## 1. Historical Growth

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---

### A. Introduction and key historical facts
- Ecuador’s real GDP growth by period:
  - 1960 to 1980: averaged 5.2 percent.
  - 1980 to 2000: averaged 2.9 percent.
  - 2001 to 2014: averaged 3.7 percent.
  - Since 2014: averaged 1.6 percent.
- Ecuador’s GDP per capita relative to regional peers (2023):
  - 25 percent below Colombia.
  - 10 percent below Peru.
  - Around 50 percent below Chile and Costa Rica.

### B. Analytical framework and data
- Production function and potential output:
  - Cobb-Douglas: Y = A K^alpha L^{1−alpha}, with alpha = 1/3.
  - Potential output: Ȳ = Ā K^alpha L̄^{1−alpha}.
  - Labor potential: L̄ = ā WAP, where WAP is working age population (aged 16-64) and ā is the potential employment ratio.
- Data sources and processing:
  - Annual data for real output, capital, and labor from 1950 to 2019 sourced from the Penn World Tables; series extrapolated to 2023 using employment, real GDP, and gross capital formation from the BCE and IMF staff.
  - Working age population from the World Bank (historical back to 1960 and projections through 2050).
  - TFP computed as a residual from the production function; HP-filters used to extract trend TFP (Ā) and trend employment ratio (ā).
  - Capital stock augmented using identity K_{t+1} = (1−δ) K_t + I_t with δ calibrated to replicate historical path.

### C. Historical decomposition of potential growth
- Potential growth trends:
  - Potential growth averaged 5.2 percent during 1960-80.
  - Slowed to 2.9 percent during 1980-2000.
  - Rebounded to 3.8 percent during 2001-2014.
  - Slowed to 2.3 percent since 2014.
- Contributions to growth:
  - Until the early 1980s, TFP, employment, and capital all supported potential growth.
  - Since the early 1980s, the contribution from TFP has diminished significantly.
  - The early 2000s rebound was primarily driven by increased contribution from capital.
  - Since 2012, contributions from capital and especially labor have declined.

### D. Assumptions for projections toward 2030
- Labor:
  - Employment ratio assumed to gradually recover to its pre-pandemic level; working age population follows World Bank projection.
- Capital:
  - Ratio of capital to labor (K/L) assumed to return to its pre-pandemic growth rate (consistent with Kaldor facts).
- TFP:
  - Trend TFP assumed to gradually return to its long-run average.
- Combined:
  - These assumptions produce a trajectory for structural employment, capital accumulation, and trend TFP used to project potential GDP.

### E. Projection of potential growth (medium-term)
- Projected potential growth path:
  - 2023: 1.6 percent.
  - 2024: 1.9 percent.
  - 2028: around 2.5 percent.
- Drivers of the projected increase:
  - Higher employment.
  - More capital accumulation.
  - A pick-up in TFP growth to its long-run trend.

### F. Policy options to raise potential growth further
- Security and crime reduction:
  - A 10 percent reduction in crime could boost economic activity by up to 5 percent.
  - A 20 percent reduction in crime over 10 years would boost annual growth by 1 percent each year over the same period.
- Labor market reforms:
  - Closing the gap in employment rates between men and women could boost GDP by as much as 17 percent.
  - If achieved over 10 years, this would boost growth every year by up to 1.6 percent.
  - Additional measures: reduce labor market rigidities, increase educational attainment, and expand job access for youth.
- Financial sector reforms:
  - Improvements in financial development (to emerging market average) could boost annual GDP growth by around 1.5 percent.
  - Proposed measures include revisiting interest rate caps, reducing financial repression, and developing domestic debt markets.
- Other structural reforms:
  - Lift regulatory constraints in product and service markets.
  - Address efficiency and governance problems within SOEs.
  - Ensure sufficient and reliable access to energy and diversify the economy in the context of the climate transition.

*Source: 1ecuea2024003-print-pdf - 1. Historical Growth.*

### 1. Historical Growth _____________________________________________________________________ 4

### 1. Historical Growth

### A. Introduction and key historical facts
- Ecuador’s real GDP growth by period:
  - 1960 to 1980: averaged 5.2 percent.
  - 1980 to 2000: averaged 2.9 percent.
  - 2001 to 2014: averaged 3.7 percent.
  - Since 2014: averaged 1.6 percent.
- Ecuador’s GDP per capita relative to regional peers (2023):
  - 25 percent below Colombia.
  - 10 percent below Peru.
  - Around 50 percent below Chile and Costa Rica.

### B. Analytical framework and data
- Production function used:
  - Cobb-Douglas: Y = A K^alpha L^{1−alpha}, with alpha = 1/3.
  - Potential output: Ȳ = Ā K^alpha L̄^{1−alpha}.
  - Labor potential: L̄ = ā WAP, where WAP is working age population (aged 16-64) and ā is the potential employment ratio.
- Data sources and processing:
  - Annual data for real output, capital, and labor from 1950 to 2019 sourced from the Penn World Tables; series extrapolated to 2023 using employment, real GDP, and gross capital formation from the BCE and IMF staff.
  - Working age population from the World Bank (historical back to 1960 and projections through 2050).
  - TFP computed as a residual from the production function; HP-filters used to extract trend TFP (Ā) and trend employment ratio (ā).
  - Capital stock augmented using identity K_{t+1} = (1−δ) K_t + I_t with δ calibrated to replicate historical path.

### C. Historical decomposition of potential growth
- Potential growth trends:
  - Potential growth averaged 5.2 percent during 1960-80.
  - Slowed to 2.9 percent during 1980-2000.
  - Rebounded to 3.8 percent during 2001-2014.
  - Slowed to 2.3 percent since 2014.
- Contributions to growth:
  - Until the early 1980s, TFP, employment, and capital all supported potential growth.
  - Since the early 1980s, the contribution from TFP has diminished significantly.
  - The early 2000s rebound was primarily driven by increased contribution from capital.
  - Since 2012, contributions from capital and especially labor have declined.

### D. Assumptions for projections toward 2030
- Labor: employment ratio assumed to gradually recover to its pre-pandemic level; working age population follows World Bank projection.
- Capital: ratio of capital to labor (K/L) assumed to return to its pre-pandemic growth rate (consistent with Kaldor facts).
- TFP: trend TFP assumed to gradually return to its long-run average.
- These assumptions together produce a trajectory for structural employment, capital accumulation, and trend TFP used to project potential GDP.

### E. Projection of potential growth (medium-term)
- Projected potential growth path:
  - 2023: 1.6 percent.
  - 2024: 1.9 percent.
  - 2028: around 2.5 percent.
- Drivers of the projected increase:
  - Higher employment.
  - More capital accumulation.
  - A pick-up in TFP growth to its long-run trend.

### F. Policy options to raise potential growth further
- Security and crime reduction:
  - A 10 percent reduction in crime could boost economic activity by up to 5 percent.
  - A 20 percent reduction in crime over 10 years would boost annual growth by 1 percent each year over the same period.
- Labor market reforms:
  - Closing the gap in employment rates between men and women could boost GDP by as much as 17 percent.
  - If achieved over 10 years, this would boost growth every year by up to 1.6 percent.
  - Additional measures: reduce labor market rigidities, increase educational attainment, and expand job access for youth.
- Financial sector reforms:
  - Improvements in financial development (to emerging market average) could boost annual GDP growth by around 1.5 percent.
  - Proposed measures include revisiting interest rate caps, reducing financial repression, and developing domestic debt markets.
- Other structural reforms:
  - Lift regulatory constraints in product and service markets.
  - Address efficiency and governance problems within SOEs.
  - Ensure sufficient and reliable access to energy and diversify the economy in the context of the climate transition.

*Source: 1ecuea2024003-print-pdf - 1. Historical Growth.*

### 3.      The VEL implementation is now overseen by a dedicated ministry that works closely

### 3.      The VEL implementation is now overseen by a dedicated ministry that works closely with other relevant ministries.

### Governance of VEL and institutional arrangements
- Since 2022, responsibility for gender policies has been centralized within the Ministry of Women and Human Rights, which coordinates gender equality policies in collaboration with relevant ministries.
- The Ministry of Labor plays a fundamental role because policies aim to increase women’s participation in the labor force.
- With the legal framework largely in place, next key steps include:
  - Establishing evaluation systems to ensure effective policy implementation.
  - Integrating the VEL with existing legislation to address barriers affecting women's professional opportunities.
  - Enhanced communication and outreach with private sector stakeholders to secure buy-in for reforms.

### Political empowerment of women — achievements and legislative changes
- Women's representation in the National Assembly increased from 32 percent in 2009 to 43 percent in 2023, surpassing the regional average of 36 percent.
- Ecuador’s cabinet is described as the most gender-balanced in the country's history, predominantly held by young women, and executive parity compares favorably with a regional average of 30 percent (UN Women).
- Key legislative reforms highlighted:
  - Mandatory 50% gender parity in Assembly candidate lists by 2025.
  - Presidential tickets must be male-female.
  - Sanctions against gender-based political violence.
- Ecuador’s global ranking for this category improved to 17th globally (WEF 2024).

### Human capital and labor market — participation, employment quality, and pay gaps
- Labor force participation (ENEMDU, 2023):
  - Female labor market participation in 2023: 53 percent.
  - Male labor market participation in 2023: 78 percent.
- Potential macroeconomic gains:
  - Estimates based on Ostry et al. (2018) indicate that, assuming labor complementarity, fully closing the participation gap could over time increase GDP by up to 17 percent.
- Unmet labor supply:
  - Approximately 30 percent of women who do not work would like to do so but are unable because of household duties (ENEMDU).
- Employment quality and hours:
  - Adequate employment for women stood at below 30 percent in June 2024.
  - Almost one-fifth of inadequately employed women reportedly working unpaid or fewer hours than men.
  - Less than 40 percent of employed women work within a formal salaried position (World Bank 2024).
  - Time-use survey (United Nations 2021): women worked 55.8 hours per week as of 2012 compared to men at 49.6 hours per week.
- Pay gap:
  - Women earn on average 23 percent less than men in Ecuador.
  - Comparatively, the LA5 average pay gap is 11 percent.
- Education and technical fields:
  - Less than one-third of women graduate in technical fields, compared to about 70 percent of men.

### Skills mismatches and sectoral patterns
- Skills Mismatch Indicator (SMI) findings:
  - Ecuador’s aggregate SMI (2023) ranks in the third quartile of the cross-country distribution.
  - Disaggregating by gender shows the SMI increases substantially when focusing on women only.
- Drivers of the female SMI:
  - Very low level of adequate employment for women in low-skilled sectors (especially agriculture and production of flowers), where informality is prevalent.
  - Relatively few women employed in high-skilled jobs despite significant numbers of women with higher educational attainments, indicating mismatch between fields of study and job opportunities.

### Way forward — policy priorities and expected impacts
- Reducing informality:
  - Partial reforms to tackle unpaid work and informality could bring a substantial number of women into the formal labor force, boosting access to adequate employment and higher-quality jobs.
  - Reducing informality would promote better access to financial services and greater financial independence for women.
- Family-friendly policies and skills policies:
  - Implement comprehensive family-friendly policies, expand affordable childcare options, and provide adequate parental leave.
  - Promote women’s participation in technical sectors via attraction and training policies for girls into technical jobs that offer higher incomes.
- Macroeconomic rationale:
  - Promoting women’s labor market participation and expanding opportunities in high-quality jobs would support Ecuador’s productivity and growth potential.
  - In a context of decelerating population growth, reforms to increase labor force participation would mitigate the demographic headwind to potential growth.
- Macro-critical priority:
  - Continuing to reduce the labor force participation gap between men and women is identified as a macro-critical priority with potential to deliver a significant growth dividend.

---

### Crime and its macroeconomic impact — overview and implications
- Security context and trends:
  - Homicide rate increase between 2020 and 2023: from 8 to 46 per 100,000 people.
  - On January 9, 2024, authorities declared an "internal armed conflict," classified 22 criminal groups as terrorist organizations and non-state belligerent actors (Executive Decree No. 111), and imposed temporary curfews and mobility restrictions in many locations.
  - A referendum in April 2024: the majority backed several measures to address the security crisis.
- Spatial heterogeneity:
  - The coast is the region worst affected; six out of the seven coastal provinces report homicide rates surpassing the national average.
  - Municipalities with higher urban population share, higher share of youth, and lower education levels have seen higher murder rates.
- Organized crime drivers:
  - UNODC (2023) attributes the rise in violence to clashes between rival transnational and local drug factions over cocaine routes.
  - 2023 drug seizures: 219 tons of illegal drugs confiscated (mainly cocaine).
  - Criminal diversification: firearms and human trafficking, illegal mining, trafficking in timber and wildlife, and extortion (nearly 22,000 cases recorded in 2023).
  - Implication: illegal proceeds likely imply a higher money laundering threat to the economy.

### Macroeconomic impact and fiscal spending on security
- Estimated economic effect:
  - Staff empirical analysis combining regional murder rates and night-light intensity indicates a 1 percent increase in the local murder rate is associated with a decline in the level of economic activity of up to 0.5 percent.
- Public order and safety spending:
  - Ecuador’s spending on public order and safety averaged 2 percent of GDP over 2018-22.
  - Allocation of these resources (central government expenditure data): around 60 percent to the police, nearly 10 percent to law courts, about 5 percent to prisons, remainder to other items.
  - National defense spending (excluded from these items) has hovered around 1.3 percent of GDP in recent years (Ministry of Economy and Finance budget information).
  - Compared to other Latin American countries, Ecuador’s public order and safety spending appears relatively high but below the average of emerging market and developing economies.

### Macrochannels of crime and money laundering
- Mechanisms through which crime and money laundering can harm the economy:
  - Lower capital accumulation.
  - Reduction in labor force participation.
  - Lower growth in total factor productivity.
  - Increased perceived risks of doing business and distorted prices of physical and financial assets, reducing market efficiency and inducing resource misallocation.
  - Deepening of the informal sector and impeded financial inclusion.
  - Contribution to higher inequality and social disparities.

### Policy implications and priorities
- Reducing crime to boost growth:
  - Priority actions include strengthening citizen security, tackling illicit financial flows, promoting job-rich growth, and reducing inequality.
  - Complementary policies: promote macroeconomic stability, improve governance and rule of law, expand access to education, and focus on job opportunities for youth.
- Implementation and coordination:
  - Because crime manifests locally and in “pockets of fragility,” granular data, monitoring, and policy coordination between national and local authorities are critical.
  - Systematic monitoring and enhancement of the efficiency of resources allocated to citizen security is key.

*Source: IMF staff report chapter content.*

### 8.      A deeper understanding of organized crime activities and how their profitable illegal

### 8.      A deeper understanding of organized crime activities and how their profitable illegal activities are laundered would support Ecuador’s efforts in fighting crime

### Organized crime, corruption, and AML/CFT priorities
- In-depth understanding of organized crime dynamics can inform actions to reduce their profitability and disrupt associated illicit financial flows.
- Organized crime and corruption typically feed on each other (see Box 5 in IMF, 2018).
- Ensuring the effective implementation of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework is vital to uphold financial-sector integrity and mitigate vulnerabilities to corruption.
- AML/CFT policy priorities:
  - Focus on measures with the strongest impact in detecting and deterring laundering by organized crimes.
  - Center efforts on AML/CFT risk-based supervision of high-risk sectors.
  - Couple supervision with actions that help reduce the use of cash and informality more broadly.
  - Facilitate coordination and exchange of information across relevant institutions.
  - Continue strengthening cross-border cooperation with foreign counterparts (such as neighboring countries where organized crime groups with links to Ecuador operate, and destination countries for illicit drugs).

*Source: IMF content unit provided.*

### Securing electricity sufficiency and reliability

### Introduction and context
- Nationwide blackouts began in late September 2024, as was also the case in 2023, amid a historic drought exacerbating a structural deficit in electricity generation.
- Hydropower generation accounts for about three-quarters of electricity generation in Ecuador; other renewables make up only a small fraction.
- Ecuador’s large reliance on hydropower makes the country vulnerable to droughts and hydrological variability exacerbated by climate change and intensifying El Niño phenomena.

### Causes of the electricity crisis — key findings and statistics
- Domestic production dropped by 18 percent from peak summer levels to October 2024, larger than the 12 percent drop in 2023.
- The estimated electricity imbalance in October 2024 was around 500 GWh, equivalent to 19 percent of usual demand.
- Trend electricity demand (production net of exports + imports) per month is around 2,600 GWh.
- In October 2024, supply of electricity (domestic production + imports) was only around 2,100 GWh, leaving a deficit of 500 GWh (19 percent).
- Nationwide blackouts in 2024 started a full month earlier than those in 2023.
- Colombia stopped exporting electricity to Ecuador at end-September 2024; reservoir levels in Colombia were 50 percent in September 2024 compared to 74 percent on the same day in 2023, and were 54 percent at end-October 2024.
- Electricity imports from Colombia resumed in mid-November 2024.
- Coca Codo Sinclair supplies around 29 percent of the country's electricity, does not rely on a water reservoir, is undergoing repairs hindering full-capacity operation, and faces potential mid-term shutdown risks due to structural instability.
- Existing electricity supply does not meet demand needs given the upward trend in electricity consumption, particularly by the industry, unless power capacities are increased.

### Short-run capacity additions and utilization thresholds
- Authorities announced plans to add electric capacity of up to 1.6 GW in the short run.
  - Government adding 0.434 GW in thermal capacity (0.1 GW from a barge and 0.334 GW from seven reactivated power plants).
  - In November 2024, 0.241 GW is slated to be gradually added from combustion engine generators running on fuel oil.
  - In December 2024, augmented with 0.204 GW in hydroelectric capacity.
  - Government working to secure an additional 0.715 GW at existing power plants, expected to come on stream by May 2025.
- Utilization assumptions:
  - If new capacity is utilized at 20 percent (the average for existing capacity), the new capacity would be insufficient.
  - If utilization exceeds 45 percent, the new capacity would be able to cover the current gap.
- Conversion note: If 1 GW is utilized for 100 (50) percent of all hours in the month, it will generate 730 (365) GWh over the month. On average, existing capacity in Ecuador is utilized at 21 percent (Electricity Master Plan, 2023-2032).

### Outlook and medium- to long-term plans
- The electricity gap is likely to close early next year with the new capacity and as hydroelectric production increases.
- New Master Electricity Plan 2023-2032: plan to expand generation capacity by 7,404 MW (from the existing capacity of 8,864 MW).
  - Compared to the 2021 Plan, the 2023 Plan relies more heavily on other renewable energy sources, which will cover 22 percent of added generation capacity in 2023-2032.
- Recent law revises private generation project limit from 10 MW to 100 MW, allowing private sector development up to 100 MW (with prior express authorization from the Ministry of Energy and Mines) and permitting legal entities in electricity distribution and marketing to sign long-term Power Purchase Agreements with private generators.
- Cost and investment needs:
  - Expanding generation capacity is expected to cost US$9.95 billion over the next decade.
  - Transmission expansion would require an additional US$1.75 billion.
  - Distribution expansion would require an additional US$5.65 billion.
- Electricity price context:
  - In 2021, the average industrial electricity price in Ecuador was 9.0 cents (U.S. dollar) per kWh.
  - Comparative prices: Peru 9.4 cents, Uruguay 11.5 cents, Brazil 12.7 cents, Chile 12.9 cents, Mexico 17.4 cents, Colombia 17.4 cents, Paraguay 5.2 cents.

### Policy recommendations and resilience measures
- Successful implementation requires further strengthening of the regulatory framework and encouraging private investment.
- Regulatory frameworks could consider measures to ensure aligned incentives, especially cost recovery for private investment given relatively low electricity prices.
- Water resource and basin management improvements can reduce vulnerability to hydrological events.
- World Bank Country Climate and Development Report (CCDR) recommended actions include:
  - Converting existing hydropower plants into pumped storage facilities.
  - Preventing sediment accumulation.
  - Investing in enhanced reservoir and turbine capacity.

*Source: IMF content unit provided.*

### Climate trends and macroeconomic impacts

### Key climate trends and projections for Ecuador
- Ecuador has four distinct climate regimes: coastal lowlands, Amazon basin, Andean highlands, and Galápagos Islands.
- Temperature changes and projections:
  - Average annual temperature is estimated to have increased by 0.2°C in 1985-2014 and by 0.5°C by 2021 from the average in 1901-1930 (a proxy for pre-industrial level temperature).
  - Median estimates of additional warming in Ecuador by mid- and late-century, relative to average temperature in 1985-2014, range between 1.2°C and 3.2°C depending on future emissions scenarios.
  - The number of hot days—defined as days with maximum daily temperature above 35°C—is expected to increase significantly in the coastal and Amazon regions.
  - Marine heatwaves and ocean acidity are expected to increase.
- Precipitation and extremes:
  - Total annual precipitations are not projected to significantly change, but intense rainfall events are likely to become more frequent.
  - Coastal and highland areas could see an increase in extreme rainfall events, with up to 7-15 mm more rainfall in a single day, increasing flood and landslide risks.
- Sea-level rise projections:
  - Median projections for Ecuador using a moderate emission scenario indicate that by the end of the century sea-level will increase by 0.55 meter with respect to its level in 2000.
  - With an emission scenario in line with the 2°C Paris Agreement goal, sea-level is projected to increase by 0.45 meter.
  - With a very high emission scenario, sea-level is projected to increase by 0.71 meter.
  - Due to coastal vertical movement and other factors, sea-level is projected to increase less than the global mean in Ecuador.

### Macroeconomic implications and adaptation priorities
- Rising temperatures, more frequent extreme heat days, increasing frequency of high-intensity rainfall, and sea-level rise can incur large economic costs in Ecuador and, without adaptation, can reduce growth and lead to lower GDP per capita in the long run.
- An effective and efficient adaptation roadmap should:
  - Prioritize adaptation policies with positive externalities.
  - Remove market imperfections and policies that hinder efficient private adaptation.
  - Ensure a just transition.

*Source: IMF content unit provided.*

### 6.      This section outlines trends that are expected to have a negative impact on Ecuador’s

### 6. This section outlines trends that are expected to have a negative impact on Ecuador’s economy

### Physical climate trends
- Average annual temperature will continue to increase for at least several decades.
- Warming will push maximum daily temperatures above 35°C for several weeks during the year.
- Rainfall intensity is expected to increase, particularly in coastal and highland areas, potentially raising flood risks.
- Sea level will continue to rise throughout the century.
- There are no clear trends in indicators of droughts and projections do not indicate significant changes, but droughts will continue to periodically hit Ecuador’s economy with potentially large adverse effects as revealed by empirical evidence and by the ongoing severe drought, which has caused widespread and prolonged power outages.
- Preliminary analysis underscores the need for robust climate adaptation strategies.

### Climate projections and scenarios (as used in the analysis)
- Scenarios referenced: SSP1-2.6 (Paris), SSP2-4.5 (Moderate), SSP3-7.0 (High). RCP-based nomenclature equivalences noted (RCP2.6 ~ SSP1-2.6; RCP4.5 ~ SSP2-4.5; RCP8.5 used as pessimistic but unlikely outcome).
- Median warming projections by 2050: 1.1°C under SSP1-2.6, 1.5°C under SSP2-4.5, 1.6°C under SSP3-7.0.
- Median warming projections by 2086: 1.2°C in SSP1-2.6, 2.1°C in SSP2-4.5, 3.2°C with SSP3-7.0.
- SSP3-7.0 90th percentile scenario used as a high-emission, fast-warming, pessimistic case; its warming rate is noted as very similar to the median warming rate projected using SSP5-8.5.

### Macro-economic risks: methodologies and scope
- Three complementary methodologies used:
  - Estimation of present-day weather shocks on year-to-year per capita GDP growth using big data and machine learning (Akyapi, Bellon, and Massetti, 2024).
  - Projection of slow-onset warming impact on GDP per capita using methods exploiting random temperature variations from observed warming trend (Kahn et al., 2021).
  - Estimation of SLR costs under alternative adaptation scenarios using CIAM (Diaz, 2016).
- Limitations noted: analysis excludes very large negative impacts from abrupt climatic, environmental, and climate change-induced societal changes due to lack of empirical evidence.

### Impact of weather shocks on GDP growth
- The model selects three climate variables: severe droughts (PDSI index less than -4), hot days (maximum temperature above 35ºC – TX35), and days with temperature between 9 and 12ºC.
- Historical and projected impacts:
  - Severe droughts have historically caused the largest impacts; rare, severe events can cause GDP per capita losses of up to 0.4 percent.
  - An additional week in which the entire population is exposed to maximum daily temperature above 35ºC can reduce growth by 0.1 percentage point below its normal level.
  - Projections suggest that in 2050 the population will experience each year approximately two additional weeks with maximum daily temperature above 35ºC, implying a reduction of growth equal to 0.2 percentage point.
  - Without adaptation, this translates into a 6 percent loss in the level of GDP per capita over three decades.
- Notes on empirical robustness:
  - IMF staff repeating the analysis using only Ecuador economic data found none of the variables statistically significant due to small sample size.
  - Machine learning applied to Ecuador-only data did not reveal important explanatory variables for variations in GDP per capita growth.
  - Indicators of droughts and floods developed using EMDAT disaster data do not significantly affect growth under alternative model specifications.

### Slow-moving warming (long-term warming impacts)
- An acceleration of the warming trend can reduce GDP per capita by up to 10 percent in 2100 relative to normal levels (using Kahn et al., 2021 estimates).
- Mechanism and scenarios:
  - Historical warming trend is already a drag on growth; continuation of present trend has no impact relative to that baseline.
  - SSP1-2.6 (Paris) slows warming relative to historical values and raises projected GDP per capita above reference.
  - SSP2-4.5 is close to continuation of present trends and has small impacts.
  - SSP3-7.0 represents acceleration and generates negative impacts; SSP3-7.0 90th percentile provides a worst-case outcome.
  - In the high-emission and fast-warming worst-case scenario temperature increases by 4.0°C compared to the period 1985-2014.
- Role of adaptation:
  - Adaptation is modeled as the economy fully adapting to new temperature level after m years, where m = 20, 30, 40, or 50.
  - Assuming slow adaptation (m = 50), GDP per capita is projected to decline by approximately 10 percent annually by 2100 with respect to continuation of present warming trend.
  - In a scenario without any adaptation, damages are twice as large (Mohaddes and Raissi, 2024).
  - Fast adaptation can reduce losses to approximately 3 percent of GDP per capita for the same temperature change.
- Caveats:
  - Estimates do not include extreme weather and SLR (specialized models used for those), nor the cost of adaptation (thus fast-adaptation scenarios may underestimate total costs).
  - Tail risks like climate-change induced social conflict are not included.

### Sea-level rise (SLR): impacts and costs
- CIAM (Diaz, 2016) used to estimate SLR costs and adaptation benefits.
- Average annual cost of SLR without adaptation (moderate emission scenario) is approximately equal to 0.6 percent of GDP from 2020 to 2099.
- Fast SLR for the same moderate emissions scenario would push costs to 0.8 percent of GDP.
- Due to slow response of SLR to temperature changes, using an extreme-emissions scenario changes costs only marginally.
- Components of costs (welfare losses):
  - Permanent inundation of coastal areas: 0.15 percent of GDP.
  - Disutility cost of forced relocation: 0.16 percent of GDP.
  - Floods during storm surges: 0.25 percent of GDP.
- Interpretation:
  - These costs measure welfare losses and are the appropriate metric to estimate the full economic impact of SLR, but they cannot be translated into GDP losses or fiscal impacts without additional models or assumptions.
  - General equilibrium or other models are required to translate loss of capital and land into long-term macroeconomic impacts or fiscal costs.

### SLR adaptation costs and trade-offs
- Coastal protection:
  - An investment of approximately 0.12 percent of GDP annually throughout the century allows neutralizing land loss and storm-surge impacts in all coastal areas.
  - Interference with wetland areas—for example, near Guayaquil—can cause environmental losses equal to 0.24 percent of GDP annually.
  - Overall, coastal protection costs 0.4 percent of annual GDP, on average, between 2020 and [text truncated in source].
- Notes on CIAM modelling:
  - CIAM divides global coastline into more than 12,000 segments grouped by country and uses local SLR projections, topography, capital, population, and wetland coverage to estimate inundation, capital and population at risk, storm surge impacts, protection costs, and adaptation decisions.
  - The model does not consider risks from river floods.

### Key quantitative highlights
- 35°C: threshold for extreme hot days (TX35).
- 0.1 percentage point: growth reduction from an additional week of population exposure to TX35.
- 0.2 percentage point: projected reduction in growth by mid-century from increased hot days (equivalent to ~two additional weeks per year at TX35 by 2050).
- 6 percent: loss in level of GDP per capita over three decades without adaptation from the projected 0.2 percentage point growth reduction.
- Up to 0.4 percent of GDP annually: environmental losses from wetland interference (example near Guayaquil).
- 0.6 percent of GDP: average annual cost of SLR without adaptation (2020–2099, moderate emissions).
- 0.8 percent of GDP: average annual cost of SLR under fast SLR for same moderate emissions.
- Breakdown of SLR welfare costs: 0.15 percent (permanent inundation) + 0.16 percent (disutility of relocation) + 0.25 percent (storm-surge floods) = total welfare costs reported.
- 0.12 percent of GDP annually: approximate investment needed throughout the century to neutralize land loss and storm-surge impacts via coastal protection.
- Adaptation speed parameters modeled: m = 20, 30, 40, 50 years.
- 4.0°C: temperature increase in worst-case high-emission, fast-warming scenario relative to 1985-2014.

### Policy implications and adaptation blueprint (summary points from concluding orientation)
- Ecuador’s economy will be exposed to climate change risks from warming, more intense rainfall, and SLR, underscoring the need for robust climate adaptation strategies.
- Multi-pronged assessment is required: address weather shocks, slow-onset warming, and sea-level rise using complementary models and dataset inputs.
- Adaptation can substantially reduce long-term GDP per capita losses from warming; speed of adaptation is a critical determinant of outcomes.
- Coastal protection is cost-effective for preventing land loss and storm-surge impacts but entails environmental trade-offs (notably loss of wetlands) that must be accounted for in societal cost estimates.
- Further analysis is needed to capture infra-annual climate changes, translate welfare costs into fiscal impacts, and incorporate potential tail risks such as climate-induced societal conflict.

*Source: IMF staff analysis in section 6 of the provided PDF chapter.*

### 2099. Nature-based solutions can help minimize environmental losses, and large uncertainty on

### 2099. Nature-based solutions can help minimize environmental losses, and large uncertainty on both physical impacts and economic value of biodiversity suggest caution in interpreting this result, but the possibility of large negative environmental externalities cannot be neglected.

### Sea-level rise (SLR): adaptation strategies and CIAM findings
- Planned retreat can lower the cost of SLR by avoiding negative environmental impacts but requires careful planning and assessment of distributional consequences; compensations can help alleviate conflicts.
- Planned retreat relies on a proactive, gradual population move allowing exposed assets to depreciate; opportunity cost of land lost to the sea equals the value of agricultural or marginal land as established by Yohe (1990).
- A mix of protection and planned retreat is the least costly strategy:
  - Planned retreat over 92 percent of the coastline and protection in the remaining 8 percent reduce the cost of SLR from 0.6 percent of GDP to 0.11 percent of GDP per year on average, from 2020 to 2099.
  - Combination of coastal protection and planned retreat can reduce costs by 80 percent.
- CIAM segmentation and protection choices:
  - The coastline is divided into 46 separate segments in CIAM, varying in length from 0.8 Km to 422.5 Km; median length equal to 28.1 Km.
  - Protection is the efficient solution in proximity of Guayaquil, Salinas, Posorja, and Machala.
  - Three percent of the coastline is protected to withstand 1/100 years coastal storm surge floods; remaining protections are calibrated to avoid 1/10 years floods.
  - For 67 percent of the coastline, retreat is the efficient option.
  - In most areas retreat perimeters deal only with SLR; in 25 percent of the coastline the perimeter is adjusted to avoid flooding of different intensity.
- Model limitations and comparators:
  - CIAM captures baseline erosion and vertical land movement but does not capture interaction of SLR with ongoing coastal erosion processes nor the cost of infiltration of saline water into coastal aquifers.
  - CIAM includes non-market costs such as loss of life due to storm floods, wetland loss, and disutility from relocation.
  - CIAM’s results are in line with Hinkel et al. (2018), which find cost of SLR with cost-effective protection levels can range between 0.01 percent and 0.08 percent of GDP, annually, in Ecuador.

### Adaptation capacities, policies, and fiscal integration
- Readiness and policy progress:
  - According to IMF adjusted ND-Gain index, the country scores around the median compared to Latin American peers; room for improvement exists in governance readiness, ecosystem services, health, and human habitat.
  - The government adopted its National Adaptation Plan (NAP) (2023– 2027), prioritizing six sectors: Human Settlements; Water Heritage; Natural Heritage; Health; Productive and Strategic Sectors; and Food Sovereignty, Agriculture, Livestock, Aquaculture and Fisheries.
  - Effective implementation of the NAP depends on resource availability, clarity of responsibilities, and technical and human resources.
- Principles for integrating adaptation into macrofiscal planning:
  - Adaptation should be integral to development planning; Investments in climate change adaptation are similar to other development investments (Bellon and Massetti, 2022a).
  - Authorities must allocate fiscal resources across competing needs, incentivize private adaptation, and consider distributional effects; government intervention is warranted when adaptation has large externalities (e.g., coastal protection, public infrastructure).
  - Cost-benefit analyses (CBA) are important for consistently collecting, aggregating, and comparing information on public adaptation projects and for assessing trade-offs and distributional impacts.
  - A unified approach for mitigation and adaptation is needed to maximize synergies and minimize trade-offs; robust mitigation policies would incentivize nature-based adaptations and penalize negative climate externalities of adaptation.

### Macroeconomic risks, projections, and policy recommendations
- Climate risks and projected impacts:
  - Rising average temperatures, increased rainfall intensity, and sea-level rise are expected to negatively impact economic growth.
  - With slow adaptation, high emissions (SSP3-7.0), and fast-warming, econometric methods project that GDP per capita may decline by approximately 10 percent annually by 2100 with respect to what it would be if the present warming trend continues.
  - Increasing exposure to extreme heat may further slow economic growth.
  - The annual average cost of sea-level rise could reach 0.6 percent of GDP from 2020 to 2099.
- Policy focus areas to strengthen macroeconomic resilience (potential areas of focus include):
  - (i) removing market imperfections (e.g., inefficient credit allocation) to promote private adaptation;
  - (ii) building resilient infrastructure;
  - (iii) implementing regulations that internalize climate considerations (e.g., zoning that prohibits construction in flood zones);
  - (iv) refining disaster risk management responsibilities and integrating disaster risk in public finance;
  - (v) increasing cooperation at the national and international level.

### Mitigation policies and NDCs
- Emissions profile and recent policy steps:
  - Ecuador accounts for only 0.2 percent of global GHG emissions.
  - In 2022, three sectors accounted for almost 90 percent of GHG emissions: energy (50 percent), land use/land use change/forestry (LULUCF) (25 percent), and agriculture (14 percent).
  - CO2 accounted for almost 72 percent of the GHG emissions; methane (CH4) made up 25 percent.
  - In 2019 Ecuador set NDCs with an unconditional target of 9 percent reduction in GHG emissions by 2030 compared with BAU, and a conditional target of 21 percent from BAU by 2030.
  - Recent mitigation policy developments: adoption of a National Mitigation Plan, preparation of a long-term National Plan for the Transition to Decarbonization, sector-specific policies for renewable energy, commitment to methane emission reductions (Global Methane Pledge), and removal of fuel subsidies for large shrimp farms and alignment of gasoline prices with international prices.

*Source: IMF staff synthesis of the Ecuador chapter (excerpts provided).*

### 4.      Energy-related emissions, largely driven by the power and transport sectors, have

### 1ecuea2024003-print-pdf - 4.      Energy-related emissions, largely driven by the power and transport sectors, have

### Energy-related emissions: recent trends and sectoral drivers
- Emissions from power generation have plateaued and then declined slightly by 3 percent since 2012, driven by a reduction in fossil fuel-based generation and a green energy matrix.
- Emissions from transport have increased by 47 percent over the last ten years, primarily driven by the expansion of the vehicle fleet.
- Transport-sector mitigation could yield co-benefits, including improved air quality and reduced healthcare costs: total air pollution mortality in Ecuador in 2023 was 5,048 people annually; by 2030, in the baseline (assuming no actions) it is projected to increase by 8.5 percent.

### Decarbonization opportunities and policy recommendations for energy and transport
- Diversify the energy mix toward renewable sources besides hydro (hydro currently accounts for only a small share of electricity generation).
- Improve energy efficiency via national policies (examples of prior initiatives: Organic Law of Energy Efficiency in 2019; National Energy Efficiency Committee; National Energy Efficiency Plan 2016–2035 (PLANEE); Ley Orgánica de Competitividad Energética (LOCE) passed in 2024).
- Transport policies: encourage public transit, strengthen emissions standards and controls, and promote transport electrification once electricity supply challenges are addressed.
- Lowering transport emissions to improve air quality and reduce healthcare costs.

### Methane, flaring, and oil & gas sector mitigation
- The energy sector is one of the largest emitters of methane; the bulk of methane emissions in this sector come from onshore oil, largely from gas venting followed by fugitive and flared gas.
- Global Flaring and Methane Reduction Partnership indicates flaring volume and intensity have increased over the past decade.
- The 2019 NDCs Implementation Plan envisioned reducing flaring and using petroleum-associated gas for power generation and LPG production (mostly under conditional NDCs); this will require regulations ensuring producers undertake appropriate abatement actions.
- IEA (2023) indicates that between 40-60 percent of these emissions could be avoided at no net cost through investments in technologies such as leak detection and repair and vapor recovery.
- Policy implication: eradicating routine gas flaring and venting is a cost-effective way to reduce GHG emissions and can recover methane to contribute to Ecuador’s gas supply.

### Land use, forestry, agriculture, and adaptation-mitigation synergies
- Agricultural expansion has led to rapid deforestation, reducing the forest area by 10 percent between 1998 and 2022.
- This reduced forest cover by 5 percentage points, lowering the carbon stock in forest.
- Ecuador has implemented conservation policies including the National System of Protected Areas (SNAP) and SocioBosque (a voluntary forest conservation scheme providing payments for forest conservation); both have shown positive results and could be scaled up.
- Scaling conservation policies requires targeting high deforestation risk areas and ensuring long‑term financial sustainability.
- Sustainable agriculture and improved livestock production systems (e.g., improved pastures, agroforestry) could relieve pressure on forests; adaptation policies that enhance adoption of sustainable agriculture would also support mitigation goals.

### Combining policy tools and green growth strategies
- A policy mix—targeting subsidies, feebates for clean vehicles, methane fees for extractive industries—can be more effective than single instruments.
- Green public investments, infrastructure improvements, incentives for other renewable energy sources (besides hydro), and sustainable land use practices can accelerate decarbonization.
- These measures may require increased public financing but can drive growth via investment, green foreign direct investment, higher productivity, and job opportunities.

### Vulnerabilities to the global energy transition
- High dependence on oil exposes Ecuador to international oil developments and risks from the global energy transition.
- In 2023, oil accounted for approximately 7.5 percent of GDP, one-quarter of exports, and one-third of Non-Financial Public Sector (NFPS) fiscal revenue.
- According to IEA projections, global oil demand could decline by 4 percent to 29 percent from the 2023 level by 2040, depending on mitigation scenarios.
- Forecasts suggest Ecuador’s oil production could potentially decline by 38-81 percent by 2040.
- A back-of-envelope calculation indicates that, ceteris paribus, this could imply a 3-6 percent decline in the level of nominal GDP, 10-20 percent decline in exports, and 13-26 percent decline in fiscal revenue.
- Transition risks also affect other sectors: mining could benefit from higher copper demand; agriculture could be hurt by policies targeting exports with high embedded emissions (e.g., border carbon adjustments or bans against deforestation-linked products).

### Export diversification, quality upgrading, and policy levers
- Ecuador’s exports are less diversified compared to regional peers (Theil index analysis); Ecuador’s export basket remains concentrated.
- Ecuador has lower export quality than regional peers (quality measure normalized so the 90th percentile quality = 1); quality has deteriorated over time in Ecuador while improving in some peers.
- Quality ladder analysis shows scope for upgrading in most product categories; exceptions: Beverages and Tobacco (relatively high quality).
- Developing non-oil exports should rely on horizontal policies to improve country fundamentals rather than ad-hoc suppression of oil production.
- Fundamentals identified as key for non-hydrocarbon and mining (NHM) exports: “proximity to markets” and fundamentals—education, quality of infrastructure, government effectiveness, and average tariffs.
- Ecuador has made progress in human capital and infrastructure; average tariff reduced from 11 to 7 percent but remains above the LA5 average; government effectiveness has improved but remains lower than LA5 peers.
- Policy priorities to support diversification and quality upgrading:
  - Continue improving education, infrastructure, and government effectiveness.
  - Foster regional and international trade integration (recent Free Trade Agreements cited).
  - Reduce tariff and non-tariff barriers and increase participation in global value chains.
  - Remove market imperfections (e.g., inefficient credit allocation) and barriers to firm entry, innovation, and growth.

### Climate financing needs and recent developments
- World Bank estimates annual climate investment needs of US$3.7 billion per year between 2025 and 2050.
- In 2023, Ecuador completed the world’s largest debt-for-nature swap to date: government bought back US$1.6 billion of commercially held debt at 40 cents on the dollar, unlocking an estimated US$450 million to support conservation in the Galápagos Islands.
- In December 2024, Ecuador undertook another transaction to support conservation of the Amazon.
- Ecuador can explore additional climate financing avenues, including sustainable bonds and other innovative financial solutions.

*Source: 1ecuea2024003-print-pdf - 4.      Energy-related emissions, largely driven by the power and transport sectors, have*

### 3.      There are several options available to countries looking to secure climate financing.

### 3.      There are several options available to countries looking to secure climate financing.

### Overview of climate-financing instruments
- Appropriate instruments vary according to countries’ economic and fiscal conditions, as well as climate and environmental contexts.
- Common climate financing instruments:
  - Sustainable bonds (widely traded; advantages over conventional bonds).
  - Debt-for-nature swaps (potential debt reduction benefits; do not facilitate scaling or broader market liquidity).
  - Other instruments: carbon offsets, blended finance partnerships, and other variations on conventional financing instruments.

### Sustainable bonds — types and features
- Two broad categories:
  - Use-of-proceeds bonds: finance projects with specific environmental or social benefits.
    - Three main types: green bonds (climate/environment), social bonds (social benefits), sustainability bonds (both green and social).
  - Sustainability-linked bonds: structurally tied to issuer performance (e.g., coupon tied to a GHG emissions target with step-down or step-up depending on performance). Receipts can be used for general budgetary purposes.
- Alternative/related formats:
  - Blue bonds: generally a subset of green bonds when standalone; proceeds support coastal, marine, or river-based activities while following green bond product standards.
  - Super-green bonds: combine use-of-proceeds and sustainability-linked features (spend on green expenditures and meet targets).
  - Transition bonds: support movement toward low-carbon objectives but do not fully meet green bond criteria; guidelines still evolving.
- Market standard:
  - The International Capital Markets Association (ICMA) provides “the Principles” (product standards). In 2023, 97 percent of issuers of sustainable bonds referenced the Principles.

### Sustainable bond issuance requirements and governance
- Issuers typically follow the Principles to demonstrate transparency and credibility.
- Key disclosure and governance features (summarized from Box 1):
  - Sustainable bond framework and tailored investor roadshow to present climate and environment strategy and management principles.
  - External reviewer(s) / Second Party Opinion (SPO) recommended to assess alignment with the Principles.
  - Investors assess issuer ESG credentials in addition to the instrument.
  - Annual reporting expectations:
    - Use-of-proceeds bonds: externally audited allocation report and impact report (how financing was allocated and contributed to goals).
    - Sustainability-linked bonds: reporting to demonstrate progress toward Sustainability Performance Targets (SPTs); legally binding documentation required to describe timelines, trigger events, payment amount, and mechanism; external annual verification recommended.
  - Governance changes often required (inter-ministerial processes, selection and monitoring of eligible expenditures, possible national green taxonomy or SPO verification in absence of taxonomy).

### Benefits for issuers from sustainable bond issuances
- Market liquidity: sustainable bonds are publicly tradeable and can provide liquidity comparable or higher than conventional financing.
- Cost-effectiveness:
  - Historical “greenium” observed in green bonds leading to reduced financing costs (Carmichael and Rapp, 2022).
  - Issuing multiple times under the same framework can spread upfront structuring costs.
- Debt-interest service benefit:
  - Possible under sustainability-linked structures if a step-down in coupon is triggered upon meeting SPTs.

### Sustainable bond issuance trends (global and Latin America)
- Global issuance:
  - Governments (including sub-sovereign entities) raised over US$65 billion from sustainable bond issuances in 2019.
  - This figure grew to over US$270 billion in 2023.
  - In 2023, sustainable bond issuance was 2.2 percent of total government debt issuance.
- Latin America and the Caribbean (LAC):
  - LAC government and sub-sovereign issuers raised US$30 billion in sustainable bonds in 2023, making the region the largest issuer among Emerging Market and Developing Economies (EMDEs).
  - LAC issuers have pioneered novel instruments:
    - Chile (2022): world’s first sovereign sustainability-linked bond, raising US$2 billion repayable over 20 years; SPTs related to GHG emissions and renewable energy generation; committed step-up in coupon of 12.5 basis points for each missed target.
    - Uruguay (2022): sovereign sustainability-linked bond with both step-up and step-down of 15 basis points for underperformance or overperformance on two SPTs (GHG emissions and area of natural forest cover); over 20 percent of investors in the issuance were new holders of Uruguayan debt.
    - Ecuador (2020): world’s first sovereign social bond, raising US$400 million to provide mortgage loans at a preferential interest rate to low and middle-income families, facilitating access to housing for more than 24,000 families.

### Debt-for-nature swaps — structure, types, and effects
- Definition: one-off transactions replacing sovereign debt with liabilities that entail spending commitments toward nature or conservation goals; spending usually managed through a new entity.
- Two categories:
  - Bilateral swaps: official bilateral debt reduced in exchange for expenditure commitments on nature/development objectives.
  - Trilateral (commercial) swaps: commercial debt repurchased using newly issued credit-enhanced debt; part of the debt service savings is committed toward conservation. Ecuador’s 2023 transaction was a commercial debt swap.
- Typical commercial swap mechanics:
  - Country contracts credit-enhanced debt and uses proceeds to buy back bonds in capital markets.
  - Credit-enhancement (often by a development partner) lowers interest payments compared to the country’s standalone credit.
  - Country commits part of resulting savings to environmental goals; funds may flow through a Special Purpose Vehicle (SPV).
- Advantages and limits:
  - Provide debt-service savings while supporting environmental objectives.
  - Can crowd-in private investors to the new bond.
  - One-off transactions; not intended to scale climate financing.
  - Effective when issuer aims to reduce debt burden and finance environmental objectives via swap savings.
- Usage and recent trends:
  - Used by EMDEs with increasing frequency.
  - Ecuador completed the world’s largest debt-for-nature swap in 2023 and was one of the first countries to complete such a swap in 1987.

### Ecuador’s experience with climate financing and ecosystem-building
- Sovereign transactions:
  - 2020: Issued world’s first sovereign social bond, raising US$400 million for affordable mortgages; benefited more than 24,000 families.
  - 2023: Completed a debt-for-nature swap with savings partially used to fund conservation in the Galápagos Islands; the 2023 swap was the world’s largest.
  - December 2024: Undertook another debt-for-nature swap to support conservation of the Amazon.
- Private sector activity:
  - Domestic financial institutions have issued sustainable bonds since 2019; some have pipelines of green bond-eligible assets.
  - However, many institutions prefer unlabeled, conventional funding sources; sustainable issuances typically supported by multilateral organizations.
  - Deterrents to foreign investment cited: interest rate restrictions and the capital outflow tax.
  - Foreign direct investment (FDI) flows averaged 1.1 percent of GDP between 2000 and 2022, compared with an average of 3.4 percent in Latin America and the Caribbean.
  - Additional requirements of sustainable bond issuances and lack of specific incentives hinder green finance market development.
- Institutional and policy steps to build green finance ecosystem:
  - 2016: Association of Private Banks of Ecuador (ASOBANCA) issued the Sustainable Finance Protocol.
  - 2020: Quito Stock Exchange issued a guide for green and social bonds.
  - 2023: ASOBANCA updated the Protocol and initiated development of a green taxonomy for members.
  - 2023: Ministry of Economy and Finance published a sovereign green bond framework outlining climate/environment strategy through to 2025 and eligibility selection for green expenditures.
  - September 2024: Government announced the creation of the Sustainable Finance Council (MEF, MAATE, NPS) to support green finance development.
    - The Council’s first working group will develop a national taxonomy, engaging financial sector, non-financial public sector entities, academia, and international development agencies.
    - ASOBANCA’s private-banking sector taxonomy work will inform this process; implementation of ASOBANCA’s taxonomy began from September 2024.

*Prepared by Dominique Lam (MCM).*

### 22.      The authorities have undertaken initiatives to create a climate finance risk

### 22.      The authorities have undertaken initiatives to create a climate finance risk

### Climate finance risk-management initiatives
- In 2021, MAATE published a National Climate Finance Strategy calling on the financial supervisors (also known as the “superintendencies”) to increase the management of climate and environmental risk in the financial sector.
- In 2022:
  - Superintendencia de Economía Popular y Solidaria (SEPS) in the credit cooperative sector issued resolutions requiring the development of environmental and social risk frameworks (SARAS).
  - Superintendencia de Bancos (SB) issued resolutions requiring the development of SARAS.
- Implementation status:
  - The SARAS requirement enacted change in the credit cooperative sector.
  - Many banks already had SARAS in place and do not face additional requirements from its implementation.
- Expected effect:
  - The implementation of environmental and social risk management frameworks should support the identification of sustainable bond-eligible assets.

### Box 2. Ecuador’s 2023 Debt-for-Nature Swap — factual summary
- Structure and amounts:
  - The Ecuadorian government set up a special purpose vehicle (SPV) that purchased US$1.6 billion in bonds at 40 cents per dollar.
  - The SPV issued a “blue bond” for US$656 million.
  - The DFC and IDB provided guarantees of US$656 million and US$85 million on the “blue bond,” respectively.
- Financial impacts:
  - These guarantees reduced the interest costs of the “blue bond”.
  - The swap reduced Ecuador’s debt service by an estimated US$1.1 billion through to 2041, an amount equivalent to 0.8 percent of 2023 GDP.
- Blue loan and conservation financing:
  - The Ecuadorian government set up a “blue loan” with the SPV; repayment covers both repayment of the “blue bond” and spending to support marine conservation.
  - A part of Ecuador’s interest payments on the “blue loan” are used towards the Galápagos Life Fund (GLF), providing annual funding of approximately US$12 million for 18.5 years between 2023 and 2041.
  - The swap provides upfront funding for an endowment fund projected to reach US$227 million by 2041.
  - The GLF will administer the endowment fund and marine conservation activities in the Galápagos Islands.
  - The swap is expected to provide a total of US$450 million for conservation activities in the Galápagos Islands.
- Purpose of GLF:
  - Promote and maintain the natural capital of the Galápagos Islands and their marine ecosystems.

*Sources listed in the box: IMF Regional Economic Outlook, Western Hemisphere, October 2023, DFC and IDB press releases, and media reports.*

### Concluding remarks on catalyzing climate financing (Section D)
- Key observations:
  - Climate financing succeeds in an ecosystem supportive of conventional private investment and may need additional incentives to thrive.
  - Climate financing has additional requirements that can be a disincentive to seeking sustainable financing.
  - Opportunities for international investors in climate financing exist in Ecuador and can provide another source of funding for the financial sector.
- Policy implications:
  - Catalyzing private-sector climate financing requires either changes to the overall investment environment or specific incentives for green investments.
  - Streamlining the process of issuing sustainable bonds and making it easily available to potential issuers could provide a non-monetary incentive and make issuance an attractive funding route relative to conventional financing.

### Governance and investor confidence for sustainable bond issuance
- Recommendations to facilitate sustainable bond issuances:
  - Implement comprehensive governance arrangements on the implementation of climate and environmental strategies.
  - Enhance transparency and accountability in monitoring, measurement, and reporting of the country’s NDCs, as investors will assess these for public and private projects.
  - Strengthen national implementation plans and strategies on climate and environment as part of investor due diligence.
- Instrument design considerations:
  - Evaluate which instruments best suit the country’s needs; consider distinct governance requirements for use-of-proceeds versus sustainability-linked bonds.
  - Notes on use-of-proceeds bonds:
    - They impose stringent public financial management and reporting requirements and limit how the government can utilize the financing.
    - Regulatory and governance requirements should be considered upfront as obligations persist until bond maturity.
  - Recommendation to limit the choice of instrument to one type, if possible, to:
    - Establish a program of issuances under one framework.
    - Minimize market fragmentation.
    - Enhance liquidity.
    - Optimize efficiency of sustainable bond issuances.

### Reserve adequacy in Ecuador’s dollarized economy — key findings and metrics
- Context:
  - Ecuador is fully dollarized; liquid assets in the economy can, in principle, be used to finance international trade or cross-border transactions.
  - Reserve adequacy assessment must consider balance of payments, financial sector dynamics, and fiscal sector needs.
- ARA metric and adequacy benchmark:
  - The Fund’s reserve adequacy metric (ARA) comprises weighted sums of: exports, short-term debt, medium- and long-term debt and equity liabilities, and broad money.
  - Reserves in the range of 100 to 150 percent of the metric are considered broadly adequate for precautionary reasons.
- End-2023 assessment:
  - BCE reserve buffers accounted for 18 percent of the ARA metric considering weights for fixed exchange rate regimes (21 percent after adjusting for CFMs), below adequacy levels.
  - Other metrics at end-2023 were below adequacy levels except for short-term debt coverage.
  - International reserves were US$4.5 billion at end-2023.
- Improvement through 2024:
  - International reserves rebounded to US$8.6 billion as of end-September 2024 (from US$4.5 billion at end-2023), driven by higher net exports, import compression, strong remittances inflows, and disbursements from international financial institutions.
  - This supported an increase in reserve adequacy metrics to 33 percent of the ARA metric as of end-September 2024 (text notes 33 percent earlier).
- Additional liquidity buffers beyond BCE GIR:
  - Financial sector’s Liquidity Fund: US$3.8 billion at end-September 2024; fully invested in liquid external assets and serves lender-of-last-resort functions.
  - Financial institutions’ net foreign assets (NFA): about US$7.2 billion as of end-September 2024.
  - These additional buffers can address financial-institution-level liquidity strains but are not centralized buffers usable for sovereign external financing shortfalls.
- Combined liquidity coverage (end-2023 and Sep-2024 figures):
  - Including Liquidity Fund, end-2023 liquidity buffer increases to 32 percent of the projected ARA for 2024 metric (38 percent if adjusted for CFMs).
  - After including financial institutions’ NFA, total available liquid resources at end-2023 rise to 55 percent (66 percent after accounting for CFMs).
  - With the increase in GIR in 2024, central bank reserves and the Liquidity Fund together are expected to increase to 43 percent of the projected ARA metric for the year (51 percent if adjusted for CFMs).
  - When domestic financial institutions’ NFA are also included, projected buffers rise to 68 percent of ARA metric (81 percent accounting for CFMs).
  - Despite improvements, available liquid resources remain below ARA adequacy levels.
- Reserve coverage ratios (exact figures)
  - Metrics, Dec-2023:
    - Reserves/ARA: 17.8
    - Reserves/Imports (months): 1.6
    - Reserves/Broad money (percent): 5.5
    - Gov. deposits/Expenditures (months): 0.1
    - Reserves/ST debt: 110.3
  - Metrics, Sep-2024 1/:
    - Reserves/ARA: 32.6
    - Reserves/Imports (months): 3.0
    - Reserves/Broad money (percent): 10.2
    - Gov. deposits/Expenditures (months): 0.5
    - Reserves/ST debt: 173.8
  - Benchmark:
    - Reserves/ARA: 100.0
    - Reserves/Imports (months): 3.0
    - Reserves/Broad money (percent): 20.0
    - Gov. deposits/Expenditures (months): 1.0
    - Reserves/ST debt: 100.0
  - 1/ Based on IMF staff projections for 2024.
- Projections under staff’s baseline scenario:
  - Ecuador’s GIR position is projected to gradually increase to cover 57 percent of the ARA metric by 2028.
  - Considering additional buffers from the Liquidity Fund, liquidity buffers in 2028 would represent 71 percent of the ARA metric.
  - Projected buffers would rise to 96 percent if financial institutions’ NFA are also considered.
  - This projection hinges on the steadfast implementation of the fiscal consolidation and structural reforms envisaged under the EFF-supported program.

*Source: International Monetary Fund.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ecuea2024003-print-pdf.pdf_