-term; changes in authorities and high turnover of technical staff have necessitated follow-up and repeat CD activities.
  - Recent government transition has delayed some CD plans and reduced traction in some cases.
- Mitigation strategies:
  - Break TA recommendations into straightforward, easily digestible steps adapted to local constraints.
  - Implement reforms gradually but steadily with sufficient planning and resource allocation to enhance absorption capacity and lock in long-lasting effects.
  - CD plans are part of continuous dialogue considering authorities’ priorities, absorptive capacity, and IMF staff views on pressing needs.

### Key Figures and Commitments from Appendix I (Letter of Intent)
- Request for IMF support: 48-month extended arrangement under the EFF in an amount equivalent to SDR 3 billion (about US$4 billion), or 430 percent of Ecuador’s IMF quota.
- Initial purchase upon approval: SDR 752.9 million (107.9 percent of quota).

*Source: Annex IV. Country CD Strategy Note, Ecuador.*

### 6. The Government believes that the policies described in the attached Memorandum of

### 6. The Government believes that the policies described in the attached Memorandum of Economic and Financial Policies (MEFP)

### Overview and commitments to the IMF
- The government considers the policies in the MEFP adequate to achieve program objectives, and stands ready to take additional measures if necessary.
- The government will consult with the Fund on adoption of additional measures and in advance of any substantive revisions to the MEFP, in accordance with Fund consultation policies.
- The government will provide Fund staff with all relevant information required to complete program reviews and to monitor performance on a timely basis.
- The government requests IMF Executive Board approval to retain the existing exchange restriction arising from the tax on transfers abroad (ISD) for payments and transfers on current international transactions on the basis that the measure is maintained for balance of payments purposes, temporary, and non-discriminatory, and commits to gradually phasing out this measure as macroeconomic and balance of payments stability are restored.
- The government will observe the Fund’s standard performance criteria against imposing or intensifying foreign exchange restrictions, introducing or modifying multiple currency practices, concluding bilateral payment agreements inconsistent with Article VIII, or imposing/intensifying import restrictions for balance of payments reasons.
- The government consents to publication of this letter, its attachment, and the Staff Report.

### Context: prior reforms, shocks, and security crisis
- The MEFP builds on a 48-month Extended Fund Facility (EFF) arrangement and the 2020-22 EFF.
- Key past reforms: updated Organic Budget Code (COPLAFIP); legislation criminalizing corruption (COIP); reform of the Organic Monetary and Financial Code (COMYF); strengthened social safety net.
- Political uncertainty in 2023 constrained financing and reforms; oil revenue fell due to lower production and prices; interest payments on external public debt with floating rates increased amid global monetary tightening — together reducing fiscal balances, treasury deposits, and international reserves sharply in 2023.
- Security crisis: surge in criminal activities related to organized crime and drug trafficking prompted a 60-day state of emergency in early January 2024, later extended for another 30 days, and declaration of an internal armed conflict with curfews and mobility restrictions.
- Fiscal and security measures implemented in early 2024 included a three-percentage point VAT rate hike and additional revenue measures totaling about 2 percent of GDP, limited tax incentives, steps to target fuel subsidies, reorientation of current expenditure to boost security spending, and enhancing the military’s role.
- Sovereign debt spreads declined by about 1,000 basis points since December 2023 to below 1,200 basis points in April.

### Fiscal objectives and medium-term targets
- Program objectives: (i) strengthen fiscal sustainability while protecting vulnerable groups; (ii) rebuild fiscal and external buffers; (iii) safeguard dollarization and macroeconomic stability; (iv) enhance financial stability and integrity; (v) continue structural reforms to foster inclusive growth.
- The government will publish a medium-term fiscal framework (MTFF) aligned with these objectives and the EFF-supported program (end-October 2024 structural benchmark).
- 2024 fiscal plan targets:
  - Reduce the non-financial public sector (NFPS) overall fiscal deficit by 1.6 percentage points of GDP to 2 percent of GDP in 2024.
  - Accommodate a moderate increase in capital spending and urgent security-related spending while starting to clear domestic payment arrears.
  - Enacted revenue measures expected to bring about 2 percent of GDP in additional revenue (main measures include a VAT hike and temporary contributions on corporate and bank profits).
  - Expenditure restraint: maintain wages and goods and services broadly constant in real terms while protecting space for security and urgent social/investment needs.
  - Prepared and shared with Fund staff a projected monthly cash flow and financing plan for the budgetary central government for the remainder of 2024 (prior action) and a contingency plan (prior action).
- Medium-term consolidation path:
  - NFPS overall deficit of 1.2 percent of GDP in 2025.
  - NFPS overall surplus of 0.5 percent of GDP by end-2028.
  - NFPS primary balance surplus of 0.1 percent of GDP already in 2025.
  - Cumulative consolidation of about 5.5 percentage points of GDP in the non-oil primary balance including fuel subsidies (NOPBS) over 2024-28 relative to end-2023.
- Specific structural benchmarks and timing:
  - Publish MTFF (end-October 2024 structural benchmark).
  - Prepare and share a plan to mobilize non-oil revenues over the medium term (mid-November 2024 structural benchmark).
  - Prepare and share a plan for clearing and preventing the resurgence of PGE arrears, including obligations to the private sector and intra-public sector claims (end-November 2024 structural benchmark).
  - Ensure 2025 fiscal plan is in line with the EFF-supported program targets and the MTFF (early December 2024 structural benchmark).
  - Establish timeline to operationalize the National Control Subsystem (SNC) (end-December 2024 structural benchmark).
  - Publish a new medium-term debt management strategy (MTDS) (end-October 2024 structural benchmark).

### Key measures to achieve consolidation
- Non-Oil Revenues:
  - Continue mobilizing non-oil revenues and replace temporary measures with permanent, high-quality ones; streamline inefficient tax expenditures and exemptions.
- Oil Revenues and fuel subsidies:
  - The fiscal opportunity cost of selling oil derivatives at below market prices was about US$3.2 billion in 2023, equivalent to 2.7 percent of GDP.
  - Prioritize focusing fuel subsidies on the most vulnerable while ensuring social protection mechanisms; launch initiatives to increase net oil revenues, including gradually increasing production (partly via private investments) and enhancing refinery capacity.
- Public Sector Wage Bill:
  - Continue efforts to contain the wage bill, limit increases in headcount and wages; issued a norm to cap all public sector wages below the salary of the President.
  - Strategy will allow for necessary hiring of additional police personnel and domestic security forces.
- Procurement and expenditure efficiency:
  - Continue procurement reforms to optimize spending while ensuring transparency and quality.
  - SERCOP norms (July 2023) operationalize the 2022 Procurement Law; ongoing measures include cataloguing procurement processes and prices, standardized and bulk purchases for medicines and medical inputs.
  - Created the National Control Subsystem (SNC) to improve coordination and transparency across control entities; plan to operationalize SNC (end-December 2024 structural benchmark).
  - Upgrade the Public Sector Procurement System (SOCE) with IDB support.
- Capital expenditure and public investment:
  - Prioritize capital projects by social and economic impact; promote PPPs and concessions while accounting for contingent liabilities.
  - Ecuadorian Development Bank to channel multilateral and bilateral resources for subnational infrastructure.
  - Implement recommendations from the 2023 Public Investment Management Assessment (PIMA) and climate-related C-PIMA assessments gradually.

### Domestic arrears and liquidity
- Commitment to clear public sector arrears as fiscal liquidity improves.
- Included clearance of budgetary central government (PGE) arrears with the private sector in the multi-year fiscal financing plan.
- Prepare and share with Fund staff a plan to clear and prevent resurgence of PGE arrears (end-November 2024 structural benchmark).

### Financing strategy and debt management
- Near-term reliance on bilateral and multilateral sources while seeking to regain access to international capital markets as market conditions allow and gradually developing domestic financing sources.
- Active public debt management to cover financing needs at lowest possible cost with prudent risk.
- Publish a new MTDS (end-October 2024 structural benchmark).
- Active dialogue with official bilateral partners for continued financial support; intent to return to international capital markets as conditions permit and to develop domestic capital markets.

### Social safety nets and inclusion
- Objective: ensure fiscal consolidation burden is not borne by the poor and vulnerable.
- Prepare a plan to complete the social registry to cover all families in the lowest three deciles of the income distribution (end-October 2024 structural benchmark).
- As of March 2024, 1.2 million family units from the bottom three income deciles already benefit from social protection transfers.
- Aim to extend coverage by 47,000 additional family units per year into social protection programs, ensuring almost all families in the bottom two deciles and the majority in the third decile are covered by the end of the IMF-supported program.
- Work on permanent updating of the social registry, including institutional strengthening at the central level and territorial deployment with subnational governments (GADs).
- With World Bank support, make social protection more efficient and comprehensive through monetary transfers and complementary services.

### Institutional, governance, and transparency reforms
- Strengthened fiscal statistics timeliness, reliability, and consistency under COPLAFIP reforms; regulations require timely collection, accurate compilation, and transparent publication of fiscal data with adequate NFPS subsector coverage.
- Established a dedicated statistics unit at the Ministry of Economy and Finance with expertise in government finance statistics (GFS) compilation.
- IMF technical assistance updated GFS training curriculum and produced a training schedule for staff.
- An IMF long-term expert (LTX) worked one year with the statistics unit to improve MEF capacity in compiling, verifying, and reconciling government finance and debt statistics.
- Objective to increase NFPS coverage by including public companies in the electricity sector and expanding the statistical sample of local government companies.

*Attachment I. Memorandum of Economic and Financial Policies (selected excerpts).*

### 16. Currently fiscal statistics are disseminated monthly according to a pre-established

### 16. Currently fiscal statistics are disseminated monthly according to a pre-established

### Fiscal statistics dissemination and analytical reporting
- Fiscal statistics are disseminated monthly according to a pre-established publication calendar, which is updated once a year.
- Time series data on revenues, expenditures, and transactions in financial assets and liabilities by each subsector of the NFPS are published monthly with an indication whether the data is preliminary or definitive.
- An analytical report on the Budgetary Central Government GFS has been created in collaboration with the IMF’s Statistics Department and is published alongside the monthly time series.

### Social Security Fund (IESS) historical revisions and ongoing recording
- Historical balances of the Social Security Fund (IESS) were revised in cooperation with the IMF’s Statistics Department.
- The compilation process of the IESS was adjusted and transfers from the central government to IESS for accrued pension liabilities were corrected going back to 2013.
- Additional healthcare transfer obligations to IESS were incorporated into expenditure and debt statistics based on a conservative estimation while healthcare audits are pending.
- The central government 2024 budget and medium-term fiscal framework include the accrued pension transfer obligations and the estimation of the healthcare transfer allocations to the IESS; conservative estimates will continue to be recorded in future budgets.

### Mechanism to settle IESS healthcare claims and audit procurement
- Commitment to establish a revised mechanism to settle healthcare claims from IESS to bring legal predictability to auditing and clearing verified obligations.
- Establish an updated agreement between the MEF and IESS on the transfer of healthcare obligations (including both internal and external providers), building on the December 2022 agreement (end-October 2024 structural benchmark).
- The updated MEF/IESS agreement will stipulate the process to audit and settle the 2022 healthcare obligations.
- Plan to initiate the tender to procure the external auditor to review the 2023 and 2024 healthcare obligations to IESS (end-December 2024 structural benchmark).

### Cash management, arrears monitoring, and reporting
- Ongoing work to implement better cash management practices to address running up accounts payable throughout the year.
- With a long-term PFM expert provided by the IMF, cash management planning capability and horizon expanded to encompass the full length of the annual budget cycle.
- Remaining challenge: develop capability to update cash management planning on a 12-month rolling basis from any point in the budget year.
- A new monitoring system was implemented to evaluate the existing stock of domestic payment arrears of the central government and selected relevant entities of the NFPS.
- In January 2022, a methodology to estimate the stock of arrears and reporting templates for public sector entities was published.
- Estimated the stock of potential claims on PGE, including with the IESS, GADs, private sector, or others by type of expenditure, year, and beneficiaries.
- Monthly arrears data are being published in the public debt bulletins, as per COPLAFIP law.
- Plan to design a policy so MEF can gather monthly information on arrears from other entities of the NFPS, as mandated by COPLAFIP.

### SOE efficiency and fiscal risk monitoring
- Seven public companies that were not managed efficiently are in the process of closure.
- For SOEs remaining in operation: commitment to strengthen operational framework, implement best practices to improve efficiency and limit contingent liabilities to the budget.
- Support for a structural cost-optimization strategy, including a comprehensive efficiency assessment of the state to curtail unproductive activities and obtain efficiency gains.

### Public debt transparency improvements
- Implemented actions to improve public debt transparency following a new debt methodological definition and with WB and Fund technical assistance.
- A new Debt Bulletin was developed and released on a monthly basis on the official website of the MEF.
- The Bulletin includes detailed information on previously not included past obligations related to internal debt, arrears, accounts payable, and previous unregistered budgetary obligations.
- The current public external and internal debt profile and the amortization profile by source and operation are published.
- The detailed database supporting the Bulletin is now accessible on the MEF website.

### Strengthening tax administration and customs modernization
- Assessment of tax administration produced; Tax Administration Diagnostic Assessment (TADAT) undertaken with IMF support.
- Plan to implement an institutional model under the TADAT methodology to close gaps in tax administration, especially in control processes.
- Implementation, with support from the IDB, will focus on process integration, transparency, tax registration, data intelligence, and information management.
- Requested IMF technical assistance for the National Customs Service of Ecuador (SENAE) to enhance its modernization process.

### Strengthening the institutional framework and capacity of the BCE; safeguarding dollarization
- 2021 revisions to the COMYF included: eliminating the possibility of monetary financing of the government; restoring full reserve coverage of private and public financial institutions’ deposits at the BCE; and giving technical and managerial autonomy to the BCE.
- Revised law removed all legacy assets from the 1999 banking crisis and improved central bank transparency by establishing an audit committee, appointing external auditors, and publishing audited BCE financial statements.
- Additional steps: capacity development program for auditors; requiring certification of audit departments and individual auditors by the Institute of Internal Auditors; and implementing peer-review audit recommendations.

### BCE access to contingent liquidity and reserves management
- In 2023, the Latin American Reserve Fund (FLAR) granted the BCE access to a contingent credit line of up to US$230 million.
- In 2022, the Federal Reserve Bank of New York granted the BCE access to a FIMA Repo Facility of US$1 billion for exclusive central banking operations.
- BCE renewed its contingent liquidity facility with the Bank for International Settlements (BIS) for up to US$840 million as a precautionary measure.
- BCE sold 241,124.26 troy ounces of gold into US$494 million, investing proceeds in safe and liquid financial instruments to reduce volatility of monetary gold and increase BCE’s revenues and liquidity.

### BCE financial results and buffers
- BCE’s net profit reached a maximum of US$683 million in 2023, double the amount reported in 2022 and triple the value reached in 2021.
- BCE now reports an equity of US$100 million and a general reserve fund of US$500 million.

### Financial system resilience, oversight, and capital market development
- The 2023 Financial System Stability Assessment (FSSA) recommended: (i) strengthening financial sector oversight and coordination among agencies; (ii) enhancing the prudential framework governing capital and liquidity; and (iii) fostering financial deepening and capital market development.
- Plan to gradually implement FSSA recommendations to meet international standards and improve services.

### Coordination, prudential framework, and macroprudential measures
- Plan to establish a Financial Stability Committee comprising the BCE, the MEF, the Financial Board (JPRF), the Monetary Board (JPRM), the Superintendency of Banks (SB), the Superintendency of Popular and Solidarity Economy (SEPS), the Superintendency of Companies (SCVS), and the Deposit Insurance Corporation (COSEDE) (end-September 2024 structural benchmark).
- Prepared methodologies to identify systemically important financial institutions and plan to issue macroprudential regulations on bank capital buffers, including surcharges on systemically important institutions and countercyclical capital buffer (end-November 2024 structural benchmark).
- Phased implementation of the Liquidity Coverage Ratio is expected to be achieved by 2028.

### Financial inclusion, interest rate caps, and study on rate system
- Banks and credit cooperatives are subject to ceilings on lending rates differentiated by credit types and, for commercial loans, by borrower firm size.
- 2023 FSSA noted that caps on lending rates in the higher interest rate environment led to margin compression, distortions in credit supply, and restrictions to financial inclusion.
- A recent revision to update interest rate caps on commercial and corporate loans led to some relief; effects are being assessed.
- Plan to undertake and share with Fund staff a study of the system of interest rates (end-March 2025 structural benchmark) including recommendations to reform the interest rate system and an implementation strategy.

### Domestic capital market infrastructure and payment systems modernization
- Primary placements of government securities with private domestic stakeholders currently take place through the Guayaquil and Quito Stock Exchanges.
- Started to standardize government securities and develop a domestic yield curve; intend to begin regular auctions of government securities as market conditions allow.
- Plan to sign a contract to implement a new platform for the BCE’s central securities depository (DCV) to modernize compensation, liquidation, and custody functions (end-November 2024 structural benchmark).
- Work to enhance the payments system by improving the real time gross settlement (RTGS) system at the BCE to promote interoperability, reduce transaction costs, mitigate cash risks, encourage digital commerce, and revitalize economic activity.

### Business environment, trade agreements, AML/CFT, and public sector transparency
- Committed to restoring competitiveness, raising living standards, improving transparency and economic governance, fighting crime and corruption, and addressing investment and employment bottlenecks.
- 2024: National Assembly ratified trade agreements with Costa Rica and China.
  - 84 percent of Ecuadorian products exported to Costa Rica will be exempted from tariffs; other products will benefit from gradual tariff reductions over the next five to fifteen years.
  - The agreement with China will allow 99.6 percent of Ecuadorian exports to China to benefit from immediate or gradual tariff reductions.
- Expect trade deals to increase potential for productive FDI inflows; negotiations ongoing with South Korea and Canada.
- Plan to enact new AML/CFT legislation in line with FATF standards (end-February 2025 structural benchmark); draft legislation is under consideration by the National Assembly.
- Strengthen governance and independence of the UAFE and enhance capabilities to produce comprehensive strategic and operational financial intelligence for law enforcement.
- Launched a Joint Investigation Unit to align efforts across key public institutions against money laundering, tax fraud, and illicit financing of organized crime.
- Drafting first holistic policy on public sector integrity covering SOEs, including transparency in public spending and conflict-of-interest measures; Draft Law to Prevent Conflict of Interests in Public Administration submitted to the National Assembly in 2022.
- SERCOP requires Ultimate Beneficial Ownership (UBO) information from state suppliers via electronic form and maintains an updated section with UBO information for recent public contracts.
- SRI is developing a Registry for Ultimate Beneficiaries, set to be launched in the last quarter of 2024, to serve as a central repository of UBO information and cross-reference with SERCOP and the Superintendency of Companies.
- Financial audits of the national oil company are under way: an independent top-tier audit firm was hired in January (with IDB support) to audit Petroecuador and Petroamazonas for 2019 and 2020 and the merged entity (Petroecuador) for 2021.
- Plan to complete and share with IMF staff the 2019 and 2020 audit results (end-March 2025 structural benchmark) and gradually address identified issues.

*Source: 1ecuea2024001 - excerpt.*

### 40. To foster private sector-led growth, we have developed a new framework for PPPs. A

### 40. To foster private sector-led growth, we have developed a new framework for PPPs. A

### Public-private partnerships (PPPs) framework
- A law approved by the National Assembly in December 2023 established the new PPP framework, complemented with regulations issued in February (year implied by context).
- PPP pipeline priorities: road infrastructure and renewable energies.
- A fiscal risk unit within the MEF will:
  - Evaluate the viability of PPP projects, including quantification of risks to the public sector’s balance sheet.
  - Propose ways to mitigate those risks.
- Fiscal risk statements presenting PPP-related risks will be annexed to the annual budgets.
- Treatment in fiscal accounts:
  - Government-funded PPPs will be treated as traditional public procurements.
  - PGE obligations accrued on PPPs will be recorded transparently in budget data and measured as part of the PGE deficit as they accrue.
  - Accrued but not settled obligations related to PPPs will be recorded either as public debt or as a contingent liability depending on the nature of the obligation.

### Electricity shortages and renewable energy generation
- Causes of power shortages since late 2023:
  - Climate change affecting hydroelectrical power generation.
  - Longstanding underinvestment in the energy sector.
- Policy focus: undertake essential maintenance on existing plants, including through private investment.
- Project pipeline:
  - Government developed 12 projects for electricity generation through Non-Conventional Renewable Energies (NCRE)—solar, wind, and hydroelectric—with support from the IDB.
  - These generation projects will contribute 833 MW of power, backed by private investments.
- Risk mitigation and investor interest:
  - Establishing a mechanism to cover commercial revenue risks, coupled with state commitment and an IDB guarantee, has spurred interest from private investors and international development financial institutions for upcoming bidding processes for electric generation and transmission projects.

### Climate change resilience and financing
- Policy stance: step up adaptation and mitigation efforts; climate policy action is framed as a macroeconomic imperative for Ecuador.
- Institutional actions:
  - Established an institutional committee on climate finance within MEF, with support from the IDB.
  - Expanded several protected areas, including the Galapagos marine reserve.
- Financing milestone:
  - In May 2023 secured long-term financing for Galapagos protection as part of the world’s largest debt-for-nature swap on record.
- Ongoing action: continue exploring options to mobilize climate financing with international partners.

### Program monitoring, performance criteria, and targets (2024–25)
- Monitoring modalities:
  - Program implementation monitored through quantitative performance criteria, indicative targets, and structural benchmarks (detailed in Tables 1 and 2 and the TMU).
  - EFF arrangement reviews: triannual during 2024-25; semiannual during 2026-28.
  - First and second reviews occurring on or after November 15, 2024, and March 15, 2025, respectively.
- Key quantitative performance criteria and indicative targets (US$, unless otherwise indicated) — cumulative change from January of each year unless noted:
  - Quantitative performance criteria (Program / Program / IT / IT by test date):
    - 1. Nonoil primary balance of the budgetary central government (PGE) (floor): -1,078 / -2,295 / -472 / -1,245
    - 2. Overall balance of the PGE and CFDD (floor): -2,200 / -4,213 / -753 / -2,377
    - 3. Accumulation of NFPS deposits at the central bank (floor): 200 / 360 / 50 / 150
    - 4. Non-accumulation of external payments arrears by the NFPS (continuous performance criterion): 0 / 0 / 0 / 0
    - 5. (No new) Central bank direct and indirect financing to the NFPS (continuous performance criterion): 0 / 0 / 0 / 0
  - Indicative targets:
    - 6. Overall balance of the NFPS (floor): -1,628 / -2,442 / -491 / -982
    - 7. Nonoil primary balance including fuel subsidies (NOPBS) of the NFPS (floor): -4,100 / -6,528 / -1,500 / -3,400
    - 8. Change in the stock of NIR (floor): -200 / -310 / 116 / 382
    - 9. Stock of PGE arrears to the domestic private sector (ceiling): 862 / 662 / 600 / 400
    - 10. Number of families in the first three income deciles nationwide covered by cash transfer programs (floor): 1,192,713 / 1,212,984 / 1,228,660 / 1,244,336
- Sources for targets and estimates: Ministry of Economy and Finance and IMF staff estimates.
- Reporting and timing:
  - All fiscal data needed for program monitoring to be provided to the Fund within 45 days from the end of each test date shown in Table 2.
  - Preliminary monthly data to be provided with a lag of no more than 30 days after the end of each month.

### Structural conditionality and benchmarks (selected items and due dates)
- Prior actions:
  - Prepare and share with the Fund a projected monthly cash flow and financing plan for the budgetary central government for the remainder of 2024. (Objective: Improve mechanisms to monitor real-time fiscal performance.)
  - Prepare a contingency plan to ensure compliance with program fiscal targets if revenues underperform. (Objective: Be ready to take corrective action.)
- Structural benchmarks (selected):
  - Publish an updated Medium-Term Fiscal Framework (MTFF) in line with program targets. — End-October 2024
  - Publish a Medium-Term Debt Management Strategy (MTDS) in line with program targets. — End-October 2024
  - Share with Fund staff an updated plan to clear and prevent the resurgence of domestic arrears of the PGE. — End-November 2024
  - Prepare and share with the Fund a plan to mobilize non-oil fiscal revenues, including by streamlining inefficient tax expenditures and replacing transitory revenue measures with permanent high-quality ones. — Mid-November 2024
  - Enact regulation on revenue and/or expenditure measures to ensure that the 2025 fiscal plan is in line with program and MTFF commitments. — December 6, 2024
  - Share with the Fund a plan to complete the social registry to cover families in the lowest three deciles nationwide. — End-October 2024
  - Establish an updated agreement between the MEF and IESS on the transfer of healthcare obligations. — End-October 2024
  - Establish a timeline to operationalize the National Control Subsystem (SNC). — End-December 2024
  - Initiate tender to select an auditor for the 2023 and 2024 healthcare audits. — End-December 2024
  - Complete audits of the 2019 and 2020 financial statements of Petroecuador and Petroamazonas and share results with Fund staff. — End-March 2025
  - Enact new AML/CFT legislation in line with FATF standards. — End-February 2025
  - Establish a Financial Stability Committee comprising BCE, MEF, JPRF, JPRM, SB, SEPS, SCVS, and COSEDE. — End-September 2024
  - Issue macroprudential regulations on bank capital buffers, including surcharges on systemically important institutions and a countercyclical capital buffer. — End-November 2024
  - Prepare and share with Fund staff a study of the system of interest rates with recommendations. — End-March 2025
  - Sign a contract to implement a new platform for the BCE’s central securities depository (DCV). — End-November 2024

### Technical Memorandum of Understanding (TMU) — selected methodological details
- Program exchange rates (as of April 23, 2024, Haver):
  - US Dollar to Euro: 0.94
  - US Dollar to Renminbi: 7.11
  - US Dollar to Yen: 154.82
  - US Dollar to SDR: 1.31
  - US Dollar to British Pound: 0.80
  - US Dollar to South Korean Won: 1,380.60
  - US Dollar to Swiss Franc: 0.91
  - US Dollar to Canadian Dollar: 1.37
  - US Dollar to Danish Krone: 6.99
  - US Dollar to Swedish Krone: 10.87
  - US Dollar to Norwegian Krone: 10.99
  - US Dollar to Australian Dollar: 1.55
  - US Dollar to Mexican Peso: 17.00
  - US Dollar to Colombian Peso: 3,924.82
  - US Dollar to Gold prices (US$/ounce): 2,313.00
- Definitions relevant to performance criteria:
  - Budgetary central government = Presupuesto General del Estado (PGE). Revenues and expenditures related to social security, public banks, SOEs, and decentralized autonomous governments excluded from PGE.
  - Non-oil primary balance of the PGE = total PGE revenues excluding oil revenues and interest revenue, minus total non-oil expenditure of the PGE excluding interest expense.
  - Non-oil primary revenues recorded on a cash basis; explicitly included: Tax revenues (ingresos tributarios) and Other revenues (otros ingresos).
  - Non-oil primary expenditures recorded on an accrual basis; explicitly included categories such as wages and salaries, purchases of goods and services, transfers (including to IESS and account 99), social assistance benefits, employment-related social benefits, and transactions in nonfinancial assets.
  - PGE transfers to the IESS will include US$337 million in accrued estimated expenses per year (to be updated upon finalization of MEF–IESS agreement).
  - Account 99: all expenditures recorded as a credit in “Account 99” will be recorded in the year the obligation was accrued or, if not available, in the year the obligation is credited to Account 99.

*Sources: Ministry of Economy and Finance and IMF staff estimates.*

### 22.      All fiscal data referred to above and needed for program monitoring purposes will be

### 1ecuea2024001 - 22.      All fiscal data referred to above and needed for program monitoring purposes will be

### Monitoring and reporting timelines
- All fiscal data referred to above and needed for program monitoring purposes will be provided to the Fund within 45 days from the end of each test date as shown in Table 2. Preliminary monthly data will be provided with the lag of no more than 30 days after the end of each month.
- NFPS deposits at the BCE data will be provided to the Fund at weekly frequency within 5 business days following the end of the week.
- All fiscal data referred to above and needed for program monitoring purposes (for non-oil primary balance including fuel subsidies) will be provided to the Fund within 60 days from the end of each test date as shown in Table 2. Preliminary monthly data will be provided with the lag of no more than 45 days after the end of each month.
- All fiscal data referred to above and needed for program monitoring purposes (for floor on the overall balance of the NFPS) will be provided to the Fund with a lag of no more than 90 days after the end of each test date as shown in Table 2 and preliminary data with the lag of no more than 60 days after the end of each month.
- Monthly data on amortizations and disbursements of BCE credit to NFPS and to publicly owned banks for the purpose of financing the NFPS will be provided within five business days to the Fund.

### Adjustors (automatic mechanical adjustments to program targets)
- Adjustor on oil prices (overall budgetary central government and CFDD): the floor will be adjusted upward/downward by US$23.85 million at corresponding test dates for each US$1 per barrel that the average Ecuador mix crude oil price is above/below the program assumption defined in Table 3. This adjustor is capped at US$178.9 million at corresponding test dates.
- Oil-price adjustor for accumulation of NFPS deposits at the BCE: the floor will be adjusted upward/downward by US$11.93/US$23.85 million at corresponding test dates for each US$1 per barrel that the average Ecuador mix crude oil price is above/below the program assumption defined in Table 3. This adjustor is capped at US$178.9 million at corresponding test dates.
- Calculation method for average Ecuador mix crude oil price: total value of crude oil exports divided by the total volume of oil exports over the period since the prior test date.
- Adjustor on external borrowing (ceiling/floor adjustments): the floor on the accumulation of NFPS deposits will be adjusted upward/downward by the amount of NFPS borrowing from non-residents above/below that envisioned under the program (as reported in Table 5), net of issuances related to liability-management operations that have no net impact on fiscal financing.
- Adjustor on disbursements from the IMF and other multilateral institutions: the floor on the accumulation of NFPS deposits will be adjusted upward/downward by the amount of the excess/shortfall in program loan disbursements from the IMF and other multilateral institutions (the IDB, World Bank, CAF, and FLAR), relative to the baseline projection reported in Table 6.
- Adjustor on external borrowing (NIR): the floor on net international reserves will be adjusted upward/downward by the amount of borrowing from non-residents above/below that envisioned under the program, as reported in Table 5 and net of issuances related to liability-management operations that have no net impact on the outstanding stock of NFPS debt.
- Adjustor on disbursement from other multilateral institutions (NIR): the floor on net international reserves will be adjusted downward/upward by the shortfall/excess in loan disbursement by multilateral institutions (the IDB, World Bank, CAF, and FLAR), and grants, relative to the baseline projection reported in Table 6.

### Key numeric program figures and assumptions (preserve exact values)
- Ecuador mix crude oil price (US$ per barrel): 67.52
- Oil-price adjustor per US$1: US$23.85 million (overall balance and many floors)
- Alternative oil-price adjustor per US$1 for NFPS deposits: US$11.93/US$23.85 million
- Oil-price adjustor cap at corresponding test dates: US$178.9 million
- External borrowing consistent with program targets (cumulative) 1/: 0.0
- Expected disbursement of IMF credit 1/: 1,000
- Expected disbursements of program loans by other multilaterals 1/: 1,608
- Note on timing for cumulative figures: 1/ Cumulative from January 1, 2024.
- Reporting lags and deadlines preserved exactly as in monitoring bullets above (30 days, 45 days, 60 days, 90 days, weekly within 5 business days, monthly within five business days for BCE credit data).

### Definitions and coverage (major program definitions preserved verbatim)
- NFPS composition for program purposes: PGE and CFDD, Decentralized Autonomous Governments (including municipal governments, provincial governments and parish boards), Social Security Funds (including IESS, ISSFA, ISSPOL and BIESS), Non-Financial State-Owned Enterprises (SOEs, detailed in Table 4), Development Bank of Ecuador (BEDE) as well as accounts related to the payments to private operators of oil concessions (Ministerio de Energía y Recursos Naturales no Renovables). The Central Bank of Ecuador falls outside of the NFPS perimeter.
- NFPS deposits at the BCE: include all depository liabilities (time and on-call deposits) at the BCE of the NFPS.
- Accumulation of NFPS deposits at the BCE at each test date: measured as the change in the stock of deposits between the beginning of the year and the last day of the corresponding test date month as shown in Table 2.
- External debt determination: residency criterion except for debt securities for which the criterion is the place of issuance of the instrument.
- Debt definition for program purposes: a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
- Forms of debt explicitly listed: Loans; Suppliers’ credits; Leases (with debt defined as present value at lease inception of all lease payments expected, excluding operation/repair/maintenance payments).
- External payment arrears (program monitoring definition): (i) external debt obligations (principal and interest) falling due after May 1, 2024 that have not been paid within 90 days of the due date, considering contractual grace periods, and (ii) payment arrears on goods delivered or services rendered by external entities.
- Coverage exclusions for the arrears performance criterion: (i) arrears on short-term trade credit or letters of credits; (ii) arrears on debt subject to renegotiation or restructuring; and (iii) arrears resulting from the nonpayment of commercial claims that are the subject of any litigation initiated prior to May 1, 2024.
- BCE direct and indirect financing to the NFPS (definitions): includes overdraft transfers from the BCE to NFPS entities, advance distribution of unrealized profits from the BCE, BCE acquisition of government debt on the primary market or by purchase from public institutions, and BCE lending to public banks for acquisition of government debt on the primary market or by purchase from public institutions.

### Indicative targets: variable definitions (selected)
- Non-oil Primary Balance of the NFPS: primary non-oil revenues minus primary non-oil spending.
- Primary non-oil revenues (recorded on a cash basis) include: Tax revenues of the PGE and of GADs; Social security contributions; Other revenues (otros ingresos), including administrative fees, sales of market and nonmarket establishments, and other Transfers not elsewhere classified.
- Primary non-oil revenues explicitly exclude: interest, proceeds from the sale of financial assets, revenues from the privatization of government-owned entities, revenues from oil exports, and revenues from the domestic sales of oil derivatives.
- Primary non-oil spending (recorded on accrual basis) comprises: Wages and salaries; Purchases of goods and services (excluding Petroecuador, CFDD and payments to private oil companies “servicios petroleros”); Grants; Social benefits, including social security benefits, social assistance, and employment related social benefits; Dividends paid by social security funds; Current and capital transfers, including “Account 99”; Transactions in nonfinancial assets.
- Petroleum product subsidies: defined as the difference between the distributor sale price of the product and the cost of this product. Cost components specified exactly, including use of export price of Eastern crude (opportunity cost) for domestically produced products and import cost at FOB plus freight and insurance.
- Non-oil primary balance of NFPS, including fuel subsidies: defined as the non-oil primary balance of the NFPS minus spending on subsidies on petroleum products.
- Treatment of government-funded PPPs: treated as traditional public procurements; PGE obligations that are accrued on public private partnerships recorded transparently in budget data and measured as part of the PGE deficit as they accrue; accrued but not settled obligations related to PPPs recorded either as public debt or as a contingent liability depending on nature.
- Recording of costs associated with divestment operations, liquidation of public entities, or awarded as part of lawsuits: recorded as expense.
- All expenditures recorded as a credit in “Account 99” will be recorded in the year the obligation was accrued or, if year is not available, in the year the obligation is credited to Account 99.

### Net International Reserves (NIR) definition (program basis)
- NIR computed as: US dollar value of the usable gross international reserve assets of the BCE minus (i) gross reserve related liabilities of the BCE to nonresidents, and (ii) the reserve holdings of domestic banks and deposits of other financial institutions held at the BCE.
- Conversion rule: Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates.
- Components included in usable gross international reserve assets: (i) currency and deposits; (ii) monetary gold; (iii) holdings of SDRs; (iv) the reserve position in the IMF; (v) securities (including debt and equity securities); (vi) financial derivatives; and (vii) other claims (loans and other financial instruments).
- Specific exclusions from gross international reserves: precious metals other than monetary gold; assets in nonconvertible currencies and illiquid assets; claims on residents; any reserve assets that are pledged, collateralized or otherwise encumbered (including assets tied up in repurchase agreement transactions).
- Gross reserve-related liabilities include: all short-term liabilities of the BCE vis-à-vis non-residents denominated in convertible foreign currencies with an original maturity of one year or less; short-term loans, securities, and other liabilities (excluding account payables) of the central government with an original maturity of less than 30 days; the stock of IMF credit outstanding; the nominal value of all derivative positions of the BCE implying the sale of foreign currency or other reserve assets.
- Reserve holdings of domestic banks held at the BCE: all liabilities of the BCE to other depository institutions (otras sociedades de depósitos, as defined in the BCE’s Metodología: Información Estadística Mensual, 4th Edition of May 2017).
- Deposits of other financial institutions at the BCE: all liabilities of the BCE to other financial institutions (otras sociedades financieras, with the exception of deposits of the BEDE and BIESS, including those held in trust funds (fideicomisos BIESS y fideicomisos IESS)).

_International Monetary Fund — https://www.imf.org/-/media/files/publications/cr/2024/english/1ecuea2024001.pdf_

### 60.      Adjustor on oil prices. The floor on the net international reserves will be adjusted

### Adjustor on oil prices. The floor on the net international reserves will be adjusted

### Adjustor on oil prices and monitoring of NIR
- Adjustor mechanics:
  - The floor on the net international reserves will be adjusted upward/downward by US$11.93/US$23.85 million at corresponding test dates for each US$1 per barrel that the average Ecuador mix crude oil price is above/below the program assumption defined in the Table 3.
  - This adjustor is capped at US$178.9 million at corresponding test dates.
  - The average Ecuador mix oil price will be calculated as the total value of crude oil exports divided by the total volume of oil exports over the period since the prior test date.
- Monitoring of NIR:
  - The change in net international reserves (NIR) will be measured as the cumulative change in the stock of NIR between the beginning of the year and the last day of the corresponding test date month as shown in Table 2.
  - Foreign exchange asset and liability data will be provided to the Fund at weekly frequency within 5 business days following the end of the week.
  - Export price of Ecuador mix crude oil, with a lag of no more than 20 days after the closing of each month.

### Ceiling on the stock of PGE payment arrears to the domestic private sector
- Definitions:
  - PGE is defined as above (in the program text).
  - Arrears are defined as other accounts payable included in the definition of PGE debt, which are overdue for more than 90 days from the date of accrual.
  - Stocks of “cartas de crédito” are explicitly excluded from the definition of arrears for this IT.
- Monitoring:
  - Below-the-line fiscal data referring to PGE accounts payable will be provided to the Fund with a lag of no more than 60 days after the end of each test date as shown in Table 2 and preliminary data with a lag of no more than 45 days after the end of each month.
  - The data will include a breakdown by economic sector of accounts payable (e.g., health, education, infrastructure, etc.), with an “of which” detail for amounts overdue by more than 90 days from the date of accrual.

### Floor on Social Assistance Scheme Coverage
- Definitions:
  - Social assistance coverage of poor families for the purpose of the program is computed as the sum of all active beneficiary family units in the three bottom deciles of the income distribution that benefit from at least one social assistance program.
  - Poor beneficiary families are defined according to information in the RS2018.
  - Coverage expansion will occur through the following social assistance programs in force on the date of issuance of the program: Bono de Desarrollo Humano (BDH), BDH con Componente Variable (BDH-V), Bono Joaquin Gallegos Lara, Pension Mis Mejores Años, Pensión Toda Una Vida, Bono para niños, niñas y adolescentes en situación de Orfandad por muerte violenta de la madre o progenitora, Cobertura de Contingencias, Bono para personas afectadas por eventos de origen natural o antrópico, and Bono 1000 Días, and others monetary transfers that might set into place for strengthen the social protection net.
  - The level (size) of benefits, understood as number of family units, of any of the cash transfer programs in the bottom three deciles of the income distribution should not be reduced (with respect to their level on May 1, 2024).
- Monitoring:
  - Monthly data on (i) number of family units in the lowest three income deciles covered by the social assistance protection programs, and (ii) monthly data on numbers of registries with information updated and validated following RS2018 by income decile will be provided to the Fund with a lag of no more than 30 days after the end of each month.

### Other information requirements and data provision (frequency and content)
- General:
  - In addition to data needed to monitor program conditionality, authorities will provide data to ensure adequate monitoring of economic variables.
- Debt definition and NFPS scope:
  - Following GFSM 2014 and Public Sector Debt Guide, total gross debt covers all liabilities that are debt instruments: Special drawing rights (SDRs); Currency and deposits; Debt securities; Loans; Insurance, pension, and standardized guarantee schemes; and Other accounts payable.
  - All liabilities in the GFSM balance sheet are considered debt, except equity and investment fund shares and financial derivatives and employee stock options.
  - For the program, Ecuador’s NFPS debt includes: Deposit liabilities; Debt securities including short term liquidity instruments (held by nonresidents, and by residents not included in the NFPS entities); Loans; and Other accounts payables.
  - Any liabilities issued by NFPS entities and held as an asset by another NFPS entity should be netted out. Central bank lending to the government is included in the stock of NFPS debt.
- Monitoring frequencies and required datasets:
  - Daily:
    - Daily monetary and financial data in the template agreed with Fund staff, no later than 1 business days after the end of the day. Template will include: (a) movements of international reserves by inflows and outflows; (b) Main balance sheet accounts of financial institutions, broken down by private banks, cooperatives and mutuals; and (c) Daily oil production.
  - Weekly:
    - Consolidated balance sheets of the banking system, by main accounts, including deposits in the banking system, available funds, credit to the private sector, and credit to the government.
    - BCE balance sheet. Financial Indicators: Deposits of banks at the BCE.
    - Weekly monetary data in the template agreed with Fund staff, no later than 5 business days after the end of the week.
    - Weekly data on international reserves and foreign currency liquidity, in line with SDDS requirements, no later than 5 business days after the end of the week.
  - Monthly:
    - Data on NFPS stock of debt in US$ will be provided monthly with a lag of no more than 90 days after the end of each month, and will include cross-holdings among NFPS entities.
    - Data on stocks and flows (above- and below the line), disaggregated by each subsector of the NFPS using agreed templates (budgetary central government and CFDD, rest of the central government, subnational governments, SOEs and social security).
    - NFPS financing data compiled from detailed financial assets and liabilities (deposits, loans, securities, equities, other accounts payable including oil related), and their amortizations, disbursements, and arrears accumulation.
    - Data on amortizations and disbursements of credit from the BCE to NFPS and to publicly-owned banks will be provided within five business days from the end of the month.
    - PGE cash flow data from the beginning to the end of the current fiscal year, with a lag of no more than 60 days after the closing of each month, including expected monthly amortizations and repayments on NFPS debt.
    - Data on social spending covering Bono de Desarrollo Humano (BDH), BDH-V, Personas con discapacidad, Pensión para Adultos Mayores, Mis mejores años, Pensión Toda Una Vida, Bonos Mis Primer 1000 Dias, Bono para niños, niñas y adolescentes en situación de Orfandad por muerte violenta de la madre o progenitora, Cobertura de Contingencias, Bono para personas afectadas por eventos de origen natural o antrópico, and Bono Joaquin Gallegos Lara.
    - Data to determine the latest net SDR position at the end of each month (total external liabilities with the SDR department for central government; total SDR holdings for the central bank); all reported data should be denominated in SDRs.
    - Provision of detailed information on collateralized debt and debt with similar arrangements within 2 weeks of signing new contracts, including contracts, escrow accounts overseas that serve as collateral, and detailed information for each creditor on stock of debt, terms, amounts pledged/sold/resold/encumbered, related commitments, and expected repayment schedules.
  - Quarterly:
    - Detailed balance of payments data, no later 90 days after the end of the quarter.
    - Detailed fiscal and debt data by the subsectors of NFPS, no later than 90 days after the end of the quarter, including above and below the line data, summary of the statistical discrepancy, calendar of amortization and payment of interest by instrument of debt stock at the end of the quarter and stock of gross debt.

### Selected fiscal and Fund exposure findings and projections
- Public debt and outlook:
  - Ecuador’s public debt-to-GDP ratio declined to an estimated 55.3 percent of GDP at end-2023.
  - Forecasted decline to 40 percent by 2032 under program assumptions (the debt limit embedded in the organic budget code).
  - Primary balance of the non-financial public sector would turn to surplus in 2025, increasing to about 2 percent of GDP in the medium term under the program.
  - Total external debt service burden will peak at 13.2 percent of GDP in 2027 before declining to an average of 11.3 percent of GDP per year during 2030-34.
  - In terms of exports of goods and services, total external debt service would peak at 48.6 percent in 2027 and decline to an average of 42.5 percent per year during 2030-34.
  - Debt service due to the Fund in 2024-34 would average 1.0 percent of GDP per year, peaking in 2027 at 1.4 percent of GDP.
- Fund exposure and proposed EFF:
  - The proposed EFF arrangement equivalent to 430 percent of quota (SDR 3 billion).
  - The IMF’s credit outstanding to Ecuador at end-April 2024 was SDR 5.8 billion (835 percent of quota).
  - After the scheduled purchase upon approval of the proposed arrangement, Ecuador’s debt outstanding to the IMF would increase to SDR 6.5 billion (935 percent of quota) by end-May 2024.
  - Repurchases under the 2020 EFF arrangement begin in the first half of 2025; repurchases under the proposed EFF arrangement would begin in 2028.
  - Total scheduled Fund repurchases amount to SDR 306 million in the remainder of 2024, SDR 759 million in 2025 and SDR 796 million in 2026.

*Source: Excerpt from the IMF staff report for Ecuador (program documentation).*

### 10.      The proposed EFF arrangement would increase the Fund’s exposure to Ecuador.

### 10.      The proposed EFF arrangement would increase the Fund’s exposure to Ecuador.

### Fund exposure and credit concentration
- After the scheduled purchase upon the approval of the arrangement, Ecuador would remain the Fund’s fourth largest GRA borrower, with credit outstanding that would account for 7.1 percent of total Fund credit.
- Credit concentration measured by the Fund’s exposure to the top five borrowers would increase slightly from 70.0 percent to 70.2 percent following the purchase upon approval of the proposed arrangement.
- Fund GRA exposure to Ecuador after the purchase upon approval of the proposed arrangement would be modest and amount to 26.8 percent of precautionary balances (PBs), rising to 28.5 percent when credit to Ecuador peaks (assuming the level of precautionary balances at end-January 2024, which is slightly below the medium-term PB target of SDR 25 billion).

### Access, quota metrics, and peak exposure
- Ecuador’s access under the proposed EFF: 430 percent of quota.
- Median access for other GRA exceptional access arrangements since 2008: 700 percent of quota.
- Ecuador’s debt outstanding prior to the proposed purchase: 835 percent of quota.
- Fund exposure to Ecuador would increase to 935 percent of quota after the purchase upon approval of the proposed EFF.
- Fund exposure would peak at 1,002 percent of quota in November 2025 assuming all purchases and repurchases are done according to schedule.
- The peak of 1,002 percent of quota would be in line with the median peak for comparators since 2008 and above the peak for Ecuador’s 2020 EFF (874 percent).

### Capacity to repay and risk profile
- Ecuador’s capacity to repay the Fund is subject to significant risks and depends on full program implementation and timely external financing.
- Comparators and relative metrics:
  - Ecuador’s peak Fund exposure in terms of gross international reserves is the highest of comparator cases—only below that of Ecuador at the time of the approval of the 2020 EFF.
  - Peak Fund exposure in terms of total external debt is above the median of comparators.
  - Peak Fund exposure in terms of GDP is slightly below the median of comparators.
  - Peak payments obligations: debt service to the Fund in percent of exports of goods and services and in percent of total external debt service is below the median of other GRA exceptional access cases.
- Key downside risks to capacity to repay:
  - Further deterioration in the security situation affecting investment, tourism, economic activity, the fiscal accounts, and the financial sector.
  - Political fragmentation delaying reform implementation and causing additional liquidity pressures.
  - Unexpected declines in oil prices or disruptions to oil production reducing oil revenue.
  - Tighter financing conditions affecting Ecuador’s ability to re-access the market in 2025 as envisaged.
- Upside risks: stronger-than-expected global growth and higher oil prices.

### Liquidity and income impacts for the Fund
- Forward Commitment Capacity (FCC) as of April 24, 2024: SDR 163.9 billion.
- The FCC would fall by 1.8 percent following the approval of the proposed EFF arrangement.
- The proposed EFF arrangement would have a modest impact on the Fund’s liquidity position.
- Fund income and burden-sharing:
  - Fund income from Ecuador is projected to account for about 17 percent of total lending income in FY2025, based on a desk survey scenario for projected program demand as of February 2024.
  - Total GRA charges and surcharges for Ecuador for FY25 are SDR 454 million, accounting for 34.5 percent of the Fund’s current residual burden-sharing capacity of SDR 1.32 billion (as of April 24, 2024).
  - If Ecuador were to accrue arrears on charges and surcharges in FY25, the Fund’s burden sharing mechanism would be sufficient to cover such arrears.

### Assessment, program objectives, and implementation priorities
- Program objectives:
  - Help Ecuador face pressing balance of payments needs driven by weak fiscal balances (including due to the decline in oil exports and contraction in net oil receipts), pressures on the financial account due to capital outflows, large external debt obligations, and lack of market access.
  - Strengthen fiscal sustainability and rebuild liquidity buffers, safeguard dollarization and macroeconomic stability, and advance the structural reform agenda to promote sustainable and inclusive growth.
- Estimated financing gap: US$4 billion in 2024-2028 after factoring in fiscal consolidation under the program and support from other international financial institutions and official bilateral creditors.
- Implementation imperatives:
  - Full program implementation and timely external financing are critical to mitigate financial risks to the Fund.
  - Credible reform implementation is key to regaining access to private international bond markets and mobilizing resources from other official creditors.
  - Risks to policy implementation are elevated due to a fragmented National Assembly and forthcoming general elections in early 2025.
  - If policy slippages—or reversals—materialize, the risks of arrears to the Fund would not be insignificant given Ecuador’s large repurchases scheduled for the next five years.

*1ecuea2024001 - 10.      The proposed EFF arrangement would increase the Fund’s exposure to Ecuador.*

### 4.      Ecuador has  faced  an  unprecedented  security  crisis.  In  recent  years,  the  country  has

### 4.      Ecuador has  faced  an  unprecedented  security  crisis.

### Security crisis and economic impact
- Homicide rate rose from 6.7 per 100,000 in 2019 to an estimated 45 per 100,000 in 2023.
- A presidential candidate was assassinated 11 days before the 2023 election.
- The surge in crime became the population’s main concern and has taken a toll on economic activity by altering investment and consumption decisions.
- Additional targeted public expenditures are needed to effectively tackle organized crime and enhance public security.
- In a referendum held in April, the population supported the government’s security policies by approving by a large margin nine security related questions.

### Recent policy actions and legislative progress
- In its first five months in office, the current administration got five significant economic reforms approved by the National Assembly.
- These bills raised the value added tax and created transitory contributions from corporations, and included measures to incentivize youth employment and to promote electricity generation by private companies.
- These revenue measures are expected to yield a net fiscal adjustment of around 1.8 percent of GDP in 2024.
- President Noboa announced his administration’s commitment to target gasoline subsidies.

### Program objectives
- The proposed arrangement seeks to strengthen fiscal sustainability and advance a broad structural reform agenda to safeguard macroeconomic stability and foster strong and inclusive economic growth.
- The macroeconomic program aims at strengthening fiscal sustainability, bolstering social protection, enhancing financial stability and integrity, and promoting sustainable and inclusive growth.
- Program design, including the pace of fiscal consolidation and reform sequencing, has been thoroughly considered and discussed with Fund staff.

### Fiscal consolidation strategy and targets
- The fiscal plan is anchored on a consolidation of the non-oil primary balance including fuel subsidies of 5.5 percent of GDP over the program period, including a frontloaded adjustment of 2.2 percent of GDP in 2024.
- The envisaged adjustment combines balanced revenue and expenditure efforts and preserves space for priority spending on security, social protection, and public investment.
- As a result of the consolidation plan, public debt-to-GDP will continue to sustainably decline to reach the 40 percent legal limit by 2032.
- Authorities stand ready to take further actions if needed to meet program objectives.

### Social protection priorities
- Priority will be given to continuing to expand the social safety net.
- Building upon the expansion during the previous EFF arrangement—which increased the number of households in need receiving cash transfers from three out of 10 to eight out of 10—authorities aim to incorporate in the social safety net all families in the lowest two deciles of the income distribution and most families in the third decile during the implementation of this program.
- To achieve this goal, they plan to add about 50,000 new families each year to the cash transfer programs and to complete the social registry.
- Authorities are determined to ensure that the most vulnerable population is shielded from immediate negative effects of fiscal adjustment.

### Financial sector reforms and market development
- Financial reforms will focus on gradually loosening financial repression, strengthening the oversight framework, and developing the domestic debt market.
- Authorities are committed to gradually phasing out financial repression measures caused by a complex system of caps on lending rates.
- A Financial Stability Committee will be established to address coordination issues among agencies involved in financial sector oversight.
- Authorities will improve market infrastructure and take other actions to help develop the domestic debt market to boost domestic financing for public and private agents.
- The financial policy agenda focuses on implementing the recommendations of the 2023 FSSA.

### Transparency, governance, and AML/CFT measures
- Authorities will establish a new agreement between the Ministry of Economy and Finance and the Social Security Fund to settle healthcare obligations to provide a clearer picture of social security spending and underlying fiscal risks.
- High priority is assigned to finalizing the audits of the state-owned oil company and improving transparency, accountability, and efficiency of SOEs.
- To mitigate the risk of illicit flows—including those related to organized crime—authorities will continue to work with legislators to enact new AML/CFT legislation in line with FATF standards.

### Financing strategy and market access
- The financing strategy relies on multilateral and bilateral sources in the near term and is centered on regaining market access as soon as 2025.
- The program is fully financed for its first 12 months, with the EFF arrangement playing a catalytic role in mobilizing international financing, including from multilateral partners.
- Authorities have assigned the highest priority to securing sustained financing support from official bilateral creditors and are engaging with them continuously and at the highest level.
- After the deep fiscal reforms approved early in 2024, sovereign spreads declined about 800 basis points.
- With rigorous program implementation, including the build-up of fiscal buffers, authorities plan to restore market confidence and regain access to international capital markets in the second half of 2025.

### Final assessment and program implementation
- Timely engagement with the Fund through an exceptional access EFF arrangement is considered critical to safeguard macroeconomic stability and support the reform agenda.
- Staff assessed Ecuador’s public debt to be sustainable, but not with high probability.
- Fund financial assistance will help bridge the most pressing period in terms of financing needs and help ensure debt sustainability.
- Successful program implementation, including completion of the ambitious reform agenda, should further reduce sovereign spreads and enable Ecuador to regain market access as well as boost the economy’s potential growth.
- Authorities reaffirm their commitment to implement this ambitious program, which contains 15 structural benchmarks for the first 12 months, well above the average of 11 per year in other exceptional access programs.
- The country has proven capacity to implement a demanding program, and there is broad political support to the main objectives of the EFF arrangement, as showcased by the legislative approval of five important economic reforms between December 2023 and April 2024.

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ecuea2024001.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ecuea2024001.pdf_