IMF Country Report No.

21/228

ECUADOR
2021 ARTICLE IV CONSULTATION, SECOND AND THIRD
October 2021 REVIEWS UNDER THE EXTENDED ARRANGEMENT
UNDER THE EXTENDED FUND FACILITY, REQUEST FOR
A WAIVER OF NONOBSERVANCE OF PERFORMANCE
CRITERION, AND FINANCING ASSURANCES REVIEW—
PRESS RELEASE; STAFF REPORT; AND STATEMENT BY
THE EXECUTIVE DIRECTOR FOR ECUADOR
In the context of the Article IV Consultation, Second and Third Reviews Under the
Extended Arrangement Under the Extended Fund Facility, Request for a Waiver of
Nonobservance of Performance Criterion, and Financing Assurances Review, the following
documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board and
summarizing the views of the Executive Board as expressed during its September 29,
2021 consideration of the staff report on issues related to the Article IV Consultation
and the IMF arrangement.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on September 29, 2021, following discussions that ended on September
7, 2021, with the officials of Ecuador on economic developments and policies. Based
on information available at the time of these discussions, the staff report was
completed on September 20, 2021.

• An Informational Annex prepared by the IMF staff.

• A Staff Statement updating information on recent developments.

• A Statement by the Executive Director for Ecuador.

The IMF’s transparency policy allows for the deletion of market-sensitive information and
premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623-7430 • Fax: (202) 623-7201
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Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.

© 2021 International Monetary Fund

 PR21/278

IMF Executive Board Concludes Second and Third Reviews of

the Extended Fund Facility for Ecuador and 2021 Article IV
Consultation

FOR IMMEDIATE RELEASE

• The IMF Executive Board concluded yesterday the combined second and third reviews of
the 27-month Extended Fund Facility (EFF) for Ecuador, allowing for an immediate
disbursement equivalent to about US$800 million. The Executive Board also concluded the
2021 Article IV consultation.

• Ecuador’s EFF-supported economic program aims to support the economic recovery from
the pandemic, restore fiscal sustainability with equity, and generate sustainable growth with
high quality jobs.

• Continued improvement in public financial management and advances in transparency and

anti-corruption would strengthen confidence in public institutions and boost private sector
activity going forward.

Washington, DC – September 30, 2021: The Executive Board of the International Monetary
Fund (IMF) concluded yesterday the combined second and third reviews of the extended
arrangement under the Extended Fund Facility (EFF) for Ecuador. The Board’s decision
allows f or an immediate disbursement of SDR 568 million (about US$800 million), bringing
Ecuador’s total disbursements under the arrangement to about US$4.8 billion. The
Ecuadorian authorities plan to use the disbursement for budget support.

Ecuador’s 27-month EFF arrangement was approved by the Executive Board on September
30, 2020 (see Press Release No. 20/302) for SDR 4.615 billion (about US$6.5 billion or
around 661 percent of Ecuador’s quota). The program aims to support Ecuador’s policies with
the economic recovery from the pandemic, to restore fiscal sustainability with equity by
reducing public debt while expanding social safety nets, and generate environmentally friendly
sustainable growth with high quality jobs that benefits all Ecuadorians.

The Executive Board granted a waiver of nonobservance of the end-April 2021 quantitative
perf ormance criterion on nonfinancial public sector deposits based on the minor nature of the
nonobservance and corrective action taken by the authorities.

Following the Executive Board discussion on Ecuador, Ms. Antoinette Sayeh, Deputy
Managing Director and Acting Chair, issued the following statement:

The COVID-19 and oil price shocks severely hit the Ecuadorian economy in 2020. The
recovery has been slow but the accelerated pace of vaccinations, the improving global
economy, and funding from the IMF and other IFIs are supporting Ecuador’s recovery.

The authorities have significantly expanded social assistance programs. Over 440,000 low-
income families have been added to the social safety net since July 2020. The continued
expansion of social safety nets, reaching families in the lowest income groups and in generally
underserved locations, will be crucial to mitigate the impact of the pandemic on the most
vulnerable.

The ongoing pandemic and gradual economic recovery warrant continued support of the
economy this year. Going forward, the authorities are committed to securing medium-term
f iscal sustainability, reducing public debt, and building buffers through an expenditure-led
consolidation strategy while protecting the most vulnerable, supplemented by progressive tax
ref orm. Coordinating within the nonfinancial public sector, enforcing the timelines for data
submission, and establishing budget ceilings in key spending categories in the near and
medium term will be critical to achieve expenditure targets. Progressing with structural reforms
to strengthen public financial management will also be essential.

The authorities have implemented key structural reforms to strengthen the anticorruption
f ramework and the foundations of dollarization by enacting a new anticorruption law and a
new organic monetary and financial code.

Improved transparency and governance in the management of public resources, including

COVID-related spending, is crucial for bolstering trust in public institutions. Implementing fully
and swif tly the regulation that was adopted last year to collect and publish ultimate beneficial
ownership information in public procurement contracts is also critical. Further efforts are
needed to improve asset declarations of politically exposed people, overhauling the AML/CFT
f ramework, and conducting audits of taxes.

The banking system appears ready for the removal of the crisis measures at the end of the
year, as currently envisaged by the authorities. Closing regulatory gaps over time across the
f inancial system will level the playing field and enhance resilience.

The need to improve competitiveness and raise potential growth puts a premium on structural
ref orms, informed by national dialogue. In this regard, the authorities’ ongoing efforts to forge
new international trade deals and reform the labor market can help foster private sector
growth and foreign direct investment.

Executive Board Assessment

Executive Directors commended the authorities for the measures taken to mitigate the
economic and social impact of the pandemic and for the progress made in implementing
ref orms. Directors welcomed the decision to continue with the EFF-supported program and its
objectives of supporting the economic recovery from the pandemic, restoring fiscal
sustainability, and generating green, inclusive growth with high quality jobs.

Directors supported a more gradual fiscal consolidation to accommodate urgent pandemic-

related spending needs this year, to expand social assistance programs, and to support the
economic recovery. They welcomed the authorities’ commitment to fiscal consolidation over
the medium term, stressing the need for strong revenue efforts, including a progressive tax
ref orm, to complement the expenditure-led consolidation strategy. Contingency planning in
case of financial shortfalls was also encouraged. Directors recommended further efforts to
strengthen public financial management, informed by the planned public expenditure review,
f iscal transparency evaluation, and public investment management assessment.
Directors underscored the need to continue strengthening transparency and governance in the
management of public resources to further improve trust in public institutions. They urged the
f ull and swift implementation of the regulation for collecting and publishing ultimate beneficial
ownership information in public procurement contracts. They also encouraged continued
ef f orts to enhance the AML/CFT f ramework and conduct audits of taxes.

Directors welcomed the recent amendments to the central bank law to strengthen its
independence and governance. They commended the authorities for the progress in
improving the central bank balance sheet and the foundations of the dollarization regime.

Directors welcomed the authorities’ intention to unwind the crisis measures in the banking
system to preserve its health and avoid creating distortions. The planned third-party asset
quality review for public banks would help identify provisioning and capitalization needs.
Directors encouraged the development of a plan to close regulatory gaps, level the playing
f ield, and strengthen the overall financial system.

Directors underscored the need to make progress on structural reforms to improve

competitiveness, enhance the business environment, and accelerate environmentally friendly
growth led by the private sector. Directors welcomed the authorities’ ongoing efforts to forge
new trade agreements and reform the labor market to set the course for higher and more
inclusive growth. They noted that reducing the dependence on oil would help prepare Ecuador
f or the global transition to reduce carbon emissions while also promoting the development of
other sectors.
 Ecuador: Selected Economic Indicators
Proj.
2020 2021 2022
Output
Real GDP growth -7.8 2.8 3.5
Employment
Unemployment (%) 5.3 4.6 4.2
Prices
Inflation, average (%) -0.3 0.0 2.1
Public sector
Revenue (% GDP) 29.8 33.2 33.8
Expenditure (% GDP) 35.9 35.5 33.8
Overall fiscal balance (% GDP) -6.1 -2.3 0.1
Non-oil primary fiscal balance (excl. fuel subsidies) (% GDP) -3.8 -4.4 -2.0
Non-oil primary fiscal balance (incl. fuel subsidies) (% GDP) -4.9 -5.8 -2.8
Public sector debt (% GDP) 1/ 61.2 61.0 59.9
Money and credit
Broad money (% change) 2/ 6.0 5.9 5.2
Credit to the private sector (% change) 2.5 9.9 7.0
Balance of payments
Current account (% GDP) 2.5 1.7 1.7
FDI (% GDP) -1.2 -0.8 -1.1
GIR (in months of imports of goods and services) 4.3 3.9 4.3
External debt (% GDP) 54.9 52.3 50.3
Exchange rate
REER (% change, depreciation-) -3.5 … …
REER (% change, depreciation-)
Sources: Central Bank, Ministry of Finance, National Statistical Institute (INEC), UNDP Human Development Indicators, World
Bank WDI, and IMF staff calculations.
1/ Gross debt consolidated at the level of the NFPS. Includes the outstanding balance for advance oil sales, treasury certificates,
central bank loans, other liabilities and the stock of domestic floating debt. The public debt estimates are preliminary and subject
to revisions in accordance with the IMF’s Government Financial Statistics Manual.
2/ M2
 ECUADOR
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION,
September 20, 2021 SECOND AND THIRD REVIEWS UNDER THE EXTENDED
ARRANGEMENT UNDER THE EXTENDED FUND FACILITY,
REQUEST FOR A WAIVER OF NONOBSERVANCE OF
PERFORMANCE CRITERION, AND FINANCING
ASSURANCES REVIEW

EXECUTIVE SUMMARY
Context. The new administration has committed to continue with the Fund-supported
Extended Fund Facility (EFF) of SDR 4,615 million (661 percent of quota, about $6.5
billion) that was approved by the IMF Executive Board on September 30, 2020. The
authorities’ objectives under the program are to ensure an environmental-friendly
growth with high quality jobs, promote a transparent management of public resources,
and ensure equity in the conduct of fiscally sustainable policies. Upon the completion
of the Second and Third Reviews under the EFF, an additional SDR $568 million would
be made available.

Outlook. While the historic downturn in 2020 triggered by the pandemic was milder
than originally anticipated, the recovery has been timid so far in 2021. Significant
progress in vaccination and an improved global outlook should support the recovery
going forward. Risks to the outlook remain high, albeit balanced.

Program implementation. All quantitative performance criteria (QPCs) for end-

December 2020, and all but one for end-April 2021, as well as all indicative targets (ITs)
were met. Progress on the structural reform agenda has been good, including
amendments to the central bank legal framework, notwithstanding some delays relative
to the timetable under the program. The program has been flexibly recalibrated to
support the timid economic recovery and maximize the authorities’ ownership. The
structural agenda has been enhanced, including on strengthening social safety nets,
public financial management, transparency in the management of public resources, and
the anti-corruption agenda.

Article IV consultation. Improving competitiveness and generating environmentally

friendly growth with high quality jobs remains a key medium term challenge for
ECUADOR

Ecuador. A strong push for a comprehensive structural reform agenda, informed by national
dialogue, are needed in this regard. Reducing the dependence on oil would not only strengthen
fiscal policy and leave space for other economic sectors to develop, but also help prepare Ecuador
for the global transition to reduce carbon emissions.

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Approved By Discussions were held in Quito, Guayaquil and via videoconferences

James Morsink during August 2–September 7, 2021. The report was prepared by a
(WHD) and Maria team comprised of Ceyda Oner (head), Botir Baltabaev, Matteo
Gonzalez (SPR) Ghilardi and Constant Lonkeng Ngouana (all WHD), Deirdre Daly
(SPR), Pablo Druck (MCM), Mariano Moszoro (FAD), Mariana Sabates
Cuadrado (STA), Julien Reynaud (Resident Representative) and Juan
Pablo Erraez (Resident Representative Office), with support from
Ivan Burgara, Nicolas Landeta, Anaysa Delsid (all WHD) and Lizeth
Crow (Resident Representative Office). Staff from FAD, FIN, LEG,
MCM, SPR and STA joined meetings, including Antonio Manzanera
(FIN), Virginia Alonso, Ricardo Fenochietto, and Miguel Pecho (all
FAD), and Ivana Rossi (LEG), who provided substantive input in the
formulation of conditionality, review of legislation, and in the
drafting of relevant sections of the report. Alejandro Werner, James
Morsink (WHD) and Afonso Bevilaqua (OED) attended some
meetings. Ricardo Velloso and Jorge Gallardo (OED) joined the
discussions.

CONTENTS
CONTEXT _________________________________________________________________________________________ 5

RECENT ECONOMIC DEVELOPMENTS __________________________________________________________ 6

PROGRAM IMPLEMENTATION __________________________________________________________________ 9

OUTLOOK AND RISKS __________________________________________________________________________ 12

POLICY DISCUSSIONS __________________________________________________________________________ 13

Improving Fiscal Sustainability with Equity ____________________________________________________ 13
Manage Public Resources Transparently, Improve Confidence in Institutions _________________ 19
Restoring Competitiveness, Reforming the Labor Market and Boosting Growth Potential ____ 24

PROGRAM ISSUES ______________________________________________________________________________ 27

STAFF APPRAISAL ______________________________________________________________________________ 29

BOXES
1. Estimation of Arrears __________________________________________________________________________ 20
2. Recording and Use of the SDR Allocation _____________________________________________________ 32
3. Assessment of Exceptional Access Criteria _____________________________________________________ 33

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FIGURES
1. Recent Economic Developments ______________________________________________________________ 35
2. Fiscal Developments ___________________________________________________________________________ 36
3. A Vulnerable External Position _________________________________________________________________ 37
4. Financial System Developments _______________________________________________________________ 38
5. Competitiveness _______________________________________________________________________________ 39

TABLES
1. Selected Economic and Financial Indicators ___________________________________________________ 40
2a. Operations of the Nonfinancial Public Sector (Net Accounting) (in millions if US dollars ) ___ 41
2b. Operations of the Nonfinancial Public Sector (Net Accounting) (in percent of GPD ) ________ 42
3. Nonfinancial Public Sector Financing __________________________________________________________ 43
4. Balance of Payments ___________________________________________________________________________ 44
5. External Financing _____________________________________________________________________________ 45
6. Monetary and Financial Statistics ______________________________________________________________ 46
7. Financial Soundness Indicators ________________________________________________________________ 47
8. Indicators of Fund Credit 2020-30 _____________________________________________________________ 48
9a. Proposed Quantitative Performance Criteria and Indicative Targets for 2021 ________________ 49
9b. Proposed Indicative Targets for 2022 ________________________________________________________ 49
10. Original Access and Phasing Under the Extended Fund Facility (EFF) ________________________ 50
11. Prior Actions (PAs) and Structural Benchmarks (SBs) _________________________________________ 51

APPENDIX
I. Letter of Intent _________________________________________________________________________________ 74
Attachment I. Memorandum of Economic and Financial________________________________ 77
Attachment II. Technical Memorandum of Understanding _____________________________ 104

ANNEXES
I. Debt Sustainability Analysis ____________________________________________________________________ 57
II. External Sector Assessment ____________________________________________________________________ 65
III. Status of Implementation of 2019 Article IV Consultation Recommendations IV _____________ 70
IV. Risk Assessment Matrix _______________________________________________________________________ 72

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CONTEXT
1. Ecuador made significant strides in macroeconomic management and institutional
reform over the past two years. A good track record of program implementation by the Moreno
administration helped restore macroeconomic stability and strengthen domestic institutions.
Notable achievements since 2019 have included amendments to the fiscal responsibility law
(COPLAFIP) to anchor medium-term fiscal sustainability, a successful debt exchange that lowered
financing needs for the next five years, amendments to the anti-corruption framework (COIP) to
criminalize corruption offenses, and to the central bank law (COMYF) to restore the autonomy of the
central bank and strengthen the basis for dollarization. The government also took important actions
to limit the economic fallout of the COVID-19 pandemic on the population, supported by Fund’s
emergency financing under the RFI in May 2020 ($643 million), and exceptional access under the
Extended Fund Facility (EFF) of $6.5 billion starting in September 2020.

2. Following a smooth transition post-election, the new administration has committed to

continue with the EFF-supported economic program. The market reaction to President Lasso’s
election was positive, with spreads dropping by
about 400 bps overnight and remaining low
thereafter (text chart). Vaccination has progressed
significantly after some initial setbacks. The
completion of the combined Second and Third
Reviews, together with the 2021 Article IV
consultation—as requested by the new
administration—will help anchor the reform
agenda. The authorities’ economic objectives under
the EFF arrangement are to ensure an
environmental-friendly growth with high quality
jobs, promote a transparent management of public
resources, and ensure equity in the conduct of fiscally sustainable policies. With a fragmented
National Assembly, governing will require forging alliances across the political spectrum.

3. The authorities request a reorientation of the fiscal policies to meet the objectives of
their Fund-supported program. The authorities are committed to the overall program’s fiscal
objectives while pursuing a somewhat narrower consolidation path--so as to better support the
economic recovery—with a different composition. For 2021, they see a strong need for additional
spending, striking a balance between supporting the still fragile economic recovery and saving some
of the oil windfall. Going forward, they favor achieving the consolidation targets by reducing the size
of the public sector more than originally envisaged, while raising revenues with a smaller albeit
progressive tax reform, coupled with some administrative measures. Considering the updated
outlook, staff and the authorities concurred that the program objectives are achievable under this
strategy. The mission also discussed the authorities’ reform agenda and incorporated key steps in
structural conditionality under the program.

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RECENT ECONOMIC DEVELOPMENTS

4. COVID-19 infections eased over the past months, and vaccination has progressed. The
number of infections has moderated over the past months, after reaching their second highest point
at end-April. Over 9 million people have received at least one dose of a COVID-19 vaccine as of
September 5, with close to 8 million (50 percent of the population) fully vaccinated. The authorities
continue to acquire more vaccines and have stepped up capacity to administer them.

Ecuador: COVID-19 Developments

5. While the downturn triggered by the pandemic—the worst contraction on record—

was milder than originally anticipated in 2020, the recovery has been timid so far in 2021,
including relative to peers (text chart):

• After bottoming out in 2020:Q2, GDP rebounded in 2020:Q3, leading to a milder contraction in
2020 as a whole than anticipated (7.8 percent y/y, compared to 9.5 percent in the First Review).
The economic recovery subsequently lost momentum in 2020:Q4, reflecting in part new waves
of mobility restrictions to curb the spread of the virus, while regional peers continued to
rebound. GDP expanded modestly in 2021:Q1, by 0.7 percent q/q (5.6 percent y/y) on the back
of private consumption and investment that drove up imports of raw materials and investment
goods.

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• High frequency indicators suggest a mild

improvement during 2021:Q3, with wholesale
and retail sales up by 30 percent (y/y) in June,
reflecting a base effect. Indices of business
confidence and economic activity have also
recovered somewhat, as the election-related
uncertainty waned after April.

• CPI inflation was subdued in 2020, averaging -

0.3 for the year; a weakness that continued
through 2021:H1. Inflation turned positive (1
percent, y/y) in July for the first time in a year,
driven by the prices of food, transport and utilities.

Ecuador: High Frequency Indicators

6. The labor market remains weak, with

less educated workers, minority groups and
women with children hit hardest by the
pandemic. While the level of employment and
labor force participation have almost recovered
to pre-pandemic levels, important vulnerabilities
and disparities have emerged. Despite some
recent improvements, the share of adequate
employment (full time workers earning at least
the minimum wage) stood at 31.3 percent in June
2021, still well below its pre-pandemic level of
around 40 percent. The recovery in formal employment has also been timid (text chart) and labor
market outcomes uneven across population groups (SIP #2).

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7. The fiscal outturns at end- Ecuador: Changes in Fiscal Balances – 2020

December 2020 were significantly First Review Forecast vs. Actual Outturn
better than envisaged at the time of (In US$ millions)
the First Review. The overall balance of 2020
the budgetary central government (PGE) Forecast Actual Difference
PGE+CFDD
and the domestic derivatives financing
Revenues 18,052 18,578 526
account (CFDD) recorded a deficit of Expenditures 25,711 25,683 -28
about $7.1 billion, $554 million better Overall Balance -7,659 -7,105 554
than programmed; other fiscal balances
NFPS
were also better than expected (text table,
Revenues 28,505 29,408 903
Table 2a). At the NFPS level, the over- Expenditures 35,830 35,476 -353
performance was driven by both better- Overall Balance -7,324 -6,068 1,256
than-expected revenues (about $900 Change in Deposits at the BCE -590 403 993
Source: Ministry of Finance and IMF staff calculations.
million) owing to partial economic
recovery in the latter part of 2020 and spending restraint at the NFPS level ($350 million),
particularly by local governments, lower oil investment, net lending, and lower social security
benefits. In particular, COVID-related spending was $410 million, below expected by $622 million.
The sizeable fiscal overperformance more than offset a shortfall in IFI disbursements, leading to
higher NFPS deposit accumulation at end-2020 by $1 billion. Public debt ended 2020 at 61.2
percent of GDP, about 5 ppt lower than expected, largely owing to the denominator effect (Table 3).

8. The overall balance for the first Ecuador: Changes in Fiscal Balances – Jan-Apr
four months of 2021 at the PGE+CFDD 2021, First Review Forecast vs. Actual Outturn
level was in line with expectations, (In US$ millions)
Jan-Apr 2021
while fiscal balances at the NFPS level
Forecast Actual Difference
significantly overperformed owing to
PGE+CFDD
better revenues (see ¶11 for assessment Revenues 6,999 7,578 580
of program performance). With a Expenditures 7,239 7,762 523
substantial increase in oil prices, revenues Overall Balance -241 -184 57
were well above expected at both the
NFPS
PGE+CFDD and NFPS levels, by $580
Revenues 10,222 11,501 1,279
million and about $1.3 billion, respectively
Expenditures 10,495 10,659 164
(text table, Table 2a). Besides higher Overall Balance -273 842 1,115
CFDD expenses caused by higher oil Change in Deposits at the BCE -47 -55 -8
prices (about $550 million), the Source: Ministry of Finance and IMF staff calculations.
expenditure restraint at the NFPS level
also continued in 2021:Q1. Notwithstanding the better fiscal outturns, as well as higher domestic
financing, NFPS deposit accumulation was slightly lower than expected, owing to financing shortfalls
from IFIs ($534 million) and higher-than envisaged repayment of other accounts payable as well a
statistical discrepancy ($666 million).

9. The external position was considerably stronger than anticipated in 2020 and in 2021
year-to-date.

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• The current account posted a surplus of 2.5 percent of GDP in 2020, well-above the forecasted
deficit of 0.6 percent, supported by a tighter fiscal stance, robust remittances, and higher-than-
anticipated exports (mainly non-oil). This, together with buoyant private deposits and the $2
billion Fund disbursement towards the end of the year, lifted end-2020 gross international
reserves (GIR) to $7.2 billion.

• The current account recorded a surplus of $0.7 billion in Q1:2021, driven by continued growth in
exports and buoyant remittances. Exports increased by 30 percent during this period, driven by
oil and mining. Imports increased by 30 percent (y/y) over the same period, driven by raw
materials and machinery/equipment from firms that had drawn down inventories during the
pandemic.

• International reserves declined by $1.4 billion in 2021:H1 on account of external public debt
repayment and the gradual recovery in imports, as the December Fund disbursement was
utilized. Election-related uncertainty may have also led to a temporary uptick in capital outflows
in 2021:Q1, which subsequently subsided.

10. The financial sector remains liquid. The ratio of liquid assets to short-term liabilities stood
at about 30 percent at end-July 2021, supported by buoyant private deposits and ample buffers,
aided by the 3 ppts reduction in the contribution to the liquidity fund earlier in the pandemic. While
reported non-performing loans (NPLs) dropped to 2.5 percent at end-July 2021, down from their
peak of 4 percent in September last year, these low levels reflect the crisis measure that gives more
time to record an overdue loan as past due, and masks true NPLs. These crisis measures for banks
are set to expire in December 2021, but for the cooperative sector have been extended until
December 2022. Private deposits have continued to trend up (14.2 percent at end-July, y/y),
supporting recovery in private credit (6.4 percent at end-July 2021, y/y) from the crisis trough,
including to the productive sector.

PROGRAM IMPLEMENTATION
11. All quantitative performance criteria (QPCs) for end-December 2020, and all but one
for end-April 2021, as well as all indicative targets (ITs) were met:

• NFPS deposit accumulation. The end-April QPC was missed by a margin of $77 million due to
insufficient monitoring of accounts payable. Specifically, deposits declined in the first 4 months
by $55 million, while the adjusted QPC required an increase of at least $22 million. The
unadjusted QPC, a drawdown of at most $47 million, was adjusted up for oil prices (by $119
million) and down for IFIs disbursements (by $50 million). The latter reflects that the forecasted
IMF disbursement ($400 million) did not materialize, while unplanned budget loans from the
IADB ($350 million) were received. The authorities request a waiver of nonobservance (¶43). They
will also prepare a cash plan for the rest of the year, with analysis of arrears, fiscal risks, and
deviations from the earlier cash plans, with support from the Fund-provided long-term expert
(prior action, MEFP ¶22).

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Ecuador: Quantitative Performance Criteria and Indicative Targets for end-

December 2020 and end-April 2021
(In US$ millions, unless otherwise indicated)
End-Dec. 2020 End-Apr. 2021

Prog. 3/ Adj. 4/ Actual Status Prog. 3/ Adj. 4/ Actual Status

Quantitative performance criteria

1. Overall balance of the budgetary central government and CFDD (floor )1/ -4,005 -3,893 -3,655 Met -241 -305 -184 Met
2. Accumulation of NFPS deposits at the central bank (floor )1/ 300 487 1,293 Met -47 22 -55 Not Met
3. Non-accumulation of external payments arrears (continuous PC ) 0 0 0 Met 0 0 0 Met
4. (No new) Net credit to government from the central bank (continuous PC ) 0 0 0 Met 0 0 0 Met

Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor )1/ -5,467 -5,355 -4,072 Met -572 -636 -90 Met
6. Overall balance of the NFPS (floor )1/ -5,656 -5,544 -4,334 Met -273 -337 842 Met
1/
7. Change in the stock of NIR - program definition (floor ) -4,228 -4,041 -2,357 Met -579 -110 542 Met
8. Coverage of the cash transfer programs for lower income families - number of families (floor) 2/ 225,600 225,600 271,668 Met 384,600 384,600 443,619 Met
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/
Cumulative change from July 1, 2020 for the end-December 2020 target, and from January 1, 2021 for the end-April 2021 target.
2/
Cumulative change from July 1, 2020.
3/
Staff report for the EFF first review, No. 20/325.
4/
Adjusted for oil prices (and for disbursements from multilateral institutions and China for NFPS deposits) as per the TMU.

• Central government balance. The end-December 2020 QPC on the overall balance of the
budgetary central government and the domestic derivatives financing account (CFDD) was met
with a sizeable margin of $238 million, reflecting prudent macroeconomic management in the
face of uncertainty in timing of disbursements. The end-April 2021 QPC was also met—the
actual deficit was $184 million, compared to the adjusted QPC of $305 billion. The QPC was
adjusted down for oil prices ($119 million) and up for unplanned loans from China ($183 million
in budget support from CDB).

• Continuous performance criteria. The continuous performance criteria on no new gross credit
to government from the central bank and on the non-accumulation of external payment arrears
were both met.

• NFPS non-oil primary balance with fuel subsidies (NOPBS) and overall balance. The end-
December 2020 IT on the NOPBS was met with a sizeable margin of $1,282 billion, while the
end-April IT was met with a margin of $1,405 billion; the margin of overperformance for the IT
on the NFPS overall balance at the end of 2020 was $1,449 billion, while the end-April IT was
met with a margin of $843 million.

• Net international reserves (NIR). The change in NIR at end-December 2020, evaluated at
program exchange rates was negative $2,357 billion, well-above the program IT, adjusted for oil
prices of about negative $4,041 billion, mainly on account of higher-than-expected NFPS
deposits. The NIR IT was also met at end-April 2021 ($542 million at end-April 2021 compare to
the adjusted target of negative $110 million).

• Social assistance coverage. 271,000 additional families were brought into social assistance
programs in 2020:H2, 46,000 above the end-December 2020 IT. The end-April 2021 IT was also
exceeded by about 59,000 families.

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12. Progress on the structural reform agenda has been good, notwithstanding some
delays relative to the timetable under the program:

• Central bank law (COMYF) (end-January benchmark – Not met; Implemented with delay).
The authorities amended on April 22, 2021 the central bank legal framework within the Organic
Monetary and Financial Code (COMYF). The enacted amendments to COMYF were
comprehensive revisions that significantly strengthened the basis for dollarization and the
autonomy of the central bank.

• MTDS (end-February benchmark – Met). The authorities produced and published a MTDS.
While the benchmark was met, the strategy would have been stronger if it had provided a better
roadmap by demonstrating how the current debt portfolio would be transformed into a future
debt portfolio based on future issuance choices. The authorities are building up capacity to
strengthen investor relations and will work on an updated strategy.

• Arrears clearance strategy (end-April benchmark – Not met). The authorities prepared an
arrears strategy in April. The document summarized how to clear and prevent arrears
accumulation at the central government level. However, it did not provide an estimate of the
arrears stock or cover the NFPS as stipulated in the benchmark. The authorities are advancing on
estimating arrears and strengthening the strategy for clearing them, including with assistance
from the Fund LTX (¶23). The MEF will issue a methodology to estimate the arrears stock and the
template for public sector entities to report them (proposed structural benchmark for end-
November 2021).

• GFS benchmarks (end-May benchmarks – one met, one not met; implemented with delay).
The GFS compilation guide was finalized and disseminated by end-May. The revised historical
revenues and expenditures data for each of the sectors of the NFPS (central government, local
governments, social security, and public corporations) were published in August.

• Audit of COVID-related spending (end-June benchmark—Not met). The Office of the

Comptroller General conducted close to 400 special examinations of the procurement processes
carried out during the state of emergency (with 268 approved audit reports and 128 reports
indicating potential criminal responsibility that were forwarded to the public prosecutor’s office).
While the criminal investigation and subsequent resignation of the Comptroller General
impeded progress, the authorities remain committed to continue advancing the work while the
position is being filled.1 As such, they have recently published the approved audit reports
performed during the state of emergency in a dedicated website that compiles and facilitates
access to all information. The website also notes the existence of 128 COVID-related audit
reports whose content cannot be published on the webpage at this moment due to

1
The timeline envisaged by the legal process in Ecuador suggests that a new Comptroller General could be named in
six months.

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confidentiality required by law arising from ongoing investigations and legal proceedings (prior
action).2

OUTLOOK AND RISKS

13. The macroeconomic outlook remains uncertain:

• 2021. Economic activity is projected to expand by

2.8 percent in 2021, 0.7 ppts below the forecast at
the time of the First Review, with Ecuador’s
recovery being weaker relative to peers. This
downward revision reflects two opposing forces:
On the one hand, the stronger base from 2020
implies a lower growth rate in 2021 all else equal.
On the other hand, compared to the First Review
forecast, global demand is expected to be stronger,
oil prices are expected to be higher (by about $23
per barrel in 2021 alone), and fiscal policy would be more supportive (¶18). Nonetheless, the first
effect dominates the latter in the baseline. The current account surplus is expected to contract
by 0.8 ppt (to 1.7 percent of GDP) in 2021 as imports recover. The upward revision of the current
account balance relative to the First Review reflects higher oil exports and continued buoyancy
in non-oil exports.

• Medium-term. The growth outlook has improved slightly, owing to less fiscal consolidation
compared to the First Review to strengthen the recovery and limit long term scarring (¶15-17),
higher oil prices, and a stronger recovery in
trading partners. Even so, Ecuador would have a
relatively weak recovery among regional peers
(chart). The contact intensive sectors (about 43
percent of 2019 GDP) are assumed to
permanently lose about 5 percent of output
relative to pre-pandemic levels. Potential scarring
could be even larger in the absence of structural
reforms in the areas of labor and product
markets, access to finance, and governance.
Inflation would remain subdued relative to
trading partners, supporting competitiveness.
The current account is expected to stabilize toward around 2 percent of GDP, as imports
continue to recover with the economy and non-oil exports offset declines in oil exports.

14. Risks to the outlook are broadly balanced (Annex IV):

2
https://www.contraloria.gob.ec/EmergenciaSanitaria/Covid19

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• On the downside, subsequent waves of the pandemic, coupled with a slowdown in

vaccinations, could prompt renewed economic closures, worsen labor market outcomes, push
many more people into extreme poverty, and fuel social unrest. Confidence could wane if the
new administration does not capitalize on the honeymoon period to durably transform the
economy and/or does not implement concrete structural measures to firmly anchor fiscal
sustainability. Garnering political and social support for the larger expenditure rationalization
under the revised fiscal strategy could prove challenging. This, together with an abrupt
tightening in global financing conditions, would dampen financing prospects. A significant
downgrade of the oil price outlook could reduce fiscal and external buffers if policies do not
adjust commensurately, or stifle the recovery if policies adjust abruptly to make up for the new
financing gap.

• On the upside, with the election uncertainty finally resolved, continued strong program
implementation could further lower sovereign risk and allow Ecuador to re-access international
capital market in the near term. As the new administration makes progress in implementing its
policy agenda to restore fiscal sustainability, improve Ecuador’s competitiveness, liberalize and
develop the private sector, confidence can continue to rise, boosting domestic as well as foreign
investment and Ecuador’s potential growth prospects (SIP #1). A stronger recovery in trading
partners, including the large fiscal stimulus in the US, could boost exports, oil prices, and
remittances inflows beyond current projections.

POLICY DISCUSSIONS
The COVID-19 shock underlined the pre-existing vulnerabilities of the Ecuadorian economy, including
the need to reduce the reliance of public finances on oil revenues and tackle deep-rooted structural
rigidities that limit Ecuador’s potential growth. With the elections behind, the recovery from the
pandemic and the period ahead provide a unique opportunity to reorient policies to improve fiscal
sustainability with equity, manage public resources transparently and restore confidence in institutions,
and generate environmentally friendly, job-rich, private sector-led growth. The AIV policy discussions
were interwoven with the reform plans under the EFF arrangement.

Improving Fiscal Sustainability with Equity

Balancing Supporting the Economy and Restoring Sustainability

15. The fiscal strategy has been recalibrated to provide more support to the economy and
build more buffers while preserving medium term sustainability.

• The outlook at program approval and First Review—with oil prices remaining around $40/barrel
through the medium term and debt peaking above 66 percent of GDP at end-2020—
necessitated a large and front-loaded fiscal consolidation plan to attain the debt targets
enshrined in COPLAFIP, reorient the budget deficits to surpluses, and build up liquidity buffers in
Treasury deposits.

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• Fast forward to today, the stronger-than-anticipated fiscal performance in 2020, lower debt
outturn of 61 percent of GDP, and higher oil prices (by $20/barrel in 2021 and around $10/barrel
over the medium-term) implies that a smaller, albeit still ambitious consolidation would achieve
the same fiscal objectives of reaching the COPLAFIP debt target of 57 percent of GDP by 2025,
attaining a nonoil primary surplus over the medium-term, and building significant liquidity
buffers. Moreover, this path can be formulated with a less front-loaded consolidation path to
meet the continuing expected pandemic-related spending needs in the near term and help limit
long-term scarring.

• Against these considerations, a consolidation in the nonoil primary balance with subsidies
(NOPBS) of 4.5 ppts of GDP over 2019-2025 (corresponding to an improvement in the NFPS
overall balance (OB) of 4.1 ppts of GDP) strikes a good balance between supporting the
economy in the near-term and firmly restoring fiscal sustainability, while building adequate
policy buffers against negative shocks or contingent liabilities. This represents a 1 percentage
point reduction in total consolidation over the medium term relative to what was envisaged at
the time of the First Review (text table).

Ecuador: Select Balances, Non-oil Primary Balance with Subsidies

(Change from previous year, in percent of GDP)
2019 2020 2021 2022 2023 2024 2025 2020-25
Revenue -1.3 -0.7 -0.3 0.7 0.3 0.2 0.0 0.2
o/w Planned tax reform 0.0 0.4 0.0 0.1 0.6 0.0 0.0 1.1
o/w Temporary Tax measures 0.0 0.0 0.0 0.5 -0.4 0.0 0.0 0.0
o/w Administrative Measures 0.0 0.0 0.0 0.1 0.1 0.1 0.0 0.3
o/w Macroeconomic effect on tax revenues 0.0 -1.4 0.0 0.0 0.0 0.1 0.0 -1.3
Expenditure 2.0 0.6 -0.6 2.3 1.0 0.6 0.4 4.2
Wages and salaries 0.2 -0.3 0.6 0.4 0.3 0.1 0.1 1.2
Goods and services 0.1 0.2 0.1 0.4 0.2 0.3 0.1 1.3
Other spending -0.1 -0.2 -0.2 0.2 0.0 0.0 0.0 -0.2
Capital spending 1.3 0.2 0.0 0.4 0.4 0.2 0.1 1.3
Fuel subsidies 0.8 1.1 -0.6 0.9 0.0 0.0 0.0 1.4
Social spending -0.3 -0.5 -0.5 0.0 0.1 0.0 0.0 -0.8
Total 0.7 -0.1 -0.8 3.0 1.3 0.8 0.4 4.5
Memo items
First Review
Revenue -1.3 -0.1 0.2 1.9 0.6 0.1 0.0 2.8
Expenditure 2.6 -0.9 1.7 0.9 0.8 0.1 0.0 2.7
Total 1.3 -0.9 1.9 2.8 1.4 0.2 0.0 5.5
Sources: Ministry of Finance and IMF staff calculations.

16. The 2021 fiscal targets envisage higher expenditures and a larger nonoil primary
deficit relative to the First Review, accommodating urgent and mostly pandemic-related
spending pressures while saving more of the oil windfall.

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• On the one hand, important expenditure

pressures this year, which are temporary or Ecuador: One-off Expenditures in the Central
one-off in nature, justify a larger deficit to Government Budget, 2021 (In US$ millions)
Increase in social spending (bonos ) 125
support the economic recovery. These
Vaccines and vaccination-related expenses 293
include, at the central government level, the Additional spending on health care workers 25
continued higher pandemic-related Refurbishing schools and education expenses 121
spending relative to the First Review Expenses related to termination of employment 135
Expenses for elections 21
projections, including securing vaccines and
Overdue VAT payment to local governments 300
administrating them, safely re-opening Total 1,020
schools and supporting online learning, and Sources: Ministry of Finance and IMF staff estimations.
shoring up social protection (social security
payments, unemployment benefits, and medical insurance). The government is actively
negotiating with Perenco on the payment of a $374 million indemnification pursuant to a recent
international arbitration award, which is outside the central government budget but adds to
NFPS deficit in 2021.

• On the other hand, higher oil prices would lead to smaller deficits, all else equal. The
increase in oil prices is expected to bring in net additional revenues of $1.6 billion this year after
considering the higher cost of production and of importing oil derivatives and of $3.9 billion
cumulatively over 2021–25 compared to the First Review. Moreover, the plans to restore fiscal
sustainability would also argue for continuing the trend of expenditure reduction.

• On balance, the 2021 fiscal plans have been revised to entail 35.5 percent of GDP in total
expenditure, which is both higher than the 34.3 percent envisaged in the First Review, but also
lower than the 2020 outturn of 35.9 percent, thereby balancing the two considerations of
supporting the recovery while continuing with the medium-term expenditure reduction strategy.
This level of expenditure would correspond to a relaxation of the nonoil primary deficit to 4.4
percent of GDP (from 3.8 percent last year) and of the NOPBS deficit to 5.8 percent (from 4.9
percent last year). At the same time, more of the oil windfall would be saved in Treasury deposits
under this plan compared to the First Review, by an additional $400 million (beyond the SDR
allocation).
17. For 2022 and the medium-term, the authorities’ objective is to follow an expenditure-
led consolidation path, supplemented by a progressive tax reform:

• Tax reform (MEFP ¶16). Shifting away from volatile oil revenues and reducing the procyclicality
of fiscal policy requires raising permanent non-oil revenues. Sustaining that shift, in turn,
requires a progressive and equitable tax system. To that end, the authorities have developed a
tax bill to make it more equitable, simpler, and growth-friendly, which they plan to submit to the
National Assembly in September, for enactment by end-October (proposed revision to
structural benchmark). The bill is underpinned by a combination of policy and administrative
measures as well as one-off contributions:

• Policy measures (0.7 percent of GDP) include changes in (i) personal income tax to
lower personal expenditure deductions (from the current maximum of $14,575 to the

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median of deductions); change deductions from being applied to pre-tax income to a tax
credit with a quota, and narrow income brackets for the higher tax brackets, while leaving
marginal tax rates unchanged; and (ii) corporate income tax, with measures to eliminate
credits and deductions.

• Administrative measures (0.3 percent of GDP) include improvements in collection

through the Large Contributors Unit, enhanced customs tariff collection, and improved VAT
compliance, implementing the recommendations of past Fund TA.

• Transitory measures (0.5 percent of GDP) include (i) a special contribution from
corporations with net worth over $1 million, whose sales in 2020 exceeded those of 2019; (ii)
a special contribution of high-net-worth individuals, with rates progressively increasing from
0.5 percent to 1.5 percent; and (ii) the disclosure of foreign investments/assets held abroad,
previously not reported to the tax authority, which would allow for a one-time tax to be
charged.

18. Expenditure prioritization (MEFP ¶17). Given the expected permanent yield from the tax
bill of 1 ppt of GDP, reaching the authorities’ medium-term sustainability targets entails a
cumulative primary spending reduction of 4.2 ppts of GDP over 2022–25 (Tables 2a-2b). To achieve
these savings in the most growth-friendly and distributionally optimal way, the authorities have
opted for a diversified approach: important savings will come from rolling back the one-off
spending incurred in 2021 (0.9 ppt of GDP), generating efficiency gains from enforcing new
guidelines in the procurement of goods and services and for capital investment (1.5 ppt), and
enforcing spending rationalization through multi-year and budget ceilings across various line items
(0.9 ppt). Continuing to implement the fuel subsidy reform will contribute to the consolidation (0.9
ppt). More specifically:

Ecuador: Expenditure Rationalization 2022-25

(In percent of GDP)
2022 2023 2024 2025 Total
Expenditure Rationalization 2.3 1.0 0.6 0.4 4.2
Identified policies and measures 2.6 0.8 0.4 0.2 4.1
Wage bill measures 0.2 0.3 0.1 0.1 0.7
Procurement efficiency measures 0.6 0.5 0.3 0.1 1.5
Implementing fuel subsidy reform 0.9 0.0 0.0 0.0 0.9
Rollback of 2021 one off spending 0.9 0.9
Measures to be identified -0.4 0.2 0.2 0.1 0.2

• Wage bill: The plan is to have a slower nominal growth in the wage bill over the medium term
than GDP growth, thereby reducing the total wage bill from 9.1 percent of GDP to 8.2 percent by
2025. Such a path can be achieved by rolling back one-off crisis measures, allowing wages to
grow with inflation, and replacing retiring staff and expiring fixed-terms contracts partially.
Additional savings could be generated from lower wages for new hires, or a lower replacement

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rate of retiring of fixed-term staff. The authorities plan to set wage bill targets in annual budgets
and closely coordinate with the Ministry of Labor to generate the planned savings.

• Procurement: Most of the expenditure reduction is expected to happen from goods and
services, from 4 percent of GDP in 2021 to 3 percent by 2025, and capital expenditure (which, in
Ecuador, includes non-investment spending financed by non-permanent revenues) from 7.3
percent in 2021 to 6.1 percent in 2025. A key component of this expenditure reduction strategy
is to generate savings by putting in place more efficient procedures: the national public
procurement agency (SERCOP) and the MEF have identified several measures to that end,
drawing on World Bank TA (MEFP ¶17).3 These include using more bulk and standardized
purchases, relying more on competitive bidding, process simplification and dynamization,
suppliers’ pre-qualification, better project management, and catalog purchases for off-the-shelf
items. The cumulative savings from these measures is estimated at 1.5 percent of GDP over
2022–25. The authorities will undertake several actions to enforce those savings. First, they will
establish the Subsistema Nacional de Control (SNC) comprising MEF, SERCOP, UAFE, the tax
administration, the Office of the Comptroller, the State Attorney’s Office, and financial regulators
(proposed new structural benchmark for October 2021), which will coordinate to tackle
irregularities in procurement across the public sector, including through interoperable
databases, and thereby generate savings. Second, in coordination with MEF and the National
Secretary of Planning, SERCOP will issue and enforce procurement guidelines (proposed new
structural benchmark for November 2021) for adoption by the central government and the
social security administration by the end of the year, and by local governments and SOEs by the
first quarter of 2022. In addition to the efficiency gains, rolling back the one-off spending from
2021 and enforcing further spending rationalization through the medium-term and annual
budgets would achieve the planned savings.

• Capital expenditure (¶22): In addition to rolling back the one-off spending in 2021 and
strategically selecting growth enhancing projects to achieve the planned savings, the authorities
also plan to undertake a Public Investment Management Assessment (PIMA) in 2022:Q1. This
IMF technical support would help improve the public investment management cycle, increase
transparency and efficiency in public investment, and prioritize investments, thereby generating
savings from the historically high public investment levels.

• Expenditure review. The authorities have requested support from the Fund and the WB for this
year to identify measures for any additional savings, including for contingency purposes,
building on the extensive TA provided in the past, updating and conducting new analyses as
needed.

• SDR allocation (Box 2). The authorities have chosen to reflect the newly allocated SDRs
(equivalent of $940 million for Ecuador) on the central government balance sheet. A MOU was
signed between the MEF and the BCE, enabling the BCE to conduct the operation as the

3https://openknowledge.worldbank.org/bitstream/handle/10986/32359/Ecuador-Public-Finance-Review-Phase-
Two.pdf?sequence=1&isAllowed=y

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government’s fiscal agent, with MEF being responsible for all interest costs and exchange rate
risks. Strong proponents of COMYF and adverse to monetary financing, the authorities have
verified that the operation is in line with domestic legislations, does not undermine the
institutional safeguards against central bank financing of the budget or central bank
independence. Since the allocation is reflected in the net international reserves and central
government deposits at the BCE, the program targets on both indicators have been updated to
include the new allocation.

• Contingency planning. The authorities have developed contingent policies to hedge against oil
price shocks, materialization of contingent liabilities, and financial shortfalls (MEFP ¶20). Low oil
price assumptions and a fiscal risk report that are being included in the 2022 and medium-term
budgets, as per COPLAFIP, will transparently analyze fiscal risks and mitigation measures. In case
of unexpected developments, the authorities have identified a set of contingent fiscal measures,
with spending adjustment as the first port of call. Should transitory tax measures yield less than
planned, additional revenue measures should be implemented in 2022 to achieve the same
yield.

Improving Social Outcomes

19. While coverage of social assistance programs had been expanding ahead of schedule,
progress is now slowing. The authorities had exceeded past targets towards the year-end goal of
covering at least 80 percent of the low-income families (lowest 3 deciles of the income distribution).
However, progress plateaued in May for a number of reasons, including the change in the operator
to survey poor families, lack of vaccination of social workers, and lack of census data in the Social
Registry to identify vulnerable families (MEFP ¶9). The authorities are now increasing efforts to
continue with the expansion, utilizing the pre-census work, and plan to achieve the 80 percent
target by no later than mid-April 2022 (proposed revision to structural benchmark).

20. The authorities intend to improve the coverage of social protection by income groups
and across provinces. The speedy increase in coverage over the last year was mainly in the second
and third income deciles with uneven geographical coverage, partly reflecting challenges in reaching
the most vulnerable households in some peripheral areas and urban pockets of poverty.
Vulnerability to economic challenges also overlaps with climate and social challenges; this makes
covering bottom-income groups across provinces urgent and crucial (SIP #7). In this regard, the

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authorities are committed to work towards covering at least 70 percent of the first three income
deciles in each province and at least 65 percent of the first income decile nationwide by end-
December 2022 (proposed new structural benchmark, MEFP ¶10).

Manage Public Resources Transparently, Improve Confidence in

Institutions

Strengthening Fiscal Frameworks

21. The authorities are moving forward with implementing the new PFM framework
(MEFP ¶22). PFM reforms are anchored by the amended organic code of public finances and
planning (COPLAFIP), with Fund support being provided in nearly all areas. They include i) the
development and implementation of a fiscal risk strategy to underpin the fiscal risk statement that
would be annexed to the budget. The statement will present, analyze, and estimate the impact of
fiscal risks on the budget, including from PPPs; ii) a medium-term fiscal framework (MTFF) to be
presented together with the budget documents in October 2021 and in April 2022 to guide the
budget process with a top-down approach; iii) issuance of a regulation effectively putting budget
ceilings at the institutional, group and sub-sector levels, as part of the expenditure growth rule
under COPLAFIP; iv) enhanced intra-NFPS coordination, including to improve GFS and meet budget
goals. To this effect, a National Fiscal Coordination Committee (NFCC) will be established (proposed
structural benchmark end-November 2021).

22. In parallel, the authorities intend to undertake a public expenditure review, Fiscal
Transparency Evaluation (FTE), and a Public Investment Management Assessment (PIMA). The
public expenditure review will supplement earlier TA from the IMF and the WB on expenditure
rationalization and efficiency in public procurement, and help identify additional options for
implementing the expenditure-led consolidation strategy (MEFP ¶18). The FTE will inform the next
set of reforms in transparency. The PIMA will support the authorities’ objective to prioritize spending
on public investment and improve the efficiency of public investment management.

23. Monitoring and clearing arrears will require concerted effort and a system adjustment.
The current financial information system (SIGEF) is not conducive to collecting data on arrears;
moreover, data reporting from other NFPS institutions is not regular (Box 1). These shortcomings
impede getting a clear account of NFPS arrears. That said, staff estimates that central government
(PGE) arrears are at $967 million as of end-June 2021, mostly to other public institutions. The
authorities’ plan to put in place a new system that could track arrears in real time (SINAFIP) at the
beginning of 2021 has been delayed to at least 2023 due to technical issues. In the meantime, the
authorities will publish templates for reporting on arrears to be used by public sector entities and
develop a methodology to estimate the arrears stock (proposed structural benchmark end-
November 2021). They also plan to improve a number of processes, including using short-term
securities to address temporary liquidity deficiencies, keeping the Financial Plan up to date under
the guidance of the Financial Committee (MEFP ¶18) and putting in place partial systems that can
track arrears at the start of 2022.

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24. The pension system needs to be reviewed. A diagnostic of the pension system conducted
by MEF and the World Bank found that the system is overly generous in payouts compared to
contributions. With persistently weak formal employment due to the pandemic, and arrears from the
central government, the sustainability of the system has come under more stress. The authorities are
working on a reform, with support from the WB, to prevent large imbalances over the medium term
without creating additional fiscal needs, namely, adjusting key parameters such as the retirement
age and the payout rate (MEFP ¶18).

Box 1. Estimation of Arrears

Arrears are used as a source of financing. The causes of arrears have been identified through several technical
assistance missions, and various alternatives have been proposed for their clearance and to prevent
accumulation. The government is working on the technological and regulatory changes for the identification of
arrears, as well as on a management strategy that will generate more transparency and their eventual
elimination.
The central government (PGE) financial information system (e-SIGEF) does not include the due date of
payment obligations, precluding data collection on arrears. Instead, estimates are made by taking the
approximate accrual date and adding 90 days, which is the definition of arrears as per COPLAFIP.1/ Using this
approach, as of June 2021, the PGE arrears were $967 million, showing an increase since December 2020 of 48
percent (see Table 1). As of June 2021, 69 percent of the arrears were with the local governments (GADs) and
Social Security; 21 percent were with the private sector.

Table 1. Estimated PGE Arrears (in US$ million)

Dec-2020 Jun-2021
Private Sector Total Private Sector Total
From previous years 340 641 165 529
From current year 8 15 36 438
Total 348 655 201 967

Table 2. PGE Arrears by Creditor (in US$ million, as of June 2021)

From current From previous Total
Creditor
2021 years Arrears
GAD 24 6% 174 33% 199 21%
Social Security 375 86% 96 18% 471 49%
Devel. Bank of ECU (BEDE) 0% 56 11% 56 6%
Private Sector 36 8% 165 31% 201 21%
Others 3 1% 37 7% 40 4%
Total 438 529 967

The GADs, social security, public companies, and the rest of the NFPS do not carry out transactions in
the e-SIGEF, which makes information on arrears more difficult to estimate. According to the COPLAFIP
regulatory decree, the unit in charge of cash management in each entity has to report monthly to the MEF the
stock of arrears, its causes, the adopted mechanisms of control, the payment forecast, and the preventive
actions to avoid arrears. To this end, the MEF must "issue technical guidelines, mandatory for Public Sector
entities, for the determination of arrears and the provision of information on the arrears generated at each
level of government." 2/ The implementation of these guidelines and reporting mechanism, however, is
pending. Therefore, the information keeps missing on the MEF side.

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Box 1. Estimation of Arrears (concluded)

There is a high concentration of expenditure execution at the end of the year. Accrued expenditure
usually peaks at the fourth quarter every
year and accounts payable, which may Figure 1. Accruals, Accounts Payable from
Previous Years, and Accounts Payable from the
include arrears, accumulate throughout
Current Year (in US$ millions)
the year peaking by the fourth quarter
1,000
too, causing a subsequent larger amount
of previous year accounts payable in 750
January. This shows the difficulty that the
authorities are having in aligning the 500
cycle of budget execution with the 250
availability of cash and the need to use
the available alignment tools, already in -

May-17
Sep-17

May-18
Sep-18

May-19
Sep-19

May-20
Sep-20

May-21
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21
their regulation, such as the quarterly
commitments and monthly accrual
Accruals
quotas (see Figure 1, yellow dashed line). Accounts Pay. Prev Yrs
Accounts Payable Current Year
The Accounting Undersecretary has
information for the GADs with a time-lag, which distinguishes between accounts payable from the
current year and accounts payable from previous years; however, arrears are not identified. With this
information, the level of arrears can be estimated assuming that by end-March, all accounts payable from
previous years have at least 90 days and are therefore arrears. Additionally, it would be expected that the
payment of accounts payable from previous years will be prioritized. Thus, all accounts payable generated in
January would be arrears 90 days later, that is, in April 2021, and those of February would be new arrears in
May 2021. Using this methodology, arrears are estimated at $622 million in April 2021 ($547 million from the
previous year 2020 plus $75 million from January 2021) and $550 million in May 2021 ($508 million from the
previous year 2020 minus $75 million from January 2021 plus $117 from February 2021).

Table 3. Accounts Payable in the GADs (in US$ million)

Dec- Jan-21 Feb-21 Mar-21 Abr-21 May-21
20
From previous years 374 660 615 567 547 508
From 2021 360 75 117 129 169 181
Arrears in GADs 567 622 550

Arrears from social security entities are small while public companies have arrears to April of $422
million. The arrears of public companies are concentrated in Petroecuador, with arrears of $192 million, and
Tame, an airline in liquidation, with arrears of $200 million, of which $154 million are with Petroecuador.
1/
The accrual date of the system date does not necessarily coincide with the date of delivery of the good or service.
2/
Art. (...) Determination, reporting and management of arrears. Second unnumbered article, after Article 176 of COPLAFIP.

Entrenching Governance, Transparency and Anti-corruption Reforms

25. The authorities are committed to fostering transparency around the use of public
resources (MEFP ¶22). A resolution had been passed in September 2020 allowing SERCOP to
request and publish ultimate beneficial ownership (UBO) information in public procurement
contracts. To improve transparency, SERCOP is building a new section on its website to publish all
contracts in a more accessible way. The end-goal would be to ensure that this website reflects UBO
information for all contracts, as full compliance with this requirement remains uneven. As a first step,
all contracts above $962,410 (the threshold beyond which the Office of the Comptroller General

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preapproves the contracts, corresponding to 0.003 percent of the central government budget)
awarded since September 2020 will be published, including the UBO information currently available,
(prior action) and all remaining contracts, also including UBO information currently available by the
end of November (proposed structural benchmark). In addition, the authorities will ensure full
compliance with UBO requirement in all new contracts after November when they revise the
procurement application procedures, which will continue to be published regularly on the site. This
will complement the efforts to enhance the efficiency in procurement which are anchoring the
savings in the program.

26. The authorities will also enhance the governance of tax expenditures. They will conduct
an independent audit of the 100 largest public procurement contracts awarded over 2020-21 to
assess tax expenditures (new structural benchmark for end-September 2022). As revenue
mobilization and fiscal transparency will become more critical in the coming years, the authorities
need to ensure there is full compliance and no discretion in the attribution of tax expenditure in
investment and public contracts from the private sector.

27. Improving debt transparency remains a priority. The authorities continue to regularly
publish a statistical public debt information bulletin as well as sovereign debt and crude oil pre-sale
contracts as legally permissible. They have also produced information on the debt holder profile in
line with the new requirements under the Debt Limits Policy (Annex I). The authorities will seek to
identify additional areas to improve debt data disclosure, seeking technical assistance as needed.

28. The authorities intend to overhaul the AML/CFT legislation and enhance anti-
corruption efforts to tackle related crimes and support asset recovery. The IMF is providing TA
to various government entities (UAFE, Superintendency of Banks) to bring the current legislation in
line with international standards that Ecuador committed to through its membership of the FATF-
style regional body, GAFILAT. The assistance focuses on i) legal drafting to assist the country in the
enhancement of the legal and regulatory framework for AML/CFT; and ii) strengthening the
country’s supervisory capacity of the financial sector with the implementation of a risk-based
approach (RBA) to AML/CFT supervision. Enactment of the new AML/CFT legislation, in line with
FATF international standards, is a proposed structural benchmark for end-March 2022, so that it is
in effect ahead of the GAFILAT assessment later in 2022. While published information on asset
declarations, including assets and liabilities, was enhanced and is available in an easily-accessible
way, work towards enacting legislation to strengthen the framework to prevent and manage conflict
of interest and the asset declaration regime in line with international best practices, originally
planned for end-January 2022 has lagged, the work agenda is being reset to be advanced even in
the absence of the Comptroller General and is proposed for completion by August 2022 with Fund
technical assistance (structural benchmark for end-August 2022).4

Strengthening the Central Bank and Safeguarding Financial Stability

4
There is currently an acting Comptroller General until the position is filled as per the established selection
procedures. Itemized information on assets and liabilities of high-level officials can be found at
https://www.contraloria.gob.ec/Consultas/DeclaracionesJuradas.

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29. The authorities are making progress in implementing the amendments to the central
bank law (COMYF). A recent agreement between the Ministry and the BCE transferred about $2.4
billion in shares of three public financial institutions—acquired by the BCE from the MEF in 2017—
back to MEF, with the MEF committing to repay the BCE in equal annual installments during 2027–
35 (MEFP ¶23). The authorities have also issued a decree initiating the process to remove legacy
assets (from the 1999 financial crisis) from the BCE balance sheet. The President sent his
nominations of the new board members for the Financial Policy Board (Junta de Politica y Regulacion
Financiera) and for the BCE Board (Junta de Politica y Regulacion Monetaria) to the National
Assembly in August. The Ministry and the BCE are working together on long-term projections of
reserves, since government deposits are an essential part of reserves, to ensure that the four reserve
balances legislated in COMYF are met under the timeframe set in the law. These steps are critical for
strengthening the central bank balance sheet that had been weakened in past years (SIP #4).

30. Staff support the authorities’ plan to strengthen public banks. The portfolios of two of
the public banks, BanEcuador and Corporacion Financiera Nacional (CFN), have further deteriorated
during the pandemic, with their NPLs ratios reaching about 16 and 19 percent respectively. To have
a comprehensive view of the strength of the public banks’ balance sheets, the authorities will
conduct independent third-party asset quality reviews for all four public banks (proposed structural
benchmarks for November 2021 to initiate the reviews, and for June 2022 to finalize them), to
ascertain any provisioning and/or capitalization needs (MEFP ¶33). In addition to the AQRs, the
authorities should identify governance issues that may have contributed to past NPLs, and consider
remedies including revising the banks’ business models and strengthening corporate governance.

Ecuador: Selected Financial Indicators of Public Banks1/ 2/

(In percent, unless otherwise indicated)

31. The planned revision to lending rate caps, aimed at widening financial inclusion,
should be coupled with enhanced supervision. The central bank has prepared a proposal to revise
the methodology for setting interest rate caps for approval by the Financial Policy and Regulation
Board (MEFP ¶35). The proposal is to replace the caps with bands that reflect market conditions,
including credit risk, funding costs, as well as operational and capital costs. The rates would be
reviewed periodically by the BCE based on information provided by the regulators. The revised
methodology would allow higher interest rates to be charged to new borrowers, thereby increasing
financial inclusion and fostering competition in the financial system. It is expected to be approved

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by the new Financial Policy and Regulation Board through a regulation by the end of the year. Staff
stressed the need to make sure that lending in new segments is coupled with higher provisioning
requirements and with enhanced supervision to ensure that banks assess risks adequately and take
needed safeguards.

32. The banking system appears prepared for the crisis measures to be unwound at the
end of the year. The measures implemented by the authorities since the onset of the crisis,
including the restructuring of loans, the reduction in contributions to the liquidity fund, the
extension of the period for classifying loans as non-performing and the reduction in provisioning
requirements, helped to shelter financial institutions and borrowers from the pandemic. While these
measures have also been instrumental in maintaining financial stability, keeping them for too long
could create distortions and weaken the health of the banking system. With the economic recovery
underway and banks having taken proper safeguards, the system appears ready for the crisis
measures to expire at the end of this year as currently planned. If some banks are still under-
provisioned after the NPL classification and provisioning requirements revert to the pre-crisis
system, the Superintendency of Banks, after a thoroughly assessment of these bank’s financial
situation, could grant additional time to achieve compliance under certain conditions on a bank-by-
bank basis. Such conditions should include a clear financial plan to reach needed provisioning levels,
restrictions on dividend payouts, and closer supervisory scrutiny to safeguard financial stability.

33. Supervisory authorities should use the additional time afforded to cooperatives to
close the regulatory gap vis-à-vis banks on NPL classification and provisioning. The crisis
measures for cooperatives were recently extended to December 2022. Supervisory authorities plan
to examine the expansion of this sector and the regulatory arbitrage vis-à-vis the banking sector,
especially for the larger cooperatives, which are closer to banks in size and lending activity.
Following the principle of same activity, same risk, same regulation, the additional time afforded by
the extension of crisis measure could be leveraged to close the regulatory gap vis-à-vis banks for
these larger cooperatives on NPL classification and provisioning. The supervisory agency plans to
develop a proposal in that regard by end 2022 (MEFP ¶30).

Restoring Competitiveness, Reforming the Labor Market and Boosting

Growth Potential

34. The External Sector Assessment (ESA) suggests that the external position in 2020 was
moderately weaker than implied by fundamentals, although much improved from the 2019
assessment (Annex 2). The REER is estimated to be overvalued by about 9 percent, albeit
significantly improved compared with the 30 percent overvaluation estimated in the 2019 ESA. The
improvement reflects the strengthening of the current account in 2020 and a depreciation in the
REER (by 3.8 percent).

35. Competitiveness can be restored by addressing longstanding bottlenecks to growth

and private sector development. Policy uncertainty and high borrowing costs are recurrently listed
among the main impediments to growth in Ecuador. Sound macroeconomic management with

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clearly established policy anchors would improve policy predictability, further reduce Ecuador’s
sovereign risk, and lower local private borrowing costs (SIP #3). These important pull factors would
in turn stimulate domestic investment and attract FDI. Staff supports the authorities’ ongoing efforts
to strengthen the country’s digital infrastructure and to foster capital market development (MEFP
¶36).

36. Aligning the governance framework and operations of state-owned enterprises (SOEs)
to that of private companies will improve efficiency and limit contingent liabilities. The
National Assembly is overhauling the SOE law to promote corporate governance practices and
strengthen transparency in the operations of SOEs. These best practices will limit calls on the state
budget and contingent liabilities overtime. Seven SOEs are in the process of liquidation. It will be
critical to reconcile the data of PetroAmazonas and PetroEcuador for the merged entity (also called
Petroecuador), in line with ongoing improvements in GFS. To that end, the authorities will conduct
independent audits of the individual 2019 and 2020 financial statements of PetroEcuador and
PetroAmozonas (new structural benchmarks to begin the audits by end-Nov. 2021 and complete
the audits by end-April 2022) as well as the 2020 financial statement of the merged entity (new
structural benchmark by end-October 2022). The recently issued executive decree aims to
increase private sector participation in the extractive sectors, aligning incentives between the state
and oil private companies, and also reducing the need for public sector investments. To support
private sector-led activity, the PPP Committee is developing guidelines, with help from the IDB and
US Treasury, as a follow up to the PPP decree of November 2020. It will be important for the MEF to
assess fiscal risks from PPPs on an ongoing basis as part of its enhanced fiscal risk monitoring
function (MEFP ¶22, 42). Greater transparency in foreign investment contracts is essential to provide
a level playing field and foster accountability, good governance, and protect the public’s interest.

37. COVID-19 has made the need to reduce labor market rigidities more pressing. Pre-
existing sources of labor market rigidities range from high separation costs to high minimum wages
that affect both competitiveness and equity across sectors. Implementing the newly established
formula-based minimum wage setting mechanism would help avoid widening the wage-productivity
gap, which could further affect competitiveness (Annex II). The authorities’ plans for a labor market
reform to, inter alia, promote flexible work arrangements and reduce current rigidities in part-time
employment, should help lower informal employment over time. Other areas of reform, based on
disparities in labor market outcomes during COVID-19, include expanding quality education for all
to level the playing field among labor market participants (SIP #2).

38. Staff estimates that structural reforms in these areas could yield substantial long-term
growth dividends. Ecuador has significant room to i) improve the labor market flexibility and better
link wage growth to productivity; ii) increase access to finance, including by reducing domestic
lending rates; iii) further enhance the business climate by streamlining regulations and licenses; iv)
further improve governance by raising transparency and accountability of public spending; v)
liberalize external trade and external finance, including by better integrating into global value chains
and gradually eliminating the tax on transfers abroad (ISD). These could add 1.5-2 percentage points
to baseline potential growth in the 5 to 10-year horizon from implementation, through higher
capital accumulation and TFP growth (SIP #1).

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39. The authorities broadly concurred with staff’s diagnostic of Ecuador’s competitiveness
challenges and the recommended policies. While broadly agreeing with the bottom-line ESA
assessment, the authorities noted that the improvement in the current account last year reflected a
number of one-off factors related to the pandemic, such as the sharp import compression. They also
noted that the medium-term current account path is subject to uncertainty (e.g., COVID-related
developments, oil prices and production), which could change the degree of exchange rate
misalignment going forward. They agree with the need to press ahead with structural reforms to
complement fiscal consolidation, and in that context, argued that their ongoing discussions towards
international trade agreements would generate higher growth dividends. They believe that the
pending reform of the labor market will complement their ongoing efforts to make Ecuador a
destination of choice for businesses, supporting private sector-led growth. They are committed to
fostering transparency in foreign investments and PPPs, openness to private sector participation in
the economy. They see these reforms and a gradual reduction in the ISD as conditions that will
attract foreign investment flows, lower the country risk, and reduce domestic borrowing costs.

Enhancing Climate and Natural Disaster Resilience and Reducing the Dependence on Oil

40. Reducing dependence on oil and ensuring resilience to natural disasters is a double
climate and macro imperative for Ecuador. While there is a lot of uncertainty on the global
transition to a zero-net carbon world, expectations are that in the medium to long term, oil prices
could decline as global demand for energy shifts to cleaner sources. That would permanently hit
fiscal revenues, making gradually transitioning away from oil a medium-term policy priority. And
even if not dictated by the global transition trends, Ecuador has its part to play in the global drive
for climate mitigation, including as a signatory country of the Paris Agreement. Moreover, Ecuador’s
vulnerability to natural disasters puts a premium on building resilient infrastructure and exploring
options for climate risks financing. Notably, Ecuador is already equipped with a relatively adequate
institutional set up for climate action, which needs to be fully implemented, including with help from
its development partners (SIP #5). Climate change could also potentially impact Ecuador’s savings
and investment balance, through a potential transition away from fossil fuels or the need for
investment for climate change adaptation and mitigation. Additional data, such as costing of climate
change adaptation and mitigation plans, along with multilateral considerations, would be critical for
determining the optimal savings and investment mix more precisely (SIP #6).

41. Savings from oil windfall, governed by a sound fiscal framework, would not only make
fiscal policy less procyclical, but also help build critical buffers that give resilience to the
state’s fiscal position, fund environmental reforms, and improve inter-generational equity.
Although precise cost estimates are not yet available, Ecuador will likely need substantial resources
to finance its climate and natural disaster mitigation policies, including mitigating their socio-
economic impact in vulnerable areas (SIP #5, 7). Saving part of the oil windfall would not only
improve inter-generational equity, but would also reduce fiscal procyclicality, and help finance
environmental policies. It is essential to ensure sufficient scaling up of the natural resource
governance framework, given past experiences in the country, as weaknesses in governance
frameworks typically exploit vulnerabilities in the areas of allocation of property rights, revenue
collection from extractive industries, and the oversight of state-owned enterprises involved in the

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sector. Sound governance is critical to ringfence savings and support an effective scaling-up of
investment capacities. To ensure that investment projects can fully meet their economic and social
objectives, it is essential to establish the capacity to effectively appraise, select, and implement
strategic public investment projects.

42. The authorities affirmed their commitment to advance the climate agenda and reduce
Ecuador’s oil dependence. They appreciated staff’s work on incorporating climate issues into policy
discussions with Ecuador. On procyclicality of oil prices and fiscal policy, they noted that the carry-
forward arrangement with oil companies and the import of fuel derivatives are natural hedges, given
that these costs move in tandem with global oil prices. On climate adaptation, they acknowledged
that Ecuador’s regions vary in their vulnerability to climate events and argued that financing from
the international community could support their adaptation efforts. They also signaled their
intention to consider climate risks financing. A recent Presidential decree laid out a plan for
establishing a small fund to tackle child malnutrition funded by oil revenues; COPLAFIP requires
setting up a sovereign wealth fund (SWF) for oil once debt reached the long-term target of 40
percent of GDP. The authorities expressed their interest in establishing such a fund ahead of
schedule, if possible, fully cognizant of the need to avoid governance pitfalls that were associated
with such funds in the past.

PROGRAM ISSUES
43. Program monitoring and fiscal quantitative conditionality (Tables 8-9b). The delay in
concluding the Second Review requires revising the disbursement schedule for 2021. The QPCs for
end-August 2021 were expected to be set at the time of the Second Review, but with the delay in
completing the review, and the fact that the combined Second and Third Reviews are now expected
to be completed after end-August, staff propose to move the end-August test date and set QPCs for
end-September 2021, while maintaining the end-December 2021 test date under the original
program, as indicated in Table 9a. Staff also propose to set the fiscal balance QPC targets on
PGE+CFDD for both test dates, since time lags in the compilation of data on the NFPS fiscal balance
would make it impossible for the authorities to take corrective actions in between the reviews, if
needed, and more work is needed to shorten the lags. The test dates and phasing for 2022 would
remain unchanged from the original program; QPCs would be set on the NFPS balance on a 4-
monthly cycle.

44. Request for a waiver. While the authorities diligently tracked progress against targets
during the test period, the missed April QPC on deposit accumulation highlights the need for better
cash management practices. The authorities request a waiver of nonobservance from the Executive
Board for the missed NFPS deposits QPC. The prior action on a cash plan for the rest of the year,
prepared with Fund support, will help in this regard (¶11).

45. Financing assurances. Staff has obtained assurances from all creditors and ensured that the
program is fully financed, with firm commitments for the next 12 months and good financing
prospects for the remainder of the program. The contribution of other multilateral institutions is
critical for better burden sharing. Financing post program is partly predicated on reasonable

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assumptions of market access, reflecting the improving sovereign risk profile of Ecuador. The
authorities continue to see asset monetization as an important source of upside financing risk in
outer years and have developed several contingency measures (¶18). The BCE has also increased
their contingency liquidity line with the BIS against shortfalls in USD availability (MEFP ¶34).

46. Exceptional access/Capacity to repay. Staff judge that the exceptional access criteria
continue to be met, as elaborated in Box 3. Ecuador’s capacity to repay the Fund for disbursements
under the current and previous EFF arrangements, and the recent RFI disbursement, remains
adequate; it has improved markedly since the First Review, owing mainly to significant
improvements in the outlook for global oil prices and better than expected fiscal outturns. However,
the capacity to repay remains contingent on steadfast program implementation, including to
sustainably regain market access, and on continued support from other creditors. A sharp
deterioration in the outlook for oil prices or new large contingent liabilities materializing could
severely strain the capacity to repay if policy or financing does not adjust commensurately; the
authorities’ reform program is designed to mitigate this risk by building buffers (¶¶15-17).

47. Safeguards reviews and assessments. A fiscal safeguards review was conducted in
February 2021. As a follow up on the recommendations, the authorities plan to implement a risk-
based approach to internal and external audits, establishing an internal working group to oversee
the implementation of reforms under COPLAFIP, and ensuring a smooth and timely transition to the
new transactional digital platform (SINAFIP). The enactment of COMYF paved the way to governance
and accountability reforms for the BCE (¶29). The authorities have implemented most of the
recommendations from the last safeguards assessment of the BCE and are on track to implement
the remainder albeit with some delay. These include adopting IFRS accounting standards and
making the Audit Committee operational by appointing its members; they also intend to publish the
audit opinion on the BCE financial statements starting with the 2021 report (MEFP ¶26). Steps are
being taken to modernize the BCE’s internal audit function.

48. Statistical issues. Ecuador will continue aligning GFS to international standards with support
from STA. The financial data of the oil companies and a successful implementation of the new
financial reporting system in the MEF are critical for the improvement of the fiscal data. The
transmission lag of fiscal data from local governments—currently at 90 days—would also need to be
brought in line with the 60-day norm under the related COPLAFIP regulation. This would help
ensure better fiscal monitoring at the NFPS level, in line with COPLAFIP, and program monitoring.
The mission will follow-up with the BCE on their project for rebasing GDP.

49. Article VIII/CFM. The authorities plan to gradually phase out the tax on transfers abroad
(ISD), once the macroeconomic stability is restored, and the reserves position is strengthened. As a
sign of policy direction, in September 2021 the government enacted an Executive Decree lowering
the tax rate to zero for foreign airline companies operating in Ecuador, which will enter into force
upon its publication in the official gazette, which would have an annual fiscal cost of less than $10
million (0.01 percent of GDP). Staff recommended that any reduction be gradual, based on market
conditions, and be properly calibrated to avoid undue BOP pressures. The ISD tax constitutes both
an exchange restriction subject to Fund approval under Article VIII, Section 2(a), and a capital flow

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management measure (CFM) under the Fund’s Institutional View on Liberalization and Management
of Capital Flows. The authorities have requested temporary Fund approval for maintaining the
exchange restriction arising from the tax on transfers abroad for one year for balance of payments-
reasons (see LOI).

50. Lending into arrears. Ecuador maintains a residual amount of arrears to international
private bond holders arising from outstanding claims on those international bonds that the
authorities repudiated in 2008/2009. At that time, the majority of government obligations were
repurchased by the government. However, US$52 million remain outstanding in the hands of
individual creditors and the authorities have been unable to identify these creditors in order to settle
the claims. The authorities established a public procedure to follow in the event that a holder of
these bonds requests the liquidation of the securities. Staff judges that good faith efforts have been
made to reach a collaborative agreement with the remaining creditors and the requirements under
the policy on lending into arrears have been met. The authorities have indicated they have no
outstanding arrears to bilateral or multilateral creditors.

STAFF APPRAISAL
51. The new administration’s decision to continue with the EFF-supported program is
welcomed. The new administration’s objective of instilling environmentally friendly growth with
high quality jobs, promoting a transparent management of public resources, and ensuring equity in
the conduct of fiscally sustainable policies is in line with the objectives set out in the 27-month EFF
approved by the IMF Executive Board a year ago. Policy continuity and predictability will cement the
hard-earned gains in macroeconomic management and institutional reforms in Ecuador over the
past two years and support private sector development. It would be instrumental for the authorities
to leverage the early phases of their term to firmly anchor medium term policies and advance key
reforms.

52. Further strengthening social safety nets will allow the government to continue
providing the much-needed financial support to vulnerable groups. The COVID-19 pandemic
has increased poverty and re-affirmed the need for having strong social support programs in place
for reaching and compensating vulnerable households in a timely manner when needed. The
authorities should redouble efforts to reach families in the lowest income groups and in generally
underserved locations. Improving the institutional capacity of the Social Registry and using new
technologies to identify low-income households will help in this endeavor. Going forward, providing
greater access to quality education and health will promote job opportunities for all and help limit
the long-term effects of the pandemic on Ecuador’s workforce.

53. The ongoing pandemic and timid economic recovery warrants continuing to support
the economy this year. To avoid stifling the fragile economic recovery and meet the urgent
spending needs to address pandemic-related pressures, a larger-than-envisaged deficit would be
justified. Starting with next year, it would be important to roll back the pandemic-related one-off
spending items to make progress towards restoring fiscal sustainability.

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54. Over the medium term, a lower and more gradual pace of consolidation can restore
medium-term fiscal sustainability while building higher buffers. Under the improved
macroeconomic outlook, less consolidation of the NOPBS over 2019–25 by 1 ppt of GDP (4.5 vs. 5.5
percent) can achieve the same fiscal objectives as before, while saving part of the oil windfall. With
the authorities’ preference for a progressive tax bill that is smaller than envisaged earlier in the
program, the consolidation strategy would rely more on expenditure rationalization. A larger tax
reform would have provided a more balanced consolidation and help further reduce the reliance on
oil revenues. In this context, the authorities’ preferred strategy will need to be implemented in
coordination with the subsectors of the nonfinancial public sector to ensure its effectiveness, and
with resolve in a timely and sustainable way in the coming years. Contingency measures and
financial planning will be critical to handle unexpected developments, including from oil prices or
financing.

55. Operationalizing the landmark COPLAFIP and COMYF laws would support the
sustainability of public finances and fortify the foundations of dollarization. Implementing the
envisaged reforms on the medium-term fiscal framework, fiscal risk, and expenditure ceilings, will be
crucial to achieve the expenditure rationalization plans. Just as important will be coordinating across
the subsectors of the nonfinancial public sector; the NFCC would be instrumental if well operated.
Enforcing the timelines for data submission established in COPLAFIP will be critical to improve the
timeliness and quality of fiscal data. This, in turn, is essential for successfully implementing Ecuador’s
own fiscal targets. On the central bank side, the authorities’ resolve to clean up the BCE balance
sheet from legacy assets and diligently build reserves over the coming years to fulfil COMYF
amendments is commendable and will serve Ecuador well by strengthening the dollarization regime.

56. Strengthening transparency and governance in the management of public resources,

including COVID-related, will improve trust in public institutions. The regulation passed last
year to collect and publish information on the ultimate beneficial owners of public procurement
contracts was an important reform, but remains to be fully implemented. Efforts to ensure full
compliance with the legal framework going forward for all procurement contracts and ensuring this
information is easily accessible is a priority, not just to fulfil a commitment made under the
emergency financing, but also for accountability to the public. A third of the COVID-related audits
leading to legal proceedings also points to the need to put further efforts into strengthening
governance in the use of public funds. The work plans on improving asset declarations of politically
exposed people, overhauling the AML/CFT framework, and conducting audits of taxes are ambitious
but necessary.

57. Unwinding the crisis measures in the banking system at the end of the year as
currently envisaged would preserve the health of the financial system and avoid creating
distortions. More than a year into the pandemic, the system appears ready to move from blanket
measures to targeted ones as needed. The authorities’ ongoing work to assess the impact of
reverting to pre-crisis regulations will help prepare the system better for the change. Coordinating
across relevant supervisory and policy agencies to close regulatory gaps over time across the
financial system will also level the playing field and strengthen the overall financial system.

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58. The authorities’ resolve to assess the health of publicly-owned institutions is

commendable. Their plans to conduct AQRs for all public banks and audit the financial statements
of the oil companies are welcomed initiatives. These will help get a clear picture of any contingent
liabilities and build any needed future actions into the fiscal and financial plans of the administration
early on.

59. Improving competitiveness and generating environmentally-friendly growth requires

a stronger push for structural reforms, informed by national dialogue. Under the dollarization
regime, fiscal prudence and structural reforms become even more important drivers of
competitiveness. To that end, the authorities’ ongoing efforts to forge new international trade ties,
reform the labor market, bring policy continuity and predictability, and create an environment that is
more conducive to private sector growth and FDI can help regain competitiveness. Reducing the
dependence on oil would not only strengthen fiscal policy and leave space for other economic
sectors to develop, but also help prepare Ecuador for the global transition to reduce carbon
emissions. Ecuador’s vulnerability to climate events put a premium on preparation and adaptation,
especially considering the populations that are particularly vulnerable. It will be important to
enhance the national dialogue around all these initiatives for the reforms to be durable.

60. Staff supports the request for a waiver of nonobservance of the NFPS deposits QPC
and completion by the Executive Board of the combined Second and Third Reviews under the
EFF arrangement. Staff support the waiver of nonobservance based on the grounds that the nature
of the nonobservance was minor and the authorities are taking corrective action (cash plan) as a
prior action. Staff also supports the request for changes to the structural conditionality and
completion of the financing assurances review.

61. Staff also supports Board approval for the retention for a one-year period of the
exchange restriction arising from the tax on transfers abroad (ISD) given that it is maintained
for BOP reasons, is temporary and non-discriminatory. The authorities intend to phase it out once
macroeconomic stability is restored, and the reserve position is strengthened. Already, the
authorities have started phasing out the tax, with any reduction to be gradual and properly
calibrated to avoid undue BOP pressures.

62. It is recommended that the next Article IV consultation take place on a 24-month
cycle.

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Box 2. Recording and Use of the SDR Allocation

The authorities have chosen to reflect the new SDR allocation directly on the central government
balance sheet (Figure). As the fiscal agent, the central bank (BCE) served as the intermediary for receiving
the allocation, and it was registered directly in
the Treasury Single Account (TSA), for which the
BCE is the custodian. When the allocation took
place, the central government (MEF) recorded: (i)
an increase of its deposits at the central bank
(TSA deposits); and (ii) an increase in external
debt liabilities.1 Simultaneously, the BCE
recorded: (i) an increase in external financial
assets (increase in GIR/NIR); and (ii) an increase in
its liabilities with the central government
(deposits in the TSA).
All interest costs and exchange rate risks lie
with the central government (MEF). The central government is responsible for paying for any interest on
the SDR allocation as well the repayment of the use of allocation (at the SDR terms). The BCE and MEF have
signed a Memorandum of Understanding (MOU) for this arrangement (similar to MOUs they have for Fund
disbursements for budget support under the RFI and EFF).
The authorities have obtained a legal opinion that ascertains that the operation is in line with
domestic legislation. The central bank law (COMYF) indicates that the State (i.e., the Republic of Ecuador) is
the legal owner of international reserves and the BCE holds and manages the reserves. The BCE is
responsible for investing them in a conservative matter, based on safety, liquidity and the profitability, which
would enable purchasing SDRs when needed. The law also explicitly defines SDR holdings as part of
Ecuador’s international reserves, and indicates they are to be used for international payments needs in a
manner that respects the BCE’s objectives of ensuring financial stability and a stable monetary system
(Article 137).
MEF intends to use the SDRs to address immediate cash flow deficiencies but build treasury deposits
back up by the end of the year by more than the new allocation. The authorities have converted the
SDRs to freely usable currencies and will use a new budget code to transparently reflect how the SDR
proceeds are spent. Deposit targets under the Fund program would ensure that reserves will be built back
up to cover the new allocation by the end of the year, which would ensure that SDRs will be spent for cash
management until more financing becomes available, and not for relaxing fiscal targets.
The immediate impact of using SDRs on reserves depends on the transactions owing to the
dollarization system. The BCE serves as the clearing house for all domestic transactions. If the SDR
proceeds (i.e., USD) are used for purely domestic payments (e.g., government wages), there would be a
reallocation of central bank liabilities (e.g., from TSA deposits to private banks) but no immediate change in
international reserves at the time of the transactions.2 International reserves would decline overtime if those
resources were used for external payments (e.g., for imports or external debt repayment). Either way, as MEF
builds treasury deposits at the BCE back up using the inflow of dollars from anticipated external financing
(including from the Fund), international reserves would rise. These changes in international reserves position
will not be the direct result of the SDR allocation but depend on how the use of the proceeds of the
allocation impacts the balance of payments.
1/ Forstatistical purposes, the full SDR allocation would be part of the stock of external debt in the GFS, and the allocation would
be part of the reporting requirements for total gross debt in line with GFSM 2014. For the purposes of the DSA, SDR holdings
are added to readily available financing sources that may mitigate debt sustainability risks, with only the shortfall in SDR
holdings relative to allocations included in the stock of nominal debt. see (¶39 of the SDR Guidance Note). For the purposes of
any program conditionality, SDR allocations are not included in the debt definition (¶70 of the SDR GN).
2/
For example, when the MEF pays wages civil servants the BCE would serve as the clearing house (civil servants have bank
accounts, and these banks have accounts at the BCE). No currency would be withdrawn from the BCE.

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Box 3. Assessment of Exceptional Access Criteria

Staff judge that the exceptional access criteria are met, as described below.
Criterion 1—The member is experiencing or has the potential to experience exceptional balance of payments
pressures on the current account or the capital account resulting in a need for Fund financing that cannot be
met within the normal limits.
Ecuador continues to experience exceptional BOP pressures, stemming from the deepest recession on
record and a loss of market access. The financing gap from the confluence of shocks described above is
estimated at $2.5 billion over 2021-22, after factoring in the fiscal consolidation underway, the new SDR
allocation, and the support from IFIs.
Criterion 2—A rigorous and systematic analysis indicates that there is a high probability that the member’s
public debt is sustainable in the medium term. Where the member’s debt is assessed to be unsustainable ex
ante, exceptional access will only be made available where the financing being provided from sources other
than the Fund restores debt sustainability with a high probability. Where the member’s debt is considered
sustainable but not with a high probability, exceptional access would be justified if financing provided from
sources other than the Fund, although it may not restore sustainability with high probability, improves debt
sustainability and sufficiently enhances the safeguards for Fund resources.
Ecuador’s public debt was assessed to be sustainable with high probability at program approval, based on
the successful debt exchange, credible financing assurances from bilateral and multilateral creditors and
commitment to an ambitious fiscal consolidation over the medium-term. Since then, the less severe
economic downturn and tight fiscal management in 2020 has resulted in lower debt and a smaller deficit
last year (¶7). All else equal, this better starting point improves the prospect of attaining the debt targets; in
fact, they are attained ahead of schedule in the baseline, providing buffer for shocks. Similarly, gross
financing needs remain around 4-5.5 percent of GDP over the medium term, well below stress levels. Stress
tests show that the debt trajectory is sensitive to shocks to contingent liabilities, and growth, particularly in
the near term (Annex I), underlining the need to continue with medium-term fiscal consolidation to keep
public debt on a sustainable path. The envisaged consolidation has been recalibrated to reflect the new
economic outlook and the objectives of the new administration, which would lower execution risk. The fact
that the debt anchors in COPLAFIP of 57 percent of GDP by end-2025 and 40 percent of GDP from 2032
onwards are enshrined in the organic budget code provides a key safeguard to debt sustainability.
Criterion 3—The member has prospects of gaining or regaining access to private capital markets within a
timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund.
Until losing market access last year, Ecuador had sustained access to foreign financial markets, with long-
term global bond issuances of around $3-5 billion per year over the last four years, although the terms of
this financing were often not favorable. Historical evidence suggests that Ecuador has been successful in
regaining access to the international capital markets within 24-36 months following a debt restructuring.
While the global economic outlook is uncertain and markets are volatile in the current conjuncture, markets
have so far reacted positively to the elections and the new economic cabinet, and have hovered around
750-800 bps, levels last seen before the pandemic and debt crisis (¶2). Notwithstanding these recent
improvements in Ecuador’s sovereign risk, staff’s assumptions on market re-access starting in 2022 at US$1
billion are broadly unchanged from the First Review.
Ecuador’s re-access to foreign capital markets would be supported by the market-friendly debt exchange,
the pro-market stance of the new administration, and their continued implementation of the fiscal and
structural reform agenda.
Criterion 4—The policy program provides a reasonably strong prospect of success, including not only the
member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.

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Box 3. Assessment of Exceptional Access Criteria (concluded)

The Ecuadorian authorities have been steadily moving forward with implementing the policies of the
program and remain fully committed to take the needed steps to ensure its success.
The Moreno administration, under the leadership of Minister Pozo on the economic team, continued
implementing the program diligently though their last day in office. They enacted two milestone structural
reforms since the First Review: the anticorruption and the central bank laws. These reforms meaningfully
strengthened Ecuador’s institutions, and also demonstrated the political capacity to carry the program
forward and rally around its key elements.
The Lasso administration took over in May, with the economic team led by Minister Cueva, who had been
part of the economic team of President Moreno as an advisor. The outgoing and incoming Ministers worked
very closely through the transition, and the new administration is determined to continue with the policy
program that has been supported by the EFF arrangement. Their will to continue with the program is
evidenced in their request for the IMF Executive Board to consider the combined Second and Third Reviews
and the 2021 Article IV in the coming months.
The challenging political environment remains an important risk to policy and program continuity. The
National Assembly elected in February is fragmented, with no clear majority for any party. Therefore, all
reforms will need to garner support from across the political spectrum. On the upside, the legislative agenda
set forth by the new Assembly in July includes key reforms that are in line with the program. The new
administration’s focus on building consensus on policies through extensive dialogue with various
stakeholders, and Minister Cueva’s attention to communication should help garner the needed broad
support and buy in.
The authorities have continued to make commendable and tangible improvements in the technical and
institutional deficiencies that have been well-recognized as key risk factors in the past. The new
administration has put in place a strong economic team and has continued to receive extensive capacity
development from the Fund and other development partners. The publication of corrected historical fiscal
data, the newly minted fiscal data compilation guide, prepared with the NFPS subsector representatives
under the guidance of STA and a Fund short-term expert (STX), are tangible improvements in fiscal statistics.
The authorities continue to work with the Fund long-term expert (LTX) in cash management to improve
financial planning and advance the arrears clearance strategy. Cognizant of the need to keep improving
technical and institutional capacity, the new administration has requested further technical assistance
support from the Fund and other IFIs.
The strong program performance to date, including the progress towards fiscal sustainability, the
commitment of the new administration to the key objectives of the program and to implement the policies
needed to attain those objectives, their focus on building consensus and buy in across the political
spectrum, tangible improvements in capacity all provide a reasonably strong prospect of success. Ultimately,
successful implementation of the reform agenda will hinge on the buy-in and political will of the legislators
and the executive.

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Figure 1. Ecuador: Recent Economic Developments

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Figure 2. Ecuador: Fiscal Developments 1/

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Figure 3. Ecuador: A Vulnerable External Position

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Figure 4. Ecuador: Financial System Developments

38 INTERNATIONAL MONETARY FUND

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Figure 5. Ecuador: Competitiveness

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Table 1. Ecuador: Selected Economic and Financial Indicators

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Table 2a. Ecuador:

Table 2a.Operations of the
Ecuador: Operations Nonfinancial
of the Nonfinancial PublicPublic
Sector Sector (Net Accounting)
(Net Accounting)
(in millions if USofdollars,
(in millions US dollars,unless otherwise
unless otherwise indicated)
indicated)
Est. Projections
2018 2019 2020 2020 2021 2021 2022 2023 2024 2025 2026
1st Rev. 1/ 1st Rev. 1/

Revenue 38,290 36,389 28,505 29,408 31,248 34,689 37,223 38,521 39,423 40,428 41,637
Oil revenue, net 2/ 8,255 7,892 4,601 4,839 5,516 8,412 8,525 8,496 8,129 8,042 8,064
Nonpetroleum revenue 27,189 25,865 22,220 22,820 23,661 23,976 26,008 27,368 28,617 29,771 30,951
Taxes 15,417 14,486 12,243 12,366 13,122 13,065 14,525 15,457 16,243 16,906 17,576
Social security contributions 5,541 5,863 5,266 5,443 5,381 5,810 6,115 6,343 6,589 6,850 7,122
Other 6,231 5,516 4,711 5,011 5,158 5,101 5,369 5,569 5,785 6,014 6,253
Operating surplus of public enterprises 2,845 2,632 1,685 1,749 2,071 2,301 2,690 2,656 2,677 2,616 2,622
O/w profits of oil companies withheld for investment 2,748 2,489 1,448 1,486 1,921 2,151 2,540 2,506 2,527 2,466 2,466

Expenditure 40,500 39,354 35,830 35,476 34,062 37,111 37,138 37,148 37,732 38,730 40,301
Primary expenditure 37,882 36,434 32,962 32,692 32,612 35,839 35,636 35,455 35,789 36,448 37,707
Current 27,399 28,122 26,217 25,421 26,175 27,719 27,944 27,888 28,134 28,712 29,645
Wages and salaries 10,323 10,190 9,643 9,598 9,535 9,479 9,590 9,645 9,874 10,109 10,510
Purchases of goods and services 4,735 4,642 4,593 4,010 4,281 4,173 3,931 3,835 3,628 3,649 3,794
Social security benefits 5,353 5,749 6,080 6,020 5,946 6,506 6,708 6,958 7,228 7,515 7,813
Other 6,989 7,541 5,902 5,793 6,412 7,561 7,715 7,450 7,403 7,440 7,529
Cost of imports of oil derivatives 4,011 4,439 3,034 3,163 2,852 4,176 4,296 4,074 3,946 3,896 3,895
Payments to private oil companies (SH) 3/ 1,504 1,407 1,198 1,232 1,130 1,278 1,278 1,278 1,278 1,278 1,278
Other 1,474 1,695 1,670 1,398 2,430 2,107 2,142 2,098 2,180 2,266 2,356
Capital 9,680 8,265 6,718 7,195 6,437 7,745 7,692 7,567 7,655 7,736 8,062
Fixed capital spending 9,680 8,265 6,583 7,195 6,296 7,607 7,545 7,414 7,496 7,570 7,890
O/w investment in oil 1,779 1,760 1,458 1,441 1,643 1,667 1,698 1,835 1,918 1,948 1,979
Net-lending 0 0 135 0 142 139 146 153 159 166 173
Extra budgetary expenses 803 46

Primary balance 408 -45 -4,456 -3,283 -1,364 -1,150 1,587 3,066 3,634 3,980 3,930
Interest 2,618 2,920 2,868 2,785 1,450 1,272 1,502 1,693 1,944 2,281 2,594
O/w external 2,340 2,627 2,505 2,453 1,166 999 1,164 1,357 1,617 1,979 2,350
Overall balance -2,210 -2,965 -7,324 -6,068 -2,813 -2,422 85 1,373 1,690 1,699 1,337
Memorandum items:
Non-oil primary balance 4/ -3,301 -2,820 -4,816 -3,773 -3,176 -4,592 -2,206 -750 120 594 551
Non-oil PB (incl. fuel subsidies) 5/ -5,908 -5,173 -5,867 -4,863 -4,167 -6,030 -3,087 -1,667 -828 -382 -453
Cyclically Adjusted Non-oil Primary Balance -3,339 -2,681 -2,914 -2,287 -2,227 -3,772 -1,708 -365 357 624 503
Oil balance 6/ 3,709 2,775 359 489 1,812 3,442 3,793 3,815 3,514 3,387 3,379
Fuel Subsidies 3,233 2,353 1,051 1,091 991 1,811 881 917 948 975 1,004
Social Spending 1,016 1,446 1,446 1,774 1,974 1,998 1,875 1,875 1,875 1,875
Public Debt 7/ 52,799 55,580 62,629 60,458 65,692 63,687 65,894 66,040 66,583 65,124 63,577
Revised fixed capital spending (PGE+CFDD) 1,040 820 533
Revised fixed capital spending (the rest of the NFPS) 2,648 2,075 1,336

Sources: Ministry of Finance; Central Bank of Ecuador; and Fund staff calculations and estimates.
1/ First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Quantitative Performance Criteria (December 21, 2020; CR No. 20/325).
2/ Net of operational cost.
3/ Reflects service contract payments to private oil companies beginning in 2011.
4/ The primary balance less oil balance.
5/ Excludes the payments of lawsuits.
6/ Oil revenue plus profits of state-owned oil companies, which is retained for investment in the oil sector, less oil-related expenditure (the costs of imports of oil derivatives,
service payments to private oil companies, and investment in oil).
7/ Gross debt consolidated at the level of the NFPS. Includes the outstanding balance for advance oil sales, treasury certificates, central bank loans, other liabilities and the stock of domestic
floating debt. The public debt estimates are preliminary and subject to revisions in accordance with the IMF’s Public Sector Debt Statistics: Guide for Compilers and Users (PSDSG).

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Table 2b. Ecuador: operations of the Nonfinancial Public Sector (Net Accounting)
Table 2b. Ecuador: Operations of the Nonfinancial Public Sector (Net Accounting)
(in percent of GPD,
(In percent of GDP,unless otherwise
unless otherwise indicated)
indicated)
Est. Projections
2018 2019 2020 2020 2021 2021 2022 2023 2024 2025 2026
1st Rev. 1/ 1st Rev. 1/

Revenue 35.6 33.7 30.2 29.8 31.5 33.2 33.8 33.8 33.3 32.8 32.5
Oil revenue, net 2/ 7.7 7.3 4.9 4.9 5.6 8.1 7.8 7.4 6.9 6.5 6.3
Nonpetroleum revenue 25.3 23.9 23.6 23.1 23.9 22.9 23.6 24.0 24.1 24.2 24.2
Taxes 14.3 13.4 13.0 12.5 13.2 12.5 13.2 13.5 13.7 13.7 13.7
Social security contributions 5.2 5.4 5.6 5.5 5.4 5.6 5.6 5.6 5.6 5.6 5.6
Other 5.8 5.1 5.0 5.1 5.2 4.9 4.9 4.9 4.9 4.9 4.9
Operating surplus of public enterprises 2.6 2.4 1.8 1.8 2.1 2.2 2.4 2.3 2.3 2.1 2.0
O/w profits of oil companies withheld for investment 2.6 2.3 1.5 1.5 1.9 2.1 2.3 2.2 2.1 2.0 1.9

Expenditure 37.7 36.4 38.0 35.9 34.3 35.5 33.8 32.6 31.8 31.4 31.5
Primary expenditure 35.2 33.7 35.0 33.1 32.9 34.3 32.4 31.1 30.2 29.6 29.4
Current 25.5 26.0 27.8 25.7 26.4 26.5 25.4 24.4 23.7 23.3 23.1
Wages and salaries 9.6 9.4 10.2 9.7 9.6 9.1 8.7 8.5 8.3 8.2 8.2
Purchases of goods and services 4.4 4.3 4.9 4.1 4.3 4.0 3.6 3.4 3.1 3.0 3.0
Social security benefits 5.0 5.3 6.4 6.1 6.0 6.2 6.1 6.1 6.1 6.1 6.1
Other 6.5 7.0 6.3 5.9 6.5 7.2 7.0 6.5 6.2 6.0 5.9
Cost of imports of oil derivatives 3.7 4.1 3.2 3.2 2.9 4.0 3.9 3.6 3.3 3.2 3.0
Payments to private oil companies (SH) 3/ 1.4 1.3 1.3 1.2 1.1 1.2 1.2 1.1 1.1 1.0 1.0
Other 1.4 1.6 1.8
0.0 1.4 2.4
0.0 2.0 1.9 1.8 1.8 1.8 1.8
Capital 9.0 7.6 7.1 7.3 6.5 7.4 7.0 6.6 6.5 6.3 6.3
Fixed capital spending 9.0 7.6 7.0 7.3 6.3 7.3 6.9 6.5 6.3 6.1 6.2
O/w investment in oil 1.7 1.6 1.5 1.5 1.7 1.6 1.5 1.6 1.6 1.6 1.5
Net-lending 0.0 0.0 0.1 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Extra budgetary expenses 0.7 0.0 0.0 0.0 0.0

Primary balance 0.4 0.0 -4.7 -3.3 -1.4 -1.1 1.4 2.7 3.1 3.2 3.1
Interest 2.4 2.7 3.0 2.8 1.5 1.2 1.4 1.5 1.6 1.9 2.0
O/w external 2.2 2.4 2.7 2.5 1.2 1.0 1.1 1.2 1.4 1.6 1.8
Overall balance -2.1 -2.7 -7.8 -6.1 -2.8 -2.3 0.1 1.2 1.4 1.4 1.0

Memorandum items:
Non-oil primary balance 4/ -3.1 -2.6 -5.1 -3.8 -3.2 -4.4 -2.0 -0.7 0.1 0.5 0.4
Non-oil primary balance (percent of non-oil GDP) -3.3 -2.8 -5.3 -4.0 -3.3 -4.7 -2.1 -0.7 0.1 0.5 0.5
Non-oil PB (incl. fuel subsidies) 5/ -5.5 -4.8 -6.2 -4.9 -4.2 -5.8 -2.8 -1.5 -0.7 -0.3 -0.4
Cyclically Adjusted Non-oil Primary Balance -3.1 -2.5 -3.1 -2.3 -2.2 -3.6 -1.6 -0.3 0.3 0.5 0.4
Oil balance 6/
excluding oil investment 3.4
5.1 2.6
4.2 0.4
1.9 0.5
2.0 1.8
3.5 3.3
4.9 3.4
5.0 3.3
5.0 3.0
4.6 2.7
4.3 2.6
4.2
Fuel Subsidies 3.0 2.2 1.1 1.1 1.0 1.7 0.8 0.8 0.8 0.8 0.8
Social Spending 0.9 1.5 1.5 1.8 1.9 1.8 1.6 1.6 1.5 1.5
Public Debt 7/ 49.1 51.4 66.4 61.2 66.2 61.0 59.9 57.9 56.2 52.9 49.6
Revised fixed capital spending (PGE+CFDD) 1.0 0.8 0.5
Revised fixed capital spending (the rest of the NFPS) 2.5 1.9 1.4

Sources: Ministry of Finance; Central Bank of Ecuador; and Fund staff calculations and estimates.
1/ First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Quantitative Performance Criteria (December 21, 2020; CR No. 20/325).
2/ Net of operational cost.
3/ Reflects service contract payments to private oil companies beginning in 2011.
4/ The primary balance less oil balance.
5/ Excludes the payments of lawsuits.
6/ Oil revenue plus profits of state-owned oil companies, which is retained for investment in the oil sector, less oil-related expenditure (the costs of imports of oil derivatives,
service payments to private oil companies, and investment in oil).
7/ Gross debt consolidated at the level of the NFPS. Includes the outstanding balance for advance oil sales, treasury certificates, central bank loans, other liabilities and the stock of domestic
floating debt. The public debt estimates are preliminary and subject to revisions in accordance with the IMF’s Public Sector Debt Statistics: Guide for Compilers and Users (PSDSG).

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Table 3. Ecuador: Nonfinancial Public Sector Financing

(in millions of US dollars, unless otherwise indicated)
Est. Projections
2018 2019 2020 2020 2021 2021 2022 2023 2024 2025 2026
1st Rev. 1/ 1st Rev. 1/

Gross financing needs 10,060 10,674 13,976 12,555 7,651 7,285 4,721 4,495 4,280 6,274 7,223
Nonfinancial public sector deficit 2,210 2,965 7,324 6,068 2,813 2,422 -85 -1,373 -1,690 -1,699 -1,337
Amortization 7,850 7,709 6,651 6,487 4,838 4,863 4,806 5,868 5,970 7,973 8,560
External 4,225 4,895 3,980 3,978 1,763 1,790 2,355 2,521 3,299 4,023 4,540
Multilateral 673 780 817 817 772 781 784 984 1,994 3,120 3,122
Bilateral 1,601 1,005 791 785 428 419 1,212 1,219 1,017 597 321
Private sector and other 885 2,125 2,237 2,233 445 465 246 217 188 206 1,051
Oil related financing 1,066 984 135 143 118 125 112 100 100 100 47
Domestic 2,998 2,814 2,671 2,508 3,074 3,073 2,451 3,347 2,671 3,949 4,019
Bonds 884 1,154 697 534 840 800 179 1,175 499 1,777 1,847
Treasury certificates 2,113 1,660 1,974 1,974 2,234 2,272 2,272 2,172 2,172 2,172 2,172

Gross financing sources 10,060 10,674 13,976 12,555 7,651 7,285 4,721 4,495 4,280 6,274 7,223
External 7,885 8,626 9,671 9,180 5,015 5,968 4,341 3,341 3,841 3,841 4,341
Multilateral 1,644 3,310 7,652 7,502 5,015 4,588 3,341 1,841 1,841 1,341 1,341
World Bank 236 653 1,455 1,242 935 923 341 341 341 341 341
Inter-American Development Bank 497 733 762 709 1,291 1,382 500 400 400 400 400
CAF 542 517 787 868 850 475 650 600 600 600 600
Other 370 5 4 0 439 308 850 500 500 0 0
IMF 0 1,401 4,643 4,683 1,500 1,500 1,000 0 0 0 0
Bilateral 1,042 701 269 149 0 420 0 0 0 0 0
Private sector and other 4,504 4,170 1,749 1,529 0 20 1,000 1,500 2,000 2,500 3,000
Oil related financing 695 445 0 0 0 0 0 0 0 0 0
2021 SDR Allocation 0 0 0 0 940
Domestic 1,298 3,509 4,305 3,207 2,636 1,151 380 1,154 439 2,433 2,882
Bonds 769 1,041 697 497 652 791 500 500 500 500 500
Treasury certificates 1,660 1,974 2,234 2,272 2,234 2,272 2,172 2,172 2,172 2,172 2,172
Change in deposits (+= drawdown) -2,018 -609 203 -875 -250 -1,668 -2,042 -1,418 -2,184 -240 210
Privatization and BCE transfers 0 0 0 0 0 0 0 0 0 0 0
Convenios de liquidez 564 138 300 114 0 0 0 0 0 0 0
Other 323 1,140 200 528 0 -245 -250 -100 -50 0 0
Margin calls -174 172 172 0
Net Arrears acumulation and other financing 2/ -823 0 0 0 0 0 0 0 0 0
Other liabilities 500 500 0
Discrepancy 1,700 -1,461 0 168 0 83 0 0 0 0 0

Net financing 2,837 4,004 7,324 6,068 2,813 2,339 -85 -1,373 -1,690 -1,699 -1,337
External 3,659 3,731 5,690 5,202 3,251 4,178 1,986 820 542 -182 -199
Domestic -1,700 695 1,634 699 -438 -1,922 -2,071 -2,193 -2,232 -1,516 -1,137
Net Arrears acumulation and other financing 2/ -823 0 0 0 0 0 0 0 0 0 0
Discrepancy 1,700 -423 0 168 0 83 0 0 0 0 0

Public Sector Debt 3/ 52,799 55,580 62,629 60,458 65,692 63,687 65,894 66,040 66,583 65,124 63,577
External 36,831 40,555 46,439 44,420 49,690 47,658 49,645 50,465 51,006 50,824 50,625
o.w. oil related financing 1,255 716 581 574 463 449 337 237 137 37 -10
Domestic 15,968 15,025 16,190 16,038 16,001 16,029 16,250 15,575 15,576 14,300 12,953
Bonds 6,046 5,541 5,120 5,992 4,931 5,983 6,304 5,629 5,631 4,354 3,007
Treasury certificates 1,660 1,974 2,234 2,320 2,234 2,320 2,220 2,220 2,220 2,220 2,220
Other liabilities 4/ 8,261 7,510 8,836 7,726 8,836 7,726 7,726 7,726 7,726 7,726 7,726

(In percent of GDP)

Gross financing needs 9.4 9.9 14.1 12.7 7.3 7.0 4.3 3.9 3.6 5.1 5.6
Nonfinancial public sector deficit 2.1 2.7 7.8 6.1 2.8 2.3 -0.1 -1.2 -1.4 -1.4 -1.0
Amortization 7.3 7.1 7.1 6.6 4.9 4.7 4.4 5.1 5.0 6.5 6.7
Gross financing sources 9.4 9.9 14.1 12.7 7.3 7.0 4.3 3.9 3.6 5.1 5.6
External 7.3 8.0 10.3 9.3 5.1 5.7 3.9 2.9 3.2 3.1 3.4
Domestic 1.2 3.2 4.4 3.2 2.5 1.1 0.3 1.0 0.4 2.0 2.3
Other financing -0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Public sector debt 3/ 49.1 51.4 66.4 61.2 66.2 61.0 59.9 57.9 56.2 52.9 49.6
External 34.2 37.5 49.2 45.0 50.1 45.6 45.1 44.2 43.0 41.3 39.5
Domestic 14.8 13.9 17.2 16.2 16.1 15.3 14.8 13.7 13.1 11.6 10.1

Sources: Ministry of Finance; Central Bank of Ecuador; and Fund staff calculations and estimates.
1/ First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Quantitative Performance Criteria (December 21, 2020; CR
No. 20/325).
2/ Includes domestic floating debt and statistical discrepancy.
3/ Gross debt consolidated at the level of the NFPS. Includes the outstanding balance for advance oil sales, treasury certificates, central bank loans, other liabilities and the stock
of domestic floating debt. The public debt estimates are preliminary and subject to revisions in accordance with the IMF’s Public Sector Debt Statistics: Guide for Compilers and
Users (PSDSG).
4/ Other liabilities include: Floating debt from all sectors, convenios de liquidez, other oil related debt (ex SH oil contracts) and deposits and other obligations from BDE

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Table 4. Ecuador: Balance of Payments

Table 4. Ecuador: Balance of Payments
(in millions of US
(In millions dollars,
of U.S. dollars,unless otherwise
unless otherwise indicated)
indicated)
Est. Projections
2018 2019 2020 2020 2021 2021 2022 2023 2024 2025 2026
1st Rev. 1/ 1st Rev. 1/

Current account -1,333 -61 -563 2,469 969 1,786 1,906 2,222 2,318 2,628 2,602
Trade balance -226 1,025 2,024 3,331 1,807 1,415 1,485 1,582 1,464 1,666 1,930
Exports, f.o.b. 22,133 22,774 19,129 20,461 19,999 23,993 25,410 25,909 26,528 27,395 28,168
Oil 8,802 8,680 5,015 5,250 5,482 8,066 8,145 7,764 7,559 7,467 7,423
Non-oil 13,331 14,094 14,114 15,211 14,517 15,928 17,265 18,145 18,969 19,928 20,745
Imports, f.o.b. 22,359 21,749 17,105 17,131 18,193 22,579 23,926 24,326 25,063 25,729 26,238
Oil 4,341 4,149 2,907 2,647 2,985 4,491 4,476 4,197 4,023 3,932 3,892
Non-oil 18,018 17,600 14,198 14,484 15,208 18,088 19,450 20,129 21,041 21,797 22,345
Services -687 -797 -1,216 -986 -1,252 -1,532 -1,631 -1,291 -898 -524 -522
Credits 3,249 3,346 1,498 1,800 1,593 2,047 2,231 2,779 3,316 3,835 3,978
Debits 3,936 4,143 2,714 2,786 2,846 3,579 3,862 4,070 4,214 4,360 4,499
Primary income -2,829 -3,028 -3,425 -2,869 -1,750 -1,107 -1,154 -1,368 -1,659 -2,030 -2,425
Credits 236 195 274 86 177 193 239 330 445 597 624
Debits 3,065 3,223 3,699 2,955 1,927 1,300 1,393 1,698 2,104 2,627 3,048
Secondary income 2,409 2,739 2,054 2,993 2,165 3,010 3,206 3,298 3,411 3,517 3,618
Of which: workers' remittances, net 2,578 2,595 1,899 2,830 2,003 2,839 3,026 3,111 3,216 3,315 3,409

Capital account -193 70 70 108 62 99 104 110 114 118 123

Financial account -1,586 677 1,693 4,664 1,229 2,017 1,534 472 -34 779 1,326
Direct investment -1,388 -974 -595 -1,190 -664 -880 -1,200 -1,406 -1,466 -1,710 -1,767
Other public sector flows -3,659 -3,731 -1,690 -519 -1,751 -2,678 -986 -820 -542 182 199
Disbursements -7,885 -8,626 -5,671 -4,497 -3,515 -4,468 -3,341 -3,341 -3,841 -3,841 -4,341
Amortizations 4,225 4,895 3,980 3,978 1,763 1,790 2,355 2,521 3,299 4,023 4,540
Other private sector flows 3,462 5,382 3,979 6,373 3,644 5,575 3,720 2,697 1,974 2,307 2,894

Errors and omissions -207 -2 0 106 0 0 0 0 0 0 0

Overall balance -146 -670 -2,186 -1,981 -198 -133 477 1,860 2,466 1,968 1,399

Financing 146 670 2,185 2,087 198 133 -477 -1,860 -2,466 -1,968 -1,399
Change in GIR (increase, -) 2/ -171 -713 -2,278 -4,146 -1,165 -1,231 -1,477 -1,626 -1,915 -1,577 -1,169
IMF net credit and loans 0 -46 463 464 -136 -136 0 -160 -321 -160 0
Other external financing 3/ 317 26 0 1,726 0 0 0 0 0 0 0
IMF exceptional financing under the EFF 0 1,403 4,000 4,683 1,500 1,500 1,000 -74 -230 -230 -230

Memorandum items:
Current account balance (percent of GDP) -1.2 -0.1 -0.6 2.5 1.0 1.7 1.7 1.9 2.0 2.1 2.0
Oil balance (percent of GDP) 4.1 4.2 2.2 2.6 2.5 3.4 3.3 3.1 3.0 2.9 2.8
Exports 8.2 8.0 5.3 5.3 5.5 7.7 7.4 6.8 6.4 6.1 5.8
Imports 4.0 3.8 3.1 2.7 3.0 4.3 4.1 3.7 3.4 3.2 3.0
Non-oil balance (percent of GDP) -5.4 -4.2 -2.8 -0.1 -1.5 -1.7 -1.6 -1.2 -1.0 -0.7 -0.7
Goods export volume growth rate (percent) -0.1 8.0 -1.9 5.1 1.9 -1.6 5.3 4.0 2.6 3.0 2.9
Goods import volume growth rate (percent) 3.6 0.4 -17.7 -11.3 4.7 12.2 5.3 1.7 2.6 1.9 2.4
Goods terms of trade growth rate (percent) 1.3 -2.0 -11.1 -5.1 1.0 2.0 -0.1 -1.5 -0.2 -0.1 0.5
Oil price Ecuador mix (U.S. dollars per barrel) 61 55 35 36 37 60 59 55 52 50 49
External debt (percent of GDP) 43.2 47.9 59.4 54.9 58.5 52.3 50.3 48.2 46.2 43.2 40.1
Sources: Central Bank of Ecuador; and Fund staff calculations and estimates.
1/ First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Quantitative Performance Criteria (December 21, 2020; CR No.
20/325).
2/ Reflects the national definition of gross international reserves.
3/ Includes foreign arrears and net flows from oil funds held abroad and flows associated with debt default and restructuring.

44 INTERNATIONAL MONETARY FUND

 ECUADOR

Table 5. Ecuador: External Financing

Table 5. Ecuador: External Financing
(in millions of USof dollars,
(In millions U.S. dollars,unless otherwise
unless otherwise indicated)
indicated)
Est. Projections
2018 2019 2020 2020 2021 2021 2022 2023 2024 2025
1st Rev. 1/ 1st Rev. 1/

Gross external financing requirements 9,433 9,184 8,992 5,958 5,371 4,581 5,076 5,074 5,830 6,179
Current account financing need 1,333 61 563 -2,469 -969 -1,786 -1,906 -2,222 -2,318 -2,628
Public sector amortizations 4,225 4,895 3,980 3,978 1,763 1,790 2,355 2,521 3,299 4,023
Private sector amortizations 3,875 4,227 4,449 4,449 4,577 4,577 4,627 4,775 4,849 4,784

Identified External Financing 9,286 9,917 10,806 8,660 6,673 5,948 6,553 6,860 8,065 7,917
Multilateral 1,644 3,310 3,652 2,819 3,515 3,088 2,341 1,841 1,841 1,341
Bilateral 1,042 701 269 149 0 420 0 0 0 0
Oil related financing 695 445 0 0 0 0 0 0 0 0
Private sector 4,504 4,170 1,749 1,529 0 20 1,000 1,500 2,000 2,500
Direct investment 1,388 974 595 1,190 664 880 1,200 1,406 1,466 1,710
Portfolio investment Financing 83 -231 94 -385 187 -200 181 416 575 495
Other investment Financing 330 -924 376 -1,539 746 -799 726 1,662 2,300 1,982
Net Transfers 2/ -399 68 70 214 62 99 104 110 114 118
IMF exceptional financing 0 1,403 4,000 4,683 1,500 1,500 1,000 -74 -230 -230
2021 SDR Allocation 0 0 0 0 0 940 0 0 0 0

Gross external financing sources 9,604 9,897 11,269 10,850 6,537 5,812 6,553 6,700 7,745 7,756
Identified External Financing 9,286 9,917 10,806 8,660 6,673 5,948 6,553 6,860 8,065 7,917
Exceptional financing 317 26 0 1,726 0 0 0 0 0 0
o/w IADB 0 0 0 0 0 0 0 0 0
o/w World Bank 0 0 0 0 0 0 0 0 0
Past IMF Net Programs 0 -46 463 464 -136 -136 0 -160 -321 -160
IMF Net EFF Financing 0 1,403 4,000 4,683 1,500 1,500 1,000 0 0 0
IMF Net RFI Financing 0 -47 -136
0 -136 -136
0 -136 0 0 0 0
0 0
Net international reserves (-, increase) 2/ -171 644 -2,459 361 -1,302 -1,367 -1,477 -1,626 -1,915 -1,577

Gross international reserves (-, increase) 3/ -171 -713 -2,278 -4,146 -1,165 -1,231 -1,477 -1,626 -1,915 -1,577
Net international reserves, prog. definition (-, increase) 4/ -397 7 5,373 4,259 562 -922 -1,226 -2,412 -3,137 -1,834

Sources: Central Bank of Ecuador and Fund staff calculations and estimates.
1/ First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Quantitative Performance Criteria (December 21, 2020; CR No.
2/ Net transfers is defined as capital account flows plus unidentified flows (errors and omissions).
3/ Reflects the national definition of gross international reserves.
4/ Program net international reserves is equal to gross international reserves less outstanding credit to the IMF (incl. budget support to the Treasury), short-term foreign liabilities of
the BCE, deposits of other depository institutions and other financial institutions (excl. BIESS) at the central bank, and short-term liabilities of the central government.

INTERNATIONAL MONETARY FUND 45

ECUADOR

Table 6. Ecuador: Monetary and Financial Statistics

(in millions of US dollars, unless otherwise indicated)

46 INTERNATIONAL MONETARY FUND

 ECUADOR

TableTable
7. Ecuador: Financial Soundness Indicators 1/
7. Ecuador: Financial Soundness Indicators1
Q2
2015 2016 2017 2018 2019 2020 2021
(In percent, unless otherwise indicated; end-of-period values)
Capital Adequacy
Regulatory capital to risk-weighted assets (CAR) 14.4 13.9 13.7 13.4 13.5 14.5 14.5

Asset Quality and Distribution

Nonperforming loans to gross loans 3.7 3.5 3.0 2.6 2.7 2.6 2.8
Provisions to nonperforming loans 187.1 189.5 234.4 247.7 225.6 293.1 258.4
Gross loans to assets 86.2 80.0 84.4 86.0 87.8 82.4 84.8

Earnings and Profitability

Return on average assets (ROA) 0.9 0.6 1.0 1.4 1.4 0.5 0.7
Return on average equity (ROE) 9.0 6.7 10.4 13.6 13.9 4.8 6.9
Interest margin to assets 0.8 0.4 0.9 1.6 1.4 0.1 0.3
Noninterest expenses to spread 87.4 92.6 85.0 76.9 78.5 98.3 93.9

Liquidity
Liquid assets to short-term liabilities 29.6 33.9 29.4 27.9 26.0 34.1 28.6
Deposit to loan ratio 126.1 137.0 121.9 111.8 109.5 123.7 121.1
Source: Superintendency of Banks.
1/ Values refer to private banks and Banco del Pacifico.

INTERNATIONAL MONETARY FUND 47

 Table 8. Ecuador: Indicators of Fund Credit 2020–30
Table 8. Ecuador: Indicators of Fund Credit 2020-30

ECUADOR
(Units as indicated)
48

Projections
INTERNATIONAL MONETARY FUND

2020 2020 2021 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
1st Rev. 1/ 1st Rev. 1/

Existing and prospective Fund arrangements (millions of SDRs)

Disbursements 2/ 3,310 3,310 1,065 1,065 710 0 0 0 0 0 0 0 0
Stock of existing and prospective Fund credit 4,419 4,419 5,386 5,386 6,096 5,925 5,521 4,762 3,925 2,987 2,049 1,166 396
Obligations 7 0 215 34 145 332 566 934 983 1049 1011 919 780
Principal 0 0 98 0 0 172 403 759 837 938 938 884 769
Charges/interest 3/ 7 0 117 34 145 160 163 175 146 111 73 35 11

Obligations, relative to key variables (percent)

Quota 1.0 0.0 30.8 4.8 20.8 47.6 81.2 133.9 140.9 150.3 144.9 131.7 111.8
Gross domestic product 0.0 0.0 0.3 0.0 0.2 0.4 0.7 1.0 1.1 1.1 1.0 0.9 0.7
Gross international reserves 4/ 0.2 0.0 4.3 0.5 2.0 4.0 5.8 8.6 8.4 8.4 7.7 7.0 6.4
Exports of goods and services 0.0 0.0 1.4 0.2 0.7 1.6 2.6 4.1 4.2 4.4 4.1 3.6 2.9
Revenues of the NFPS 0.0 0.0 0.9 0.1 0.5 1.2 2.0 3.2 3.3 3.3 3.1 2.7 2.2
External debt service 0.1 0.0 3.1 0.5 1.9 4.1 6.4 9.8 9.8 10.4 10.1 21.4 20.4

Fund credit outstanding, relative to key variables (percent)

Quota 633.4 633.4 772.0 772.0 873.8 849.2 791.4 682.5 562.5 428.1 293.7 167.1 56.8
Gross domestic product 6.4 6.1 7.4 7.1 7.6 7.1 6.4 5.3 4.2 3.1 2.0 1.1 0.4
Gross international reserves 106.7 83.9 108.1 87.6 84.4 70.6 56.5 43.7 33.5 24.0 15.5 8.9 3.2
External debt 10.8 11.1 12.7 13.5 15.1 14.8 13.9 12.3 10.5 8.3 6.0 3.7 1.4

Memorandum items:
Exports of goods and services (US$m) 20,627 22,261 21,593 26,040 27,641 28,688 29,844 31,230 32,146 33,113 34,238 35,404 36,642
External debt (US$m) 55,989 54,290 58,012 54,674 55,291 55,014 54,723 53,258 51,392 49,510 47,459 43,995 39,190
Quota (SDRm) 697.7 697.7 697.7 697.7 697.7 697.7 697.7 697.7 697.7 697.7 697.7 697.7 697.7
Gross international reserves (US$m) 5,660 7,196 6,826 8,427 9,903 11,529 13,443 15,021 16,190 17,196 18,211 18,064 16,897
Gross international reserves (% ARA metric) 28 35 33 39 45 51 59 66 71 75 79 79 76
NIR, program definition (US$m) -8,276 -7,161 -8,838 -6,239 -5,013 -2,601 535 2,369 3,574 4,600 5,623 6,625 5,264
Nominal GDP (US$m) 94,297 98,808 99,197 104,483 109,975 114,076 118,502 123,202 128,089 133,167 138,449 143,940 149,650
SDRs per U.S. dollar 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Sources: Central Bank of Ecuador and Fund staff estimates and projections.
1/ First Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Quantitative Performance Criteria (December 21, 2020; CR No. 20/325).
2/ An RFI disbursement of 67% of quota took place in May 2020.
3/ Using the GRA rate of charge of 1.05 as of September 2, 2021, for projected charges/interest
4/ GIR excludes non-liquid and encumbered assets.
 Table 9a. Ecuador: Proposed Quantitative Performance Criteria and Indicative Targets for 2021
Table 9a. Ecuador—Proposed Quantitative Performance Criteria and Indicative Targets for 2021
(in millions (In
if USD
million dollars,
USD, unlessunless
specifiedotherwise
otherwise) indicated)
End- End-Dec.
End-Dec. 2020 End-Apr. 2021 Sep. 2021

Program Adj. 3/ Actual Status Program Adj. 3/ Actual Status Program Program
Quantitative performance criteria
1. Overall balance of the budgetary central government and CFDD (floor)1/ -4,005 -3,893 -3,655 Met -241 -305 -184 Met -2,301 -4,188
2. Accumulation of NFPS deposits at the central bank (floor) 1/ 300 487 1,293 Met -47 22 -55 Not Met 899 1,527
3. Non-accumulation of external payments arrears (continuous PC ) 0 0 0 Met 0 0 0 Met 0 0
4. (No new) Net credit to government from the central bank (continuous PC ) 0 0 0 Met 0 0 0 Met 0 0
Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) 1/ -5,467 -5,355 -4,072 Met -572 -636 -90 Met -3,368 -6,030
6. Overall balance of the NFPS (floor) 1/ -5,656 -5,544 -4,334 Met -273 -337 842 Met -513 -2,422
7. Change in the stock of NIR - program definition (floor) 1/ -4,228 -4,041 -2,357 Met -579 -110 542 Met 38 717
8. Coverage of the cash transfer programs for lower income families - number of families (floor) 2/ 226,000 226,000 271,668 Met 384,600 384,600 443,619 Met 453,700 514,000
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/ Cumulative change from January 1, 2021.
2/ Cumulative change from July 1, 2020.
3/ Adjusted for oil prices (and for disbursements from multilateral institutions and China for NFPS deposits) as per the TMU.

Table 9b. Ecuador:

Table 9b. Ecuador—Proposed Proposed
Quantitative Indicative
Performance Targets
Criteria for 2022Targets for 2022
and Indicative
(in millions if USDUSD,
(In million dollars, unless
unless otherwise
specified indicated)
otherwise)
End-Apr. End-Aug.
2022 2022

IT IT

Quantitative performance criteria

INTERNATIONAL MONETARY FUND

1. Overall balance of the NFPS (floor)1/ 713 1,117

2. Accumulation of NFPS deposits at the central bank (floor) 1/ 678 1,135
3. Non-accumulation of external payments arrears (continuous PC ) 0 0
4. (No new) Net credit to government from the central bank (continuous PC ) 0 0

Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) -76 -991
6. Change in the stock of NIR - program definition (floor) 1/ 432 693
7. Coverage of cash transfer programs for families in the bottom three income deciles - percent of families in each province (floor) 60.0 65.0
8. Coverage of cash transfer programs for families in the first income decile - percent of families in the first income decile (floor) 50.0 57.5

ECUADOR
9. Coverage of cash transfer programs for families in the first income decile - number of families in the first income decile (floor) 2/ 625,600 Ⲻ
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/ Cumulative change from January 1, 2022.
2/ Cumulative change from July 1, 2020.
49
 Table 10. Ecuador: Original Access and Phasing Under the Extended Fund Facility (EFF) 1/

ECUADOR
Table 10. Ecuador: Original Access and Phasing Under the Extended Fund Facility (EFF) 1
50

Percent of quota 1/
Review Availability Date 2/ Action SDR million US$ million 3/ Disbursement Cumulative
INTERNATIONAL MONETARY FUND

September 30, 2020 Board approval of EFF 1420.0 2000.0 203.5 203.5
First Review December 15, 2020 Observance of continuous and end-September 2020 performance criteria, completion of first review 1420.0 2000.0 203.5 407.1
Second Review April 15, 2021 Observance of continuous and end-December 2020 performance criteria, completion of second review 284.0 400.0 40.7 447.8
Third Review August 15, 2021 Observance of continuous and end-April 2021 performance criteria, completion of third review 284.0 400.0 40.7 488.5
Fourth Review December 15, 2021 Observance of continuous and end-September 2021 performance criteria, completion of fourth review 497.0 700.0 71.2 559.7
Fifth Review April 15, 2022 Observance of continuous and end-December 2021 performance criteria, completion of fifth review 213.0 300.0 30.5 590.2
Sixth Review August 15, 2022 Observance of continuous and end-April 2022 performance criteria, completion of sixth review 213.0 300.0 30.5 620.8
Seventh Review December 1, 2022 Observance of continuous and end-August 2022 performance criteria, completion of seventh review 284.0 400.0 40.7 661.5

Total 4615.0 6500.0 661.5

Source: IMF staff estimates
1/ Ecuador's quota is SDR 697.7 million.
2/ The Executive Board completed the First Review on December 21, 2020
3/ Based on the program exchange rate.
 Table 11. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs)
Reform area Structural Conditionality Objectives Due date Status

Prior Actions

Transparency Pursuant to the regulation issued by SERCOP in September Strengthen Prior action
and AML/CFT 2020, make procurement contracts exceeding US$962,410 anticorruption and
awarded since September 2020, including the legal ownership AML/CFT and protect
and, when available, beneficial ownership information of legal the public purse
entities participating in public procurement, available to the
public in the procurement website, in a directly and freely
accessible and user-friendly manner.

Transparency Consolidate COVID-19 audit work in a dedicated Improve expenditure Prior action
webpage within the Comptroller General Office website. The control, including
webpage will provide easy access to all the COVID related
published independent audit reports of COVID-19-related spending, and
spending with the corresponding links to the reports. The governance
dedicated COVID-19 audit webpage should also inform the
public of other COVID-19 related audit reports that cannot be
published on the webpage at this moment due to
confidentiality required by law arising from ongoing
investigations and legal proceedings. The webpage should
INTERNATIONAL MONETARY FUND

provide a summary of the findings of such reports based on

information that can be disclosed.

Cash Prepare and present to IMF staff a central government Improve institutional Prior action
management financial plan for the remaining of year 2021 approved by the capacity and identify
Financial Committee. The financial plan will include the early warning signs of
detailed monthly cash flow, the arrears as of July 2021 verified impending liquidity
by MEF following the COPLAFIP definition by sector, 2021 constraints
clearance estimate and monthly accumulation data, a
document with the potential risks associated to the financial

ECUADOR
plan, potential mitigating measures, and an explanation of the
deviations of the 2021 Financial Plan delivered to IMF staff in
51

December 2020.
 ECUADOR
Table 11. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)
52

Structural Benchmarks
INTERNATIONAL MONETARY FUND

Fiscal Adopt a regulation, in consultation with Fund staff, to Strengthen the public End-Nov. 2020 Implemented with delay
framework implement the July 2020 amendments to COPLAFIP, among financial management
others, with regards to public debt, the MTFF, budget framework and fiscal
preparation and expenditure ceilings, preparation and discipline, and increase
publication of a fiscal strategy document, budget execution, fiscal transparency
cash management and arrears, budget modification
procedures, fiscal risk management framework, corrective
measures regime, and the fiscal rules framework.
BCE The JPRF will approve an internal audit charter prepared by Improve the BCE’s End-Nov. 2020 Met
the BCE Audit Committee aligned with international standards audit mechanisms
to provide for: (i) the function’s mandate and independence;
(ii) coverage of all BCE’s operations, (iii) adoption of a risk-
based approach, (iv) an internal and external quality
assessment program, and (v) regular reporting to an
independent oversight body.
Transparency Enhance the existing online publication of asset declarations Strengthen End-Nov. 2020 Partially implemented.
and AML/CFT ensuring the easy, searchable, and timely access to anticorruption and Proposed new Structural
declarations of high-level public officials and/or politically AML/CFT and protect benchmark to advance the
exposed persons (PEPs), and publishing additional information the public purse reform
online, including itemized information on incomes, assets and
liabilities, based on regulations adopted by the General
Comptroller, at the request of the government.

Cash Deliver to IMF staff a PGE financial plan for the year 2021 Improve institutional Dec. 16, 2020 Met
Management approved by the Financial Committee. capacity and identify
early warning signs of
impending liquidity
constraints

Transparency Enactment of the anticorruption legislation, approved by the Strengthen End-Dec. 2020 Met
and National Assembly, including measures to ensure that acts of anticorruption and
Governance corruption are criminalized in line with Articles 15 to 30 of the protect public finances
United Nations Convention Against Corruption.
 Table 11. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)
Organic Enactment of amendments to the Central Bank’s legal Strengthen the End-Jan. 2021 Not met. Implemented with
Monetary and framework, elaborated in consultation with Fund staff as autonomy and delay in April
Financial Code committed to under the 2019 EFF, in line with the substantive governance framework
(COMYF) elements and constitutional process described in MEFP ¶16. of the BCE
reform of the
Central Bank
framework

Debt Publish a Medium-Term Debt Management Strategy (MTDS), Facilitate domestic End-Feb. 2021 Met
management prepared with the support of IMF TA, which assesses the cost debt market
and risk trade-offs of the different sources of public funding, development, promote
and establishes a policy agenda. medium-term debt
management, and
increase transparency
of public debt policies

Domestic Share with IMF staff an updated arrears’ clearance strategy Strengthen the End-Apr. 2021 Not met. Converted to new
arrears with the updated information on the stock of arrears as of end monitoring and reduce benchmark
2020 based on quarterly flows for central government and accumulation of
selected relevant entities of the NFPS in line with IMF technical payment arrears
assistance recommendations.

Fiscal Statistics Correct and publish the historical NFPS data, both above- and Improve quality of End-May 2021 Not met. Implemented with
below-the-line, back to 2012. fiscal statistics delay in August
INTERNATIONAL MONETARY FUND

Fiscal Statistics Prepare a compilation guide, in consultation with IMF TA, and Improve quality of End-May 2021 Met
disseminate it to data providers across the NFPS through a fiscal statistics
workshop.

Transparency Undertake an independent audit of COVID-19-related Improve expenditure End-Jun. 2021 Not met. Reset as PA
spending by the Office of the Comptroller General by mid- control, including
2021 and publish the results on a government website. COVID related

ECUADOR
spending, and
governance
53
 Table 11. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)

ECUADOR
54

Tax reform Enactment of a tax reform, elaborated in consultation with Improve the efficiency End-Sep. 2021 New deadline of end-Oct.
Fund staff, aimed at generating revenue and improving the of the tax system 2021
INTERNATIONAL MONETARY FUND

overall efficiency of the tax system.

Transparency Establish and start operating the National Control Subsystem Strengthen End-Oct. 2021 Newly proposed
(SNC) to fight corruption in procurement. The SNC will anticorruption and
facilitate coordination amongst public entities with control AML/CFT and protect
competencies over the public procurement system, via the the public purse
interoperability of their databases.

Transparency Pursuant to the regulation issued by SERCOP in September Strengthen End-Nov. 2021 Newly proposed
2020, make all procurement contracts awarded since anticorruption and
September 2020, including the legal ownership and, when AML/CFT and protect
available, beneficial ownership information of legal entities the public purse
participating in public procurement, available to the public in
the procurement website, in a directly and freely accessible
and user-friendly manner.

Transparency SERCOP, in coordination with the Ministry of Economy and Improve expenditure End-Nov. 2021 Newly proposed
Finance and the National Secretary of Planning, will issue control
procurement guidelines for all sectors of government to
increase reliance on catalog purchases, improve procurement
processes, and enforce bulk and standardized purchases for
the central administration. Enforcement will be phased in from
the end of 2021 (Central Government, IESS) until the end of
first quarter 2022 (subnational governments, SOEs).

SOE Initiate independent audits of the 2019 and 2020 financial Strengthen SOEs End-Nov. 2021 Newly proposed
statements of Petroecuador and Petroamazonas by agreeing
on the terms of reference and timeline for completing the
audits.

Financial sector Initiate independent third-party asset quality reviews of the Improve fiscal End-Nov. 2021 Newly proposed
2019 and 2020 balance sheets of all public banks by selecting transparency
the third-party firm and agreeing on a terms of reference.
 Table 11. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)
Domestic MEF will publish a methodology to estimate the arrears’ stock Strengthen the End-Nov. 2021 Newly proposed
arrears and the templates for reporting on arrears to be used by monitoring and reduce
public sector entities. accumulation of
payment arrears

Fiscal Establish the National Fiscal Coordination Committee (NFCC) Strengthen the public End-Nov. 2021 Newly proposed
framework as set out in COPLAFIP financial management
framework and fiscal
discipline

Social Complete the upgrade of the social registry and expand the Strengthen the social Dec. 16, 2021 New deadline of mid-Apr.
assistance coverage of the social assistance program to at least 80 safety net 2022
percent of families in the bottom three deciles of the income
distribution.

Transparency Enact legislation to strengthen the framework to prevent and Strengthen the End-Jan. 2022 New deadline of end-Aug.
and AML/CFT manage conflicts of interest in the public sector, broadening framework of conflict 2022
the existing asset declaration system to include incomes and of interest and illicit
interests of high-level public officials and/or politically enrichment
exposed persons (PEPs), and ensuring the online publication
of this information on incomes and interests for high-level
public officials and/or politically exposed persons (PEPs), in
line with the UNCAC (articles 7 and 8) and international good
practices.
INTERNATIONAL MONETARY FUND

AML/CFT Enact new AML/CFT legislation to strengthen the AML/CFT Strengthen End-Mar. 2022 Newly proposed
framework in line with the FATF standards. anticorruption and
AML/CFT

SOE Share with IMF staff the completed independent audits of the Strengthen SOEs End-Apr. 2022 Newly proposed
2019 and 2020 individual financial statements of Petroecuador
and Petroamazonas

ECUADOR
Financial sector Share with IMF staff the completed independent third-party Improve fiscal End-June 2022 Newly proposed
asset quality reviews of the 2019 and 2020 balance sheets of transparency
all public banks.
55
 Table 11. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (concluded)

ECUADOR
56

Transparency Share with IMF staff the results of the independent audits by To fight against tax End-Sep. 2022 Newly proposed
INTERNATIONAL MONETARY FUND

and the Office of the Comptroller General on tax expenditures of evasion, increase
Governance the largest 100 public procurement contracts awarded over revenues, enforce the
2020- 2021. new tax code

SOE Share with IMF staff the completed independent audits of the End-Oct. 2022 Newly proposed
2020 financial statements of the merged entity Petroecuador
and Petroamazonas (joint entity audits, to accommodate IFRS
requirements)

Social Expand the coverage of the social assistance program to no Strengthen the social End-Dec. 2022 Newly proposed
assistance less than 70 percent coverage of the bottom three income safety net
deciles by province and no less than 65 percent of the first
income decile nationwide.
 ECUADOR

Annex I. Debt Sustainability Analysis

Under the baseline projection, Ecuador’s public debt remains sustainable with high
probability, in line with the assessment at program approval and the First Review, owing to
the successful debt restructuring operation and the envisaged fiscal consolidation. Debt is
expected to decline gradually from its end-2020 peak of 61.2 percent of GDP to 49.6
percent of GDP by end-2026. At 52.8 percent of GDP in 2025 and 39.6 percent in 2030
under the baseline, debt would be in compliance with the COPLAFIP targets. Gross
financing needs are also estimated to decline gradually from the 2020 peak over the next
decade, reaching 5.6 percent of GDP in 2026 and 4.7 percent in 2030. The debt profile is
vulnerable to a growth shock and to a contingent liability shock, but its trajectory is
expected to be below the critical threshold by the end of the forecasting period.

1. Definition and debt profile. Public-sector debt includes the consolidated

obligations of the non-financial public sector (central government and non-financial sector
state-owned enterprises), as reported by the authorities, as well as liabilities under oil
related financing, treasury certificates, central bank lending to the government, and other
liabilities. Under this measure, public debt almost tripled between 2012 and 2019 (from 17.5
to 51.5 percent of GDP). Debt in 2020 reached 63 percent of GDP as a result of the collapse
in economic activity, which lowered nominal GDP, and the subsequent borrowing required
to finance the budget.

2. Macroeconomic and Fiscal Assumptions. Real growth in 2021 is projected at a 2.8

percent, while inflation (GDP deflator) is projected at 1.5 percent. Over the medium term,
growth is forecasted to remain around 2.5–3 percent, in line with the economy potential,
while inflation is expected to hover around 1.1 percent. The fiscal position is expected to
improve gradually over the medium term and reach a primary surplus of 3 percent of GDP
by 2026. This is conditional to a timely implementation of the measures envisioned under
the program. On the financing side, the framework envisaged support from the IFIs of
about $4.6 billion in 2021 and about $3.3 billion in 2022, while market access is expected to
resume from 2022 with an annual access between $1 and $3 billion.

3. Baseline Scenario. The authorities are committed to implement policies that

reduce the debt-to-GDP ratio, strengthen the fiscal position, and build buffers. In the
baseline scenario, public debt is forecasted to decline from 61.2 percent at the end of 2020
to 49.6 percent of GDP at the end of 2026. The ratio at the end of 2025 is expected to be
52.8 percent of GDP, well below the level envisaged in the COPLAFYP law, which targets a
ratio of 57 percent of GDP. Maintaining a small nonoil primary surplus on 0.4 percent of
GDP beyond 2026 would keep debt on a declining trend to 39.6 percent of GDP by 2030,
ahead of target. Public debt would therefore remain below the critical risk threshold of 70
percent of GDP in the forecasting period. Gross financing needs are also expected to
decline significantly over the medium term and remain well below the critical threshold of
15 percent of GDP, declining from 12.7 percent of GDP in 2020 to 5.1 percent in 2026, and
further to 4.7 in 2030.

4. Stress Tests. Despite a significant reduction of the level of debt and gross financing
needs in the baseline scenario, the debt path is vulnerable to a growth shock, which brings

INTERNATIONAL MONETARY FUND 57

ECUADOR

the debt-to-GDP ratio to 72 percent of GDP in 2023 before declining steadily and reaching
64.8 percent of GDP in 2026. A contingent liability shock, which increases expenditures by
about $6.5 billion in 2022, brings the debt-to-GDP ratio to 72.8 percent of GDP before
reaching 65.1 percent of GDP in 2026. The size of the shock is standard and equivalent to
10 percent of banking sector assets, which is more than covers the size of pending lawsuits
and the contingent liabilities in public institutions. Despite falling below the built-in critical
threshold of 70 percent of GDP by the end of the forecasting period, debt would breach
the COPLAFIP targets. While this would still fall below the critical threshold of 70 percent of
GDP, it would breach the COPLAFIP target of 57 percent of GDP. Under current
assumptions, public debt does not appear vulnerable to a primary balance shock, a real
interest sock or a REER shock, meaning that under these shocks the critical threshold of 70
percent of GDP is never crossed. Regarding gross financing, the critical threshold of 15
percent of GDP is not breached in any of the shocks considered.

5. Risks and Vulnerabilities. The public DSA risk assessment identifies the ratio of
public debt held by non-residents as a high risk for Ecuador. While spreads have come
down in recent months, they still reflect the fact that Ecuador went through a debt
restructuring, albeit a market-friendly and successful operation, only recently. At about 73
percent of the total debt, non-residents’ holding of Ecuador’s public debt is high (and may
be higher given that non-resident holdings of domestic debt are not available due to data
limitations on secondary market transactions). However, this vulnerability is mitigated by
the fact that about half of external debt is owed to official creditors, with long maturities
and relatively low interest rates. Thanks to the 2020 debt restructuring operation, near-term
external debt rollover risks are limited.

6. Debt Transparency. The authorities remain committed to debt transparency,

including on the debt holder profile in line with new requirements under the Debt Limits
Policy (DLP) (Table 1). The authorities have agreed to publication of all required elements
on Debt Holder Profile. They are planning to request IMF technical assistance to further
improve debt data.

58 INTERNATIONAL MONETARY FUND

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Figure 1. Ecuador: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario
(in percent of GDP, unless otherwise indicated)
Debt, Economic and Market Indicators 1/
Actual Projections As of August 31, 2021
2/
2010-2018 2019 2020 2021 2022 2023 2024 2025 2026 2030 Sovereign Spreads
Nominal gross public debt 30.0 51.4 61.2 61.0 59.9 57.9 56.2 52.8 49.6 39.6 EMBIG (bp) 3/ 793

Public gross financing needs 9.6 9.9 12.7 7.0 4.3 4.0 3.6 5.1 5.6 4.7 5Y CDS (bp) n.a
Net public debt 25.0 44.0 52.2 50.9 48.5 45.6 42.5 39.5 36.9

Real GDP growth (in percent) 3.1 0.0 -7.8 2.8 3.5 2.5 2.6 2.8 2.8 2.8 Ratings Foreign Local
Inflation (GDP deflator, in percent) 3.0 0.5 -3.3 1.5 1.9 1.1 1.1 1.1 1.1 1.1 Moody's Caa3 Caa3
Nominal GDP growth (in percent) 6.3 0.5 -8.6 5.7 5.3 3.7 3.9 4.0 4.0 4.0 S&Ps B- B-
4/
Effective interest rate (in percent) 5.0 5.5 5.0 2.1 2.4 2.6 2.9 3.4 4.0 5.4 Fitch B- B-

Contribution to Changes in Public Debt

Actual Projections
cumulative
2010-2018 2019 2020 2021 2022 2023 2024 2025 2026 2030
2021-26 debt-stabilizing
Change in gross public sector debt 3.4 2.3 9.8 -0.2 -1.0 -2.0 -1.7 -3.3 -3.2 -3.0 -11.6 primary
9/
Identified debt-creating flows 2.5 3.1 13.3 1.4 -1.4 -2.1 -1.6 -2.8 -2.7 -3.1 -9.2 balance
Primary deficit 2.4 0.0 3.3 1.1 -1.4 -2.7 -3.1 -3.2 -3.1 -3.0 -12.4 0.4
Primary (noninterest) revenue and grants 35.7 33.7 29.8 33.2 33.8 33.8 33.3 32.8 32.5 32.3 199.4
Primary (noninterest) expenditure 38.1 33.7 33.1 34.3 32.4 31.1 30.2 29.6 29.4 29.3 187.0
Automatic debt dynamics 5/ 0.1 2.5 9.1 -1.3 -1.8 -0.6 -0.4 -0.3 0.0 0.6 -4.4
Interest rate/growth differential 6/ 0.1 2.5 9.1 -1.3 -1.8 -0.6 -0.4 -0.3 0.0 0.6 -4.4
Of which: real interest rate 0.6 2.5 4.7 0.3 0.2 0.8 1.0 1.2 1.4 1.8 5.1
Of which: real GDP growth -0.6 0.0 4.5 -1.6 -2.0 -1.5 -1.4 -1.5 -1.4 -1.1 -9.5
Exchange rate depreciation 7/ 0.0 0.0 0.0 … … … … … … … …
Other identified debt-creating flows 0.0 0.6 0.9 1.6 1.9 1.2 1.8 0.7 0.3 -0.8 7.6
Deposits drawdown and privatization
receipts (negative sign) 0.0 0.6 0.9 1.6 1.9 1.2 1.8 0.2 -0.2 -0.8 6.6
Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
8/
Residual, including asset changes 0.9 -0.7 -3.6 -1.6 0.4 0.0 -0.1 -0.6 -0.5 0.1 -2.3

15 15
Debt-Creating Flows projection
10
(in percent of GDP)
10
5

0
5
-5

-10
0
-15

-20
-5
-25

-10 -30
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 cumulative
Primary deficit Real GDP growth Real interest rate Exchange rate depreciation

Other debt-creating flows Residual Change in gross public sector debt

Source: IMF staff calculations.

1/ Public sector is defined as non-financial public sector.
2/ Based on available data.
3/ Long-term bond spread over U.S. bonds.
4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;
a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.
7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).
8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period. It also includes the issuance of domestic debt for the asset
swap operation with the central bank.
9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

INTERNATIONAL MONETARY FUND 59

 ECUADOR

Figure 2.Figure 2. Ecuador:

Ecuador: PublicPublic
DSA DSA - Composition of
– Composition ofPublic
PublicDebt and and
Debt Alternative Scenarios
Alternative Scenarios
Composition of Public Debt
By Maturity By Currency
(in percent of GDP) (in percent of GDP)
70 70
Medium and long-term Local currency-denominated
60 Short-term 60 Foreign currency-denominated

50 50

40 40

30 30
projection
20 projection 20

10 10

0 0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2010 2012 2014 2016 2018 2020 2022 2024 2026

Alternative Scenarios
Baseline Historical Constant Primary Balance

Gross Nominal Public Debt Public Gross Financing Needs

(in percent of GDP) (in percent of GDP)
90 20
80 18

70 16
14
60
12
50
Net debt (in
10
40 percent of GDP)
8
30
6
20
4
10 2
projection projection
0 0
2019 2020 2021 2022 2023 2024 2025 2026 2019 2020 2021 2022 2023 2024 2025 2026

Underlying Assumptions
(in percent)

Baseline Scenario 2021 2022 2023 2024 2025 2026 Historical Scenario 2021 2022 2023 2024 2025 2026
Real GDP growth 2.8 3.5 2.5 2.6 2.8 2.8 Real GDP growth 2.8 1.7 1.7 1.7 1.7 1.7
Inflation 1.5 1.9 1.1 1.1 1.1 1.1 Inflation 1.5 1.9 1.1 1.1 1.1 1.1
Primary Balance -1.1 1.4 2.7 3.1 3.2 3.1 Primary Balance -1.1 -2.4 -2.4 -2.4 -2.4 -2.4
Effective interest rate 2.1 2.4 2.6 2.9 3.4 4.0 Effective interest rate 2.1 2.4 3.0 3.8 4.6 5.6
Constant Primary Balance Scenario
Real GDP growth 2.8 3.5 2.5 2.6 2.8 2.8
Inflation 1.5 1.9 1.1 1.1 1.1 1.1
Primary Balance -1.1 -1.1 -1.1 -1.1 -1.1 -1.1
Effective interest rate 2.1 2.4 2.6 3.1 3.8 4.5

Source: IMF staff calculations.

60 INTERNATIONAL MONETARY FUND

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FigureFigure
3. Ecuador: Public
3. Ecuador: PublicDSA
DSA–- Realism
Realism ofof Baseline
Baseline Assumptions
Assumptions
Forecast Track Record, versus all countries
Real GDP Growth Primary Balance Inflation (Deflator)
(in percent, actual-projection) (in percent of GDP, actual-projection) (in percent, actual-projection)
Ecuador median forecast error, 2011-2019: 0.75 Ecuador median forecast error, 2011-2019: -2.26 Ecuador median forecast error, 2011-2019: -0.56
Has a percentile rank of: 90% Has a percentile rank of: 7% Has a percentile rank of: 37%
8 4 6
pessimistic

3 5
6
2 4
4 1 3
0 2
2 -1 1
0 -2 0
Distribution of forecast Distribution of forecast Distribution of forecast
optimistic

-3 -1
errors: 1/ errors: 1/ errors: 1/
-2 -4 -2
Interquartile range (25-75) Distribution of forecast errors: Distribution of forecast errors:
-5 -3
-4 Median Median Median
-6 -4
Ecuador forecast error Ecuador forecast error Ecuador forecast error
-6 -7 -5
2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019
Year 2/ Year 2/ Year 2/

Assessing the Realism of Projected Fiscal Adjustment Boom-Bust Analysis 3/

3-Year Adjustment in Cyclically-Adjusted 3-Year Average Level of Cyclically-Adjusted Real GDP growth
Primary Balance (CAPB) Primary Balance (CAPB) (in percent)
(Percent of GDP) (Percent of GDP) Ecuador
14 12 8
Distribution 4/ 3-year CAPB adjustment Distribution 4/ 3-year average CAPB level
12 Ecuador greater than 3 percent of Ecuador greater than 3.5 percent of 6
10
has a percentile GDP in approx. top quartile has a percentile GDP in approx. top quartile
10 rank of 12% rank of 31% 4
8
8 2 Not applicable for Ecuador
6
6 0
4
4 -2
2 2
-4
0 0
-6
More

More
Less
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8

Less
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5

Source : IMF Staff calcuulations.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.
2/ Projections made in the spring WEO vintage of the preceding year.
3/ Not applicable for Ecuador, as it meets neither the positive output gap criterion nor the private credit growth criterion.
4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

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 ECUADOR

Figure 4. Ecuador: Public DSA - Stress Tests

Figure 4. Ecuador: Public DSA – Stress Tests
Macro-Fiscal Stress Tests

Baseline Primary Balance Shock Real Interest Rate Shock

Real GDP Growth Shock Real Exchange Rate Shock

Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs
(in percent of GDP) (in percent of Revenue) (in percent of GDP)
80 250 12
70
200 10
60
8
50 150
40 6
30 100
4
20
50 2
10

0 0 0
2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026

Additional Stress Tests

Baseline Combined Macro-Fiscal Shock Contingent Liability Shock
Oil Shock

Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs
(in percent of GDP) (in percent of Revenue) (in percent of GDP)
80 300 14
70 12
250
60
10
200
50
8
40 150
6
30
100
4
20
50 2
10

0 0 0
2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026

Underlying Assumptions
(in percent)

Primary Balance Shock 2021 2022 2023 2024 2025 2026 Real GDP Growth Shock 2021 2022 2023 2024 2025 2026
Real GDP growth 2.8 3.5 2.5 2.6 2.8 2.8 Real GDP growth 2.8 -0.9 -1.9 2.6 2.8 2.8
Inflation 1.5 1.9 1.1 1.1 1.1 1.1 Inflation 1.5 0.8 0.0 1.1 1.1 1.1
Primary balance -1.1 0.2 1.4 3.1 3.2 3.1 Primary balance -1.1 -0.7 -1.3 3.1 3.2 3.1
Effective interest rate 2.1 2.4 2.6 3.1 3.6 4.1 Effective interest rate 2.1 2.4 2.7 3.3 3.8 4.4
Real Interest Rate Shock Real Exchange Rate Shock
Real GDP growth 2.8 3.5 2.5 2.6 2.8 2.8 Real GDP growth 2.8 3.5 2.5 2.6 2.8 2.8
Inflation 1.5 1.9 1.1 1.1 1.1 1.1 Inflation 1.5 8.6 1.1 1.1 1.1 1.1
Primary balance -1.1 1.4 2.7 3.1 3.2 3.1 Primary balance -1.1 1.4 2.7 3.1 3.2 3.1
Effective interest rate 2.1 2.4 3.3 4.2 5.2 6.3 Effective interest rate 2.1 2.4 2.6 2.9 3.4 3.9
Combined Shock Oil Shock
Real GDP growth 2.8 -0.9 -1.9 2.6 2.8 2.8 Real GDP growth 2.8 1.5 0.5 2.6 2.8 2.8
Inflation 1.5 0.8 0.0 1.1 1.1 1.1 Inflation 1.5 1.9 1.1 1.1 1.1 1.1
Primary balance -1.1 -0.7 -1.3 3.1 3.2 3.1 Primary balance -1.1 -4.6 -2.3 0.1 2.2 3.1
Effective interest rate 2.1 2.4 3.6 4.9 6.0 7.1 Effective interest rate 2.1 2.4 3.3 4.0 4.6 5.1

Source: IMF staff calculations.

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Figure
Figure 5. 5. Ecuador:Public
Ecuador: Public DSA
DSARisk
RiskAssessment
Assessment
Heat Map

Debt level
1/ Real GDP Primary Balance Real Interest Exchange Rate Contingent
Growth Shock Shock Rate Shock Shock Liability shock

Real GDP Primary Balance Real Interest Exchange Rate Contingent

Gross financing needs 2/
Growth Shock Shock Rate Shock Shock Liability Shock

External Change in the Public Debt Foreign

Market
Debt profile 3/ Financing Share of Short- Held by Non- Currency
Perception
Requirements Term Debt Residents Debt

Evolution of Predictive Densities of Gross Nominal Public Debt

(in percent of GDP)
Baseline Percentiles: 10th-25th 25th-75th 75th-90th

Symmetric Distribution Restricted (Asymmetric) Distribution

80 80

70 70

60 60

50 50

40 40

30 30
Restrictions on upside shocks:
20 20 no restriction on the growth rate shock
no restriction on the interest rate shock
10 10 no restriction on the primary balance shock
no restriction on the exchange rate shock
0 0
2019 2020 2021 2022 2023 2024 2025 2026 2019 2020 2021 2022 2023 2024 2025 2026

Debt Profile Vulnerabilities

(Indicators vis-à-vis risk assessment benchmarks, in 2020)
Ecuador Lower early warning Upper early warning

73%
793
bp

600 15 1 45 60

6%
0.5 0.3% 15 20
200 5
1%
1 2 1 2
Annual
1
Change2 in 1 2 1 2

External Financing Public Debt Held by Public Debt in

Bond spread Short-Term Public
Requirement Non-Residents Foreign Currency
Debt
(in basis points) 4/ (in percent of GDP) 5/ (in percent of total) (in percent of total) (in percent of total)

Source: IMF staff calculations.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline,
red if benchmark is exceeded under baseline, white if stress test is not relevant.
2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not
baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if
country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.
200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45
percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.
4/ Long-term bond spread over U.S. bonds, an average over the last month, 01-Aug-21 through 31-Aug-21.
5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at
the end of previous period.

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Table 1. Ecuador: Decomposition of Public Debt and Debt Service by Creditor 2020-22 1

64 INTERNATIONAL MONETARY FUND

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Annex II. External Sector Assessment

Overall Assessment: The external position of Ecuador in 2020 was moderately weaker than the
level implied by fundamentals and desirable policies, an improvement from 2019 ESA when the
external position was assessed as weaker than fundamentals and desirable policies. The assessment
is driven by the significant improvement in the current account (CA), owing to sharp import
compression amid lockdown, strong performance in non-oil exports, and buoyant remittances.
Nevertheless, considerable bottlenecks to structural competitiveness remain.

Potential Policy Responses: Continued fiscal adjustment efforts to restore sustainability while
supporting the recovery as envisaged under the program, reduction in labor market rigidities, and
other structural reforms would help further strengthen the external position. Greater diversification of
the export base would also support external sector sustainability.

Foreign Assets and Liabilities: Position and Trajectory

Background. The Net International investment

position (NIIP) deteriorated slightly from -26.0
percent of GDP in 2019 to -27.2 percent of GDP in
2020, according to official statistics. Over the last
five years, increases in debt liabilities (likely driven
by government borrowing, although a sectoral
breakdown is not available) have been mostly
offset by an accumulation of foreign assets by the
private sector and, more recently, increases in
reserve assets.

Assessment. Continued fiscal consolidation and reserve accumulation are expected to strengthen
the NIIP. Most external debt is held by the public sector, of which the largest shares are from
official creditors and Eurobond holders, with long maturities (see Annex 1. DSA). Further
improvements to the quality and coverage of IIP data would be important for better
understanding risks.

Gross Assets: Debt Assets: Gross Liab.: Debt Liab.:

2020 (% GDP) NIIP: -25.6
57.6 50.2 84.7 67.5

Current Account

Background. Despite the impact of the Covid-19 shock, the CA improved to a surplus of 2.5
percent of GDP in 2020, from a modest deficit of -0.1 percent of GDP in 2019 and an average of -
0.5 percent of GDP over 2015-19. Although oil exports experienced a significant decline (40
percent yoy), this was offset by significant import compression (21 percent yoy decline), and an 8
percent yoy increase in non-oil exports (driven by bananas, shrimp, and mining). The current
account is expected to narrow to 1.7 percent of GDP in 2021 as imports continue to rise with the
recovering economy, and would strengthen thereafter, as non-oil exports continue to grow. Fiscal
adjustment over the medium term would shift the public savings and investment balance from
negative to positive (chart).

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Assessment. The EBA current account (CA) model estimates a current account norm of 0.7
percent of GDP. The adjustment for cyclical factors as well as a COVID-19-related adjustment to
the oil balance, tourism, and remittances, take the CA balance to 3.7 percent of GDP (from the
non-adjusted balance of 2.5 percent of GDP). This leads to a positive current account gap of 2.9
percent of GDP, including a policy gap of 0.7 percent of GDP driven by Ecuador’s fiscal balance
and capital control deviations from desirable policies being smaller compared with other EBA-Lite
countries (in particular, relatively larger fiscal expansions in the model’s global comparator
countries). Notwithstanding the cyclical and COVID-19-related adjustments, the results are
affected by the relatively strong CA, which is expected to be temporary.

As Ecuador is a commodity-exporting country, the CA norm using the EBA Lite consumption
model was also estimated. This model relies on a longer-term view for the assessment, and factor
in both commodity price volatility and intergenerational equity considerations in the context of
exhaustible natural resources. The model suggests a medium-term current account norm of 3.6
percent of GDP, which would imply a current account gap of -1.0 percent of GDP.1 Consistent with
previous ESAs, the bottom-line assessment relies on the consumption-based module results given
the importance of commodity exports resulting in an assessment that the external position is
“moderately weaker” than implied by fundamentals. This is also consistent with developments in
the economy since 2019. The depreciation in the REER during the second half of 2020 and
ongoing policy efforts indicates some improvement in price competitiveness, but continued
weaknesses in structural competitiveness suggests the exchange rate remains overvalued.

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Ecuador: Model Estimates for 2020 (in percent of GDP)

CA model REER model Consumption Module

CA-Actual 2.5 2.5

Cyclical contributions (from model) (-) 0.05 0.05
COVID-19 adjustor (+) 1/ 1.2 0.16
Natural disasters and conflicts (-) -0.02
Adjusted CA 3.7 2.6

CA Norm (from model) 2/ 0.7 3.6

CA Gap 2.9 -1.4 -1.0

o/w Relative policy gap 3/ 0.7

Elasticity -0.12 -0.12 -0.12

REER Gap (in percent) -25.0 12.0 8.7

1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on oil trade balance (1.0 percent of GDP),
tourism (0.2 percent of GDP), and remittances (-0.1 percent GDP).
2/ Cyclically adjusted, including multilateral consistency adjustments. Ecuador uses 2025 as reference year for consumption based
module CA norm.
3/ Based on desirable policies consistent with program objectives, including: cyclically-adjusted fiscal balance of 2.0 percent of GDP;
public health expenditure of 4.3 percent of GDP; annual change in reserves of 1.0 percent of GDP; a private credit level of 43 percent of
GDP, and the capital control index set at Ecuador's actual value.

Real Exchange Rate

Background. The REER was flat in 2020 on average relative to 2019, appreciating in the first half of
the year and depreciating in the second part of the year, following movements of the USD. By end-
2020, the REER had depreciated 3.8 percent y/y, further reflecting movements in the USD and the
downward trend in inflation. It has continued to depreciate (by 1.2 percent in Jan-May 2021). This
depreciation was slightly larger than the REER depreciation in other dollarized economies (e.g., El
Salvador and Panama).

Although relatively lower inflation compared with trading partners has helped Ecuador regain
competitiveness, it still lags peers in key areas. Both average and minimum wages have outpaced
productivity growth and the minimum wage remains high relative to peers (SIP #2). Ecuador also
experiences weaknesses in structural competitiveness. Labor and product market rigidities and
high borrowing costs as key challenges to doing business. Ecuador also scores lower than peers in
survey-based competitiveness indicators like the World Economic Forum’s Global Competitiveness

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Index, scoring an average of 55.7 across indicators compared with an average of 63.0 for LA6
countries. Ecuador scored particularly low in the areas of product market and innovation capability
and behind LA6 countries in most dimensions.

Assessment. Using export and import elasticities that have been calibrated to account for specific
features of the Ecuadorian economy including its status as an oil exporter, 2 the CA model implies a
REER undervaluation of 25 percent, while the EBA REER model suggests an overvaluation of 12
percent. The consumption model result of 9 percent overvaluation that serves as the basis for the
bottom-line assessment for 2020. This compares with an overall assessment of an overvaluation of
30 percent in the 2019 ESA.

Capital and Financial Accounts: Flows and Policy Measures

Background. Despite the pandemic, FDI

rose slightly from 0.9 percent of GDP in 2019
to 1 percent of GDP in 2020, driven by
investment in the mining sector. Net public
sector inflows narrowed from 4 Percent of
GDP in 2019 to 0.5 percent in 2020,
reflecting lower disbursements from bilateral
and multilateral creditors (other than the
IMF), although debt service payments were
lower. Other private sector flows registered a
modest increase in outflows (5.8 percent of
GDP in 2019 to 6.2 percent of GDP in 2020), although this data is subject to some limitations. 3 BIS
data based on international banks’ reporting of liabilities with Ecuadorian counterparties suggests
modest outflows as loans and deposits held abroad by Ecuadorian banks increased by 5 percent to
$6.7 billion. BCE data on net private bank flows also showed average monthly net outflows in 2020
of $100 million, compared with average monthly net outflows of $146 million in 2019.

Assessment. External financing needs fell significantly in 2020 and are expected to narrow further
in 2021-22 owing to the strong CA and relatively lower public debt service, aided by the 2020 debt
restructuring. Over the medium-term, continued reform efforts should help build investor
confidence and attract private sector flows. Ecuador continues to maintain a tax on transfers
abroad (Impuesto a la Salida de Divisas, or ISD), which constitutes a capital flow measure (CFM)
under the Fund’s Institutional View on Liberalization and Management of Capital Flows and an
exchange restriction subject to Fund approval under Article VIII Section 2(a) (¶49).

FX Intervention and Reserves Level

Background. Ecuador is a fully dollarized economy and does not have its own currency. The
strong current account, together with the IMF disbursements, supported gross international
reserves (GIR), which rose by around $4.2 billion to $7.1 billion at end-2020. Reserves declined by
$1.4 billion in the first half of 2021, reflecting debt repayment and the gradual recovery in imports
as the Fund disbursement was utilized (¶9).

Assessment. Despite the significant improvement over the past year, international reserves remain
below levels adequate for prudential purposes and to support dollarization. While end-2020 GIR

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were above the traditional 3-months of imports metric at 4.3 months of imports, they were below
the 20 percent of broad money metric at 11.1 percent and only 36 percent of the Fund’s risk-
weighted ARA metric. 4 Continued efforts to build reserves, including through higher government
deposits, along with higher private inflows as the economy strengthens and investor confidence
improves will strengthen the reserve position. An SDR allocation of US$940 million (equivalent to
12 percent of the 2020 AR metric for Ecuador) could improve reserve adequacy metrics.
1
Key assumptions in the consumption-based model include total oil reserves of 8.3 billion barrels (in line with proven
reserves); flat oil production and price growth beyond the medium-term; population growth of 1.4 percent per annum. It
includes also projected net investment income from direct and portfolio investment (but excludes other investment due to
IIP data limitations).
2
A Method for Calculating Export Supply and Import Demand Elasticities” by S. Tokarick (2010) (IMF/WP/180).
3
Other private sector flows include “other investment” category is a residual under the BCEs compilation methodology and
amounts are influenced by discrepancies in other BOP flows and the change in reserve assets.
4
However traditional reserves metrics are not directly comparable between fully dollarized economies and other economies.
In fact, fully dollarized economies do not face the risk of exchange rate fluctuations and currency mismatches. They however
may need a buffer for government financing and extra liquidity buffers to support domestic financial institutions when
needed. The latter need is covered separately under the Liquidity Fund (LF) in Ecuador—the authorities indeed taped into the
LF to support liquidity in the financial system to the tune of $950 million in the aftermath of COVID-19, by lowering the
contribution of financial institutions to the Fund by 3 ppts to 2 percent; it has an outstanding balance of about $2 billion.

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Annex III. Status of Implementation of 2019 Article IV

Consultation Recommendations
Key Actions Undertaken by the
Main Staff Recommendations during
Authorities Since the 2019 Article IV
the 2019 Article IV Consultation
Consultation

Fiscal policy Reverse the upward trend in public The non-oil primary deficit (including fuel
debt and bring it to more prudent subsidies) of the non-financial public sector
levels in the medium term, including by (NOPBS) tightened by 0.7 ppts of GDP in
reducing fiscal deficits 2019. The fiscal effort continued in 2020,
with the government taking fiscal
consolidation measures in the midst of the
COVID-19 pandemic—the NOPBS
deteriorated by only 0.1 ppt of GDP despite
high pandemic-related spending and the
pressure on non-oil tax revenues caused by
the collapse in economic activity.

Adopt an equitable, broad-based, and The authorities adopted a less ambitious

growth-friendly tax reform to address tax reform with estimated yields of ½ ppt
inefficiencies in the tax system of GDP at end-2019 (short of the envisaged
1½–2 ppts of GDP)

Realign the public sector wage bill, The authorities curtailed primary spending
optimize the system of fuel subsidies, (by 1.5 ppts of GDP at the NFPS level in
and reduce public spending on capital 2019), including cuts in public employment
and goods and services as part of the and capital expenditure. Ecuador also
expenditure reform. implemented a homegrown fuel subsidy
reform to gradually align domestic fuel
prices with international levels and channel
the associated fiscal savings to social
assistance and critical public outlays.

Public Strengthen the medium-term fiscal Ecuador amended its Organic Code of
Financial policy framework and adopt better Public Finances and Planning (COPLAFIP) in
Management PFM practices to enhance the July 2020, and is on track to implementing
(PFM) and effectiveness of fiscal policy associated regulations, including the
fiscal development of a Medium-Term Fiscal
transparency Framework (MTFF), adoption and
enforcement of budget ceilings and
instauration of disclosure, quantification
and management of fiscal risks

Bring transparency in public debt A Medium-term Debt Management

statistics, align its reporting to Strategy (MTDS) was prepared and
international best practices, and published, with planned frequent updates.
revising historical data The MEF also revised and published in June
2021 historical fiscal statistics for the
consolidated NFPS and its sub-sectors

Social Expand eligibility for social The coverage of social assistance programs
protection was significantly expanded to include more
assistance, improve targeting, and
than 457,000 additional low-income
increase the generosity of social
families among beneficiaries between
assistance programs.
January 2020 and July 2021; targeting was

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also improved by removing about 80,000

higher-income families among beneficiaries

Monetary and Strengthen the governance framework Ecuador amended its Organic Monetary
financial sector of the central bank to fortify the and Financial Code (COMYF) on May 3,
policies foundations of dollarization 2021 to strengthen the central bank
balance sheet and ensure its technical
autonomy. These amendments, inter alia,
permanently prohibit government financing
by the central bank

Further strengthen oversight for banks The stress-testing capabilities of oversight

and cooperatives to build up crisis- authorities was improved, building on Fund
preparedness and contingency- TA
planning capabilities.

Remove impediments to effective The number of interest rate caps was

financial intermediation reduced from 23 to 13, and the BCE is
revising the mechanism for setting interest
rate caps to better reflect market conditions

Transparency, Improve transparency and good The anti-corruption framework (COIP) was
governance, governance to public sector operations amended in December 2020 to criminalize
and anti- while strengthening the corruption. Regulations to request and
corruption publish information on beneficial ownership
fight against corruption and the
(BO) in procurement contracts was adopted
AML/CFT framework
in September 2020; contracts are being
published with BO information where
available. Asset declarations of high-level
officials, including itemized assets and
liabilities are published. COVID-related
spending audits have been conducted and
are published where legally feasible.

Other Reduce labor market rigidities and The government adopted a series of labor
structural improve competitiveness market flexibilization measures under la
policies “Ley Humanitaria” in the wake of the
COVID-19 pandemic.

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Annex IV. Risk Assessment Matrix1

Relative
Source of Risks Possible Impact Policy Response
Likelihood
Conjunctural shocks and scenario
Re-instate containment
High
measures if a severe third wave
Uncontrolled Covid-19 local outbreaks and Uncontrolled local of infections occur. Prioritize
subpar/volatile growth in affected outbreak could lead social and health-related
countries. Outbreaks in slow-to-vaccinate High to massive local spending and continue
countries force new lockdowns. The policy disruptions and supporting the population,
response may be constrained by a lack of jeopardize the along with clearly anchored
policy space. expected economic policies when the pandemic
recovery. subsides.
High
The materialization of Continue prioritize social and
Global resurgence of the Covid-19
this downside risk health-related spending,
pandemic. Local outbreaks lead to a global
could further depress including vaccines. Seek
resurgence of the pandemic (possibly due to
recovery through additional donor funding to
vaccine-resistant variants), which requires Medium
trade, and foreign support the economy and
costly containment efforts and prompts
direct investment vaccination. Strengthen
persistent behavioral changes rendering many
(FDI). This would (financial) crisis preparedness
activities unviable.
widen BOP and fiscal and management.
financing gaps
Save part of the oil proceeds
towards policy buffers, including
Rising commodity prices amid bouts of
Medium to ensure inter-generational
volatility. Commodity prices increase by more
This represents an equity. Roll-back crisis-related
than expected against a weaker U.S. dollar,
upside risk and would accommodative policy
post-pandemic pent-up demand and supply
improve fiscal and measures and stick to the
disruptions, and for some materials, Medium
external balances and planned fiscal consolidation to
accelerated plans for renewable energy
help reduce BOP and restore confidence
adoption. Uncertainty surrounding each of
fiscal financing gaps (implementing identified fiscal
these factors leads to bouts of volatility,
faster. contingency measures if
especially in oil prices.
needed) and promote private
sector-led growth.
High
This would raise Continue engaging the broader
concerns among the public, explaining the benefits
public and the of the reform program,
Lack of social consensus around the reform international
Medium including the opportunity for a
program and policy reversal community. A drop in reset post-COVID-19 and the
market confidence policy-tradeoffs that the
could delay market dollarization regime entails.
re-access and
financing from other

1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely
to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding
the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30
percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and
overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and
materialize jointly. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon
(between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a
longer horizon.

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sources, which in turn

could require abrupt
adjustments.
Structural risks
Medium
In the case of
Ecuador, geopolitical
tensions that reduce
oil prices further
could have Adopt policies that improve the
significant fiscal, perception of Ecuador,
Intensified geopolitical tensions and growth, and BOP including by removing trade
security risks. Geopolitical tensions in ramifications. The barriers and limiting policy
selected countries/regions cause shock from uncertainty through clearly
economic/political disruption, disorderly High migration from articulated medium-term policy
migration, higher volatility in commodity Venezuela could also frameworks to limit discretion.
prices (if supply is disrupted), and lower intensify fiscal In the event tensions reduce oil
confidence, with spillovers to other countries. pressures and have a prices, implement identified
negative impact on fiscal contingency measures.
growth in the short
term though a
positive impact on
growth would be
expected in the
longer term.
Higher frequency and severity of natural
disasters related to climate change cause
severe economic damage to smaller
economies susceptible to disruptions and Implement policies to invest to
High
accelerate emigration from these economies. A protect critical financial,
Ecuador is prone to
sequence of severe events in large economies Medium transport, communication or
many natural
reduces global GDP and prompts a energy infrastructure. Build
recalculation of risk and growth prospects. disasters. precautionary savings buffers.
Disasters hitting key infrastructure or
disrupting trade raise commodity price levels
and volatility.

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Appendix I. Letter of Intent

Quito, September 16, 2021

Ms. Kristalina Georgieva

The Managing Director
International Monetary Fund
Washington, D.C.

Dear Ms. Georgieva:

1. With the landmark victory of Guillermo Lasso at the Presidential elections in April
this year, our newly elected government took office on May 24, 2021, with the objectives of
ensuring environmentally-friendly growth with high quality jobs, promoting a transparent
management of public resources, and ensuring equity in the conduct of fiscally sustainable
policies. The transition between administrations has been very smooth and well-
coordinated. We thank the IMF for its support to the Republic of Ecuador during the most
severe crisis in our recent history. Our economic objectives include the need for sustainable
growth, labor market recovery and strengthened public finances. In this new political
context, we consider Ecuador will benefit from a continued financial and technical support
from the international community, so we request a continuation of the ongoing Fund-
supported Extended Fund Facility (EFF) arrangement approved by the IMF Executive Board
on September 30, 2020.

2. Since taking office, we have made great strides in vaccinating our population, yet
the COVID- 19 pandemic continues to take a toll on our economy. GDP contracted 7.8
percent in 2020 (year-on- year) but is showing only initial signs of recovery so far this year,
while the labor market remains weak. In addition, downside risks from uncertainties
surrounding the duration of the pandemic and the global economy remain high. Our
spending needs have increased this year, owing to the need to support the economic
recovery and make vaccines as widely available as possible to our citizens. At the same
time, we remain committed to continuing restoring fiscal sustainability.

3. Since the First Review under the EFF was concluded in December 2020, important
progress has been made. On the economic front, all quantitative performance criteria (QPC)
for end- December 2020, and all but one for end-April 2021, as well as all Indicative Targets
(IT) have been met. We are requesting a waiver of nonobservance of the performance
criterion on accumulation of NFPS deposits at the Central Bank. While the macroeconomic
impact of the breach is minor, it highlights the need for better cash management, which we
plan to do with the preparation and presentation of a central government financial plan for
the remaining of year 2021 approved by the Financial Committee. The financial plan will
include the detailed monthly cash flow, the arrears as of July 2021 verified by MEF following
the COPLAFIP definition by sector, 2021 clearance estimate and monthly accumulation data,
a document with the potential risks associated to the financial plan, potential mitigating
measures, and an explanation of the deviations of the 2021 Financial Plan delivered to IMF
staff in December 2020.

4. A major achievement on the structural front has been the enactment of the Law in
Defense of Dollarization. These amendments to the central bank legal framework within the

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Organic Monetary and Financial Code (COMYF), enacted in April, were comprehensive
revisions that strengthened the basis for dollarization and the autonomy of the Central
Bank of Ecuador. In addition, a Government Financial Statistics (GFS) compilation guide has
been finalized and disseminated by end-May. The revised historical revenues and
expenditures statistics for each of the sectors of the Nonfinancial Public Sector (NFPS) have
been published. We also made good progress in several other areas, including on
developing a medium-term debt strategy and assessing arrears. We will continue with the
progress in these areas that started under the former administration.

5. We request that the Fund complete the second and the third reviews of the
extended arrangement under the IMF's Extended Fund Facility and make the associated
disbursement of SDR 568 million (about US$800 million) available for budget support. The
disbursement would continue to support our efforts to contain the pandemic, make
vaccines as widely available as possible, increase the coverage of targeted cash transfers to
vulnerable households, and support economic recovery. In addition, we are facing large
one-off expenses since we took office, some related to the vaccination process and other
related to past contingencies (such as past dues to ISSFA and local governments). The
Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of
Understanding (TMU) attached to this Letter of Intent present the specific policies our
government intends to implement.

6. Our main goal is to ensure an environmentally friendly growth with high quality
jobs, promote a transparent management of public resources, and ensure equity in the
conduct of fiscally sustainable policies. It is imperative to fix our public finances to ensure a
high and sustained growth that will create quality jobs. In this regard, we will undertake an
important tax reform focused on equity and sustainable growth. Those who earn the most
should be contributing more. The current personal income tax system lacks progressivity
and allows large deductions across the income scale. We will therefore ensure deductions
and the personal income tax brackets are reformed to ensure greater progressivity. In
addition, we will aim at increasing the tax base and fighting tax evasion by nudging
Ecuadorians with income and assets abroad to declare those to our Internal Revenue
Service (SRI). To ensure more equitable policies, we will also balance the needed fiscal
consolidation by prioritizing expenditures. Ecuador’s public sector has among the highest
cost of labor and capital expenditure in the region without delivering the highest quality of
services for our citizens. We have already identified concrete actions to improve efficiency
in public procurement and generate fiscal savings to support fiscal consolidation. We will
also undertake an expenditure review to evaluate further gains while protecting crucial
spending on health and education. Finally, with the help of the Fund, we are dedicated to
continuing improving our public financial management (PFM) framework. This will allow a
better and more transparent management of public finances.

7. Our government is dedicated to spur a private sector-led economic recovery that

will create quality jobs. We will bring more Ecuador to the world, and more world into
Ecuador, by entering into trade agreements and reforming keys areas to enhance
competitiveness of the Ecuadorian economy. We already started lowering tariffs for capital
and intermediate goods in key productive sectors, and plan to reform our public private
partnership (PPP) framework, our capital and labor markets, and business environment in
general, including state owned enterprises (SOEs), to attract foreign direct investments. We
aim to enhance the transparency of foreign investments to level the playing field and
increase accountability. In addition, we are taking steps to strengthen our Central Bank, by

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clearing its balance sheet of legacy assets and supporting its auditing capacities. Overall,
those actions will support job creation but will also strengthen the dollarization monetary
system.

8. In terms of program monitoring, we are not yet ready to move to targeting the
nonfinancial public sector as was envisaged earlier, mostly due to delays in capacity
building and turnover of our GFS compilers and the failure to upgrade the accounting
software of the Treasury. We are fully dedicated to review processes and improve our
capacities in order to move to NFPS balances targets for April 2022.

9. We also request the IMF Executive Board’s approval for retaining the existing
exchange restriction arising from the tax on transfers abroad for the making of payments
and transfers on current international transactions on the ground that the measure is
maintained for balance of payments purposes. We intend to phase out this measure once
macroeconomic stability is restored, and the reserve position is strengthened.

10. In line with this government’s objective to foster transparency, we consent to the
publication of this letter, its attachments, and the Staff Report associated with our request
for support. We will provide information requested by the Fund to assess our policy
implementation and will consult with the Fund on additional measures that may be needed
during program implementation and in advance of any changes to our policy plans, in
accordance with the Fund’s policies on such consultation.

Sincerely yours,

/s/ /s/

Simón Cueva Armijos Guillermo Avellán Solines

Minister of Economy and Finance General Manager, Central Bank of Ecuador

Attachment I. Memorandum of Economic and Financial Policies

Attachment II. Technical Memorandum of Understanding

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Attachment I. Memorandum of Economic and Financial

Policies
1. With the landmark victory of Guillermo Lasso at the Presidential elections in April
this year, our newly elected government took office on May 24, 2021, with the objectives of
ensuring environmentally friendly growth with high quality jobs, promoting a transparent
management of public resources, and ensuring equity in the conduct of fiscally sustainable
policies.

2. It is imperative to fix our public finances to ensure a high and sustained growth that
will create quality jobs. In this regard, we will undertake an important tax reform focused on
equity. Those who earn the most should be contributing more; at the time we aim at
increasing the tax base and fighting tax evasion by nudging Ecuadorians with income and
assets abroad to declare those to our Internal Revenue Service (SRI). To ensure more
equitable policies, we will also balance the needed fiscal consolidation by prioritizing
expenditures.

3. Our government is dedicated to spur a private sector-led economic recovery that

will create quality jobs. We will bring more Ecuador to the world, and more world into
Ecuador, by entering into trade agreements and reforming keys areas to enhance
competitiveness of the Ecuadorian economy. We already started lowering tariffs for capital
and intermediate goods in key productive sectors, and plan to reform our public-private
partnership (PPP) framework, our capital and labor markets, and business environment in
general, including state owned enterprises (SOEs), to attract foreign direct investments.
Through Presidential Decrees 68, 95, 123 and 151, we have already laid the groundwork for
more private investment in the oil and mining sectors, promoted more labor flexibility, and
sought to enhance competitiveness. We aim to enhance the transparency of foreign
investments to level the playing field and increase accountability. In addition, we are taking
steps to strengthen our Central Bank, by clearing its balance sheet of legacy assets and
supporting its auditing capacities. Overall, those actions will support job creation but will
also strengthen the dollarization system.

4. The Government of Ecuador already made important progress in some of the

objectives set by President Lasso. We acquired and administered vaccines for close to 9
million Ecuadorians since the beginning of our mandate on May 24, 2021, and are
committed to deliver more in the coming months with the support of our international
allies. While working on a comprehensive roadmap to implement its government plan, the
administration has already begun to make progress in the direction of reverting distortive
taxes (as exemplified by the reduction of ISD for the aeronautical sector), while issuing
directives to boost oil production and identifying concrete actions to improve efficiency in
public procurement and generate fiscal savings to support fiscal consolidation.

5. The Government of Ecuador remains fully committed to the 27-month extended

arrangement under the Extended Fund Facility (EFF), approved by the IMF Executive Board
on September 30, 2020, aimed at stabilizing the economy and protecting lives and
livelihoods, expanding the coverage of social assistance programs, ensuring fiscal and debt
sustainability, and strengthening domestic institutions to lay the foundations for strong,
job-rich, and long-lasting growth that benefits all Ecuadorians.

6. In this regard, our key priorities on the economic front are to (i) ensure fiscal

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stabilization with equity; (ii) manage public resources honestly and transparently; (iii) rebuild
trust in our institutions; and (iv) improve the competitiveness of our economy to create
environmentally friendly, private sector-led growth with job opportunities for all
Ecuadorians.

7. This memorandum outlines in detail the progress we have made toward meeting
the objectives of our Fund-supported program and our policy plans to advance these
objectives for a stronger, more prosperous Ecuador. Tables 1 and 2 show how we plan to
update the quantitative targets and structural benchmarks that serve to track our progress.

Making Vaccines Available to All Ecuadorians and Expanding our

Social Safety Nets

8. The initial priority of the Presidency has been to move quickly ahead with the
vaccination process, acknowledging that economic recovery efforts could prove fruitless if
the pandemic was not under control. Economic, diplomatic, and logistical efforts, involving
the private sector, were undertaken to secure vaccine availability. The President laid a target
of fully vaccinating 9 million Ecuadorians (51 percent of the total population and 73 percent
of the population older than 16), within 100 days of the government; this target will be met.
We will continue until we achieve at least a 75 percent coverage of the entire population
(we have started vaccinating 12–16-year-old youths). The rapid progress in the vaccination
program is enabling a faster economic recovery and lowering health costs.

9. We continue to support our population for the economic and social effects of the
COVID-19 pandemic. We continue to make progress in upgrading our social registry and
expanding the coverage of social assistance programs with the assistance of the UN and
the World Bank (WB). We increased the number of beneficiary families by 443,619 between
July 2020 and end-April 2021, meeting the related targets that we set for ourselves under
the EFF arrangement. In addition to increasing the number of families receiving support, we
are also making progress in better targeting our cash transfer program graduating those
families whose incomes are above the threshold. We will continue to work towards meeting
our target of adding a cumulative of 625,600 beneficiary families relative to July 2020,
therefore covering 80 percent of families in the bottom three income deciles. We are
cognizant that, while we were ahead of schedule up to now, progress has slowed and
meeting the year-end target of 80 percent, a commitment under both the WB and IMF
supported programs, will no longer be feasible. The pandemic and demographic change
impacted information collection in the Amazon region and other vulnerable zones in urban
and con-urban areas beyond expectations. Hence, we are working alongside the statistics
agency (INEC) and the Social Registry to boost registration in these areas, by taking
advantage of pre-census data collection to identify previously uncharted pockets of
vulnerable populations, a process that is set to yield fruit by the turn of the year. In the
meantime, the Social Registry, in consultation with the World Bank, is working on
recalibrating the algorithm that processes surveyed households. Preliminary results show
this procedure will allow us to pick up the pace at which we incorporate vulnerable
households in the first three deciles of the distribution by including previously misclassified
ones. The technical work will be concluded during September, so that between October and
December, we aim at adding around 60 thousand beneficiaries to the registry. With these
efforts, we will be able to expand the number of families in the first three deciles who
receive social support to 453,700 by the end of September, and to 514,000 by the end of

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the year. The expected additional data collection and the updated algorithm will enable us
to reach the target of providing support to 625,600 additional families by the end of the
first quarter, and no later than April 2022 (revised structural benchmark).

10. We note that Ecuador’s provinces differ markedly in their vulnerability to economic,
social, and climate conditions. We also note that the expansion of social assistance has
mostly been in the second and third deciles of the income distribution and unevenly across
provinces. We will make it a priority to improve the regional coverage of our social
assistance programs to make sure that all Ecuadorian families in need across geographical
regions are reached, with special attention to the coverage of the first income decile, who
are the economically most vulnerable group. To operationalize this goal, we will expand the
coverage of the social assistance programs to no less than 70 percent coverage of the
bottom three income deciles by province and no less than 65 percent of the first income
decile nationwide by the end of 2022 (structural benchmark for end-December 2022).

Restoring Fiscal Sustainability with Equity

11. Our administration is fully committed to ensuring the sustainability of Ecuador´s

public finances and building a more robust public financial management framework
underpinned by stronger institutions. Our focus is to ensure that consolidating public
finances will equitably be supported by the Ecuadorian population. Those who benefited
from the crisis and those who earn more should be helping the most affected by the
pandemic and the most in need. The design of our fiscal policy will be guided by the
principle of restoring sustainability and reducing public debt, consistent with debt limits
and expenditure growth rules in the organic code of public finances and planning
(COPLAFIP).

12. The $4 billion disbursed by the IMF since program approval has helped meet urgent
needs and support lives and livelihoods. We utilized these resources to maximize its reach
across the Ecuadorian society and revitalize the economy. The main uses included
investment spending in the face the pandemic shock, payments to almost 170 thousand
suppliers as well as Autonomous Subnational Governments (GADs), which allowed to
significantly reduce the overdue payments dating as far back as 2019 and other arrears.

13. The fiscal balances in 2020 were better than expected due to a rebound in
economic activity in the second half of year, when confinement measures were partially
relaxed and generated large revenues over performance and somewhat lower spending,
especially at the subnational levels. The nonfinancial public sector (NFPS) registered a
deficit of less than $6 billion for 2020, close to $1.4 billion better than expected. Some
underspending was due to delays in COVID-related spending, which was planned at $622
million but ended up at $410 million, due to supply constraints and the expectation that
pandemic-related expenses would expand through multiple years. Public debt ended the
year much lower than expected; just over 61 percent of GDP instead of 63 percent as
expected in December. Part of those under-executed spending have materialized this year.
We have faced significant financing pressures since we took office, in part, as we were able
to acquire and distribute a large number of vaccines as our top priority.

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14. Between January and April 2021, revenues were well above expected levels at both
the PGE+CFDD and NFPS levels, by $580 million and about $1.3 billion respectively, due to
a substantial increase in oil prices and, to a lesser extent, a better macroeconomic
landscape than expected. In parallel, higher oil prices increased CFDD expenses by about
$550 million. These developments resulted in the fiscal balance at the PGE+CFDD level to
be in line with expectations, and the NFPS balance to be over $1 billion better than
expected. Nonetheless, even with higher domestic financing, NFPS deposit accumulation at
the central bank, which is the quantitative performance target (QPC) under the Fund-
supported program, was slightly lower than the target. While the degree of noncompliance
was small, at $77 million, and its macroeconomic impact is minor, since April QPCs are the
controlling ones for the combined Second and Third Reviews, we request a waiver of
nonobservance. We will take corrective actions related to enhance our cash management
capacities (prior action).

15. We have submitted a 2021 budget of the central government, which balances the
pressing needs One-off Expenditures in the Central Government Budget, 2021
from vaccination (In US$ millions)
and economic Increase in social spending (bonos ) 125
recovery, one-off Vaccines and vaccination-related expenses 293
payments partly Additional spending on health care workers 25
inherited by our
Refurbishing schools and education expenses 121
administration such
Expenses related to termination of employment 135
as a court ruling on
Expenses for elections 21
VAT past due to be
Overdue VAT payment to local governments 300
paid to subnational
governments Total 1,020
(GADs) and Sources: Ministry of Finance and IMF staff estimations.
additional health costs over the period January-May 2021 (text table), and also considering
the sustainability of public finances in the short and medium term. With the nascent global
economic recovery, oil prices have significantly increased over the last 12 months, allowing
for sizable oil revenue windfalls. Our intentions are to support as much as possible our
citizens and the economy through vaccination and measures to support the recovery, but
we are also aware of the need to build fiscal buffers, in particular given uncertainties
regarding the future of the pandemic, oil prices, large arrears that need clearance over time,
and the large contingent liabilities that we are facing. We are committed to roll back those
one-offs measures next year.

16. For 2022 and the medium term, we have developed our vision for the country under
our 2021-2025 Development Plan. The main objectives of the plan are to promote an
environmentally friendly, private sector-led growth, with emphasis on an ecological
transition based on greater renewable energy capacity, greater energy efficiency, and
increased productivity. We are also considering to reduce state-owned enterprises,
including through the liquidation of some companies and the monetization of other assets,
which could bring additional revenues over the medium term. These one-off measures
would further support a broader and structural cost-optimization strategy including a
comprehensive efficiency assessment of the state which would enable us to curtail
unproductive activities and exploit efficiency gains, enhancing PPP-led investment, and
procurement reform that are expected to lead to a reduction in the size of the state from
almost 36 percent of GDP last year, to below 32 percent by the end of our administration.
We are committed to a consolidation in non-oil primary balance (including fuel subsidies)

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of 4.5 percentage points of GDP over 2019-2025 (corresponding to an improvement of 4.1

percentage points of GDP in the overall balance of the NFPS over the same period). This
consolidation path will strike the right balance between supporting the still fragile
economic recovery, reducing public debt towards our debt limits in COPLAFIP, and saving
some of oil windfall to build buffers and boost reserves towards the targets set out in the
Law of Defense for Dollarization (COMYF). The necessary fiscal package will be underpinned
by the following measures:

Tax reform

• Ecuador needs to reduce its dependency on oil revenues, which has been a source of
vulnerability to our fiscal position, given unpredictable prices. To decisively move away
from oil dependency the government needs to generate higher permanent revenues,
based on a fair and equitable tax system. The current personal income tax system lacks
progressivity, allowing large deductions across the income scale. We have therefore
developed a tax bill that we will submit to the National Assembly in September, for
enactment by end-October, to upgrade our current system of taxation to make it more
equitable, simpler, and growth-friendly (revised structural benchmark for October
2021). The tax bill will be framed around the following components:

i. Policy measures (0.7 percent of GDP). This includes changes in: (i) personal
income tax to lower personal expenditure deductions (from the current
maximum of $14,575 to the median of deductions); change deductions from
being applied to pre-tax income to a tax credit with a quota, and narrow
income brackets for the higher tax brackets, while leaving marginal tax rates
unchanged; and (ii) corporate income tax, with measures to eliminate credits
and deductions.

ii. Administrative measures (0.3 percent of GDP). We have received extensive

technical assistance from the IMF on tax and customs administration. We will
implement the recommendations covering improving collection through the
Large Contributors Unit, enhanced customs tariff collection, and VAT
compliance (see text table).

iii. Transitory measures (0.5 percent of GDP). These include (i) a special
contribution from corporations with net worth over $1 million, whose sales in
2020 exceeded those of 2019; (ii) a special contribution of high-net-worth
individuals, with rates progressively increasing from 0.5 percent to 1.5 percent;
and (ii) the disclosure of foreign investments/assets held abroad, previously not
reported to the tax authority, which would allow for a one-time tax to be
charged

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Administrative Measures
Large Taxpayer Unit (LTU)
Strengthen the LTU debt collection powers: national jurisdiction, high rank within SRI, KPI-driven.
Properly staff LTU; set up offices in each province.
Improve segmentation of debt, debtors, and risks in profiling activities.
Enhance the use of information exchanges with other jurisdictions and third parties to control cross-border operations of large taxpayers.
Special attention to cross-border operations of large taxpayers; apply Action 13 of Action Plan BEPS on transfer prices.
Set up special sub-unit to control and follow-up wealthy individuals.

Customs administration
Improve trade facilitation through processes automation and adopting new technologies.
Develop a compliance risk management program with an emphasis on the most sensitive sectors.
Optimize the use of data to define trade facilitation and control measures by HS codes and foreign trade operator segments.
Strengthen the post-clearance audit.
Ensure and improve cooperation with the SRI, in particular the information exchange and data matching.
Combat fuel smuggling.

VAT gap
Use VAT gap estimates to support SRI's actions and VAT-compliance risk strategic management.
Conduct in-depth statistical and regulatory analysis of sectors and sub-sectors with largest compliance gaps.
Use RA-GAP model to monitor the accumulation of credit carry-forwards and collection performance and to validate SRI estimates every 2-3 years.
Exchange with the BCE key statistical and regulatory information.
Close VAT compliance gap through integrated control based on the taxpayer life-cycle approach.

Spending prioritization

17. Our public sector has among the highest share of spending dedicated to wages and
salaries and capital expenditure compared to our regional peers, without delivering the
highest quality of public services for our citizens. Therefore, we have decided to implement
an expenditure-led consolidation as our medium-term strategy for restoring sustainability
to our fiscal balances. With the tax reform described above, reaching our medium-term
sustainability targets will require reducing public primary expenditures by about 4.2
percentage points of GDP by the end of our administration. The largest savings will be
generated from improving procurement practices, which are expected to yield 1.5 ppt of
GDP in savings in goods and services and capital expenditure during our term. Rolling back
the one-off spending from 2021 (0.9 ppt of GDP) will contribute to spending reduction, as
will continuing with the fuel subsidy reform with global oil prices expected to decline (0.9
ppt of GDP). The remaining 0.9 ppt of GDP will be achieved through expenditure
rationalization across a range of spending items while protecting essential services such as
health, education, and social spending.

18. Starting with our first full-year budget in 2022, and the accompanying medium-
term budget program through 2025, we will be setting expenditure ceilings on both the
central government and the other subsectors of the nonfinancial public sector to enforce
this expenditure reduction plan, as reflected in the table below. We will complement this
top-down strategy with a bottom-up approach of putting in place policies and procedures
to ensure that budget execution progresses in line with the targets and objectives set out in
our medium-term plans. The range of reforms and measures to achieve these savings is
elaborated below.

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Ecuador: Select Balances, Non-oil Primary Balance with Subsidies

(Change from previous year, in percent of GDP)
2019 2020 2021 2022 2023 2024 2025 2020-25
Revenue -1.3 -0.7 -0.3 0.7 0.3 0.2 0.0 0.2
o/w Planned tax reform 0.0 0.4 0.0 0.1 0.6 0.0 0.0 1.1
o/w Temporary Tax measures 0.0 0.0 0.0 0.5 -0.4 0.0 0.0 0.0
o/w Administrative Measures 0.0 0.0 0.0 0.1 0.1 0.1 0.0 0.3
o/w Macroeconomic effect on tax revenues 0.0 -1.4 0.0 0.0 0.0 0.1 0.0 -1.3
Expenditure 2.0 0.6 -0.6 2.3 1.0 0.6 0.4 4.2
Wages and salaries 0.2 -0.3 0.6 0.4 0.3 0.1 0.1 1.2
Goods and services 0.1 0.2 0.1 0.4 0.2 0.3 0.1 1.3
Other spending -0.1 -0.2 -0.2 0.2 0.0 0.0 0.0 -0.2
Capital spending 1.3 0.2 0.0 0.4 0.4 0.2 0.1 1.3
Fuel subsidies 0.8 1.1 -0.6 0.9 0.0 0.0 0.0 1.4
Social spending -0.3 -0.5 -0.5 0.0 0.1 0.0 0.0 -0.8
Total 0.7 -0.1 -0.8 3.0 1.3 0.8 0.4 4.5
Memo items
First Review
Revenue -1.3 -0.1 0.2 1.9 0.6 0.1 0.0 2.8
Expenditure 2.6 -0.9 1.7 0.9 0.8 0.1 0.0 2.7
Total 1.3 -0.9 1.9 2.8 1.4 0.2 0.0 5.5
Sources: Ministry of Finance and IMF staff calculations.

• Wage bill. The increase in public servants and wages over the last fifteen years was
unsustainable. It is therefore our endeavor to ensure a sustainable wage bill over the
period 2022-2025. Our plan is to slow the growth of the wage bill, which can be
achieved with a combination of partial replacement of retiring staff and partial
nonrenewal of fixed-term contracts, all while wages grow with inflation. Further savings
could be generated by additional measures on contracts and/or wages, such as revised
pay scales for new hires; inflation-adjusted wages; lower replacement rates for retiring
staff; and/or lower renewal rates of fixed-term contracts. To enforce the wage bill
targets in the annual budgets, guidelines will be provided on the public sector work
force to all levels of the public sector, to be jointly defined with the Labor Ministry.
Specific policies will be further strengthened through a thorough assessment of the
public sector, with assistance of external experts.

• Procurement. Estimated Savings from Procurement Efficient Measures

Procurement (In percent of GDP)
represents a 2022 2023 2024 2025 2022-2025

significant share of Bulk and standardized purchases 0.2 0.1 0.1 0.0 0.4
our total spending, Dynamic and electronic processes, modernization of pre- 0.1 0.1 0.0 0.0 0.2
and we are contractral procedures, and transparency
committed to curb Increased competition in procurement 0.2 0.2 0.1 0.1 0.6
past excesses in
Subsystem of control of the National System of Public 0.1 0.1 0.1 0.0 0.3
terms of cost
Procurement and close relationship with suppliers
surcharges and
Total savings (percent of GDP) 0.6 0.5 0.3 0.1 1.5
attribution of Source: Ministry of Economy and Finance based on SERCOP, World Bank, and IMF staff estimates.
contracts. We will reform our procurement system to save costs while ensuring the
highest standards of transparency. On August 12, 2021, President Lasso issued
Presidential Decree No. 155 to regulate recent anti-corruption legislation that requires
the Office of the Comptroller General to control budget availability and the existence
of market studies, before any public procurement is initiated. This will ensure ex-ante
review of costs and a fair attribution of public contracts. SERCOP, in coordination with

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the Ministry of Economy and Finance and the National Secretary of Planning, will issue
and enforce procurement guidelines to improve procurement processes as
summarized in the text table, which would generate significant savings (new
structural benchmark for November 2021). The guidelines would lay out an action
plan with target dates to attain the planned savings, e.g, enforce catalog, bulk and
standardized purchases, expand electronic catalogues to cover the majority of items
purchased by public entities, negotiate bulk contracts with suppliers, provide
information to regulators on competitive bidding, etc. The mechanisms that allow the
measures to yield the desired result would involve crosschecks by the Ministry of
Economy and Finance or a related entity that purchases adhere not only to the
guidelines, but to budgetary limits set for the procuring institution. The guidelines
would be in immediate effect for the central administration and IESS. Local
governments and SOEs would need more time to prepare for compliance with the
guidelines, including analysis to expand electronic catalogues, and training on using
them; hence enforcement for them would start no later than the first quarter of 2022.
Additionally, an anticorruption law approved in February 2021 created the National
Control Subsystem (Subsistema Nacional de Control, SNC) presided by SERCOP and
integrated by UAFE, SRI, the Office of the Comptroller, the State Attorney’s Office, and
financial regulators, which is set begin operating later this year (new structural
benchmark for October 2021). The SNC will allow public entities with control
competencies over public procurement to share information about their activities,
through the interoperability of their databases, and act in a coordinated manner when
tackling irregularities in procurement. This will generate savings and improve the
effectiveness and transparency of all involved agencies in controlling public
procurement, both directly, by curbing corruption in procurement, and indirectly, by
closing informational loopholes and therefore discouraging corruption. Building on
SERCOP’s in-house assessment and a World Bank’s study using data on public
procurement contracts across the public sector for 2013–17, those measures (SERCOP
guidelines and SNC) are estimated to yield cumulative savings of 1.5 percent of GDP
starting with the 2022 budget execution and through 2025 (text table). We will also
ensure that SERCOP has the needed resources and staff to support the effective
implementation of procurement reforms.

• Capital expenditure. We will prioritize capital expenditure projects, focusing on the oil
sector (while at the same time opening the oil sector to private sector investment). We
will also promote public-private partnerships and concessions to the private sector for
infrastructure investment, with due account to contingent liabilities and the associated
fiscal risks. The Ecuadorian Development Bank (a public bank) will channel multilateral
and bilateral resources for infrastructure investment by local governments. Finally, in
line with TA recommendations, we aim at reducing expenses in unused infrastructure
for over 5 years and related maintenance costs. To support capital expenditure
prioritization and lock in the gains over the medium term, we will undertake a Public
Investment Management Assessment (PIMA) in the first quarter of 2022, supported by
IMF technical assistance, to improve the public investment management cycle and
increasing the transparency and efficiency of public investment, with a view to ensure
that resources are allocated to growth-enhancing investment in public infrastructure.

• Fuel subsidies. We will maintain the current automatic fuel pricing mechanism to
gradually align domestic fuel prices with international prices. The automatic monthly
change in diesel prices was changed from +/-5 percent to +/-3 percent in January

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2021, to smooth the adjustment for economic agents and sectors, considering the
large increases in global oil prices and pass through to date. We believe those
subsidies are not well-targeted instruments to support those in need. Instead, fuel
subsidies benefit more those who do not need the support, and also provide ground
for corruption and smuggling, with a significant fiscal cost. They also encourage more
fuel consumption, which is harmful to the environment and in conflict with our goals
for reducing carbon footprint. We will look for opportunities to advance on the reform
in the period ahead. We are currently exploring options to target subsidies on public
transportation, while continuing the reduction in the subsidy for other users, with
some tariff reductions for vehicles and inputs for the transportation sector. We have
also lowered import tariffs on energy efficient vehicles, so that Ecuadorians can more
cheaply get vehicles that use less energy, both saving resources and helping the
environment. We will seek ways to make the subsidy reform permanent and limit the
risk of reversal when international prices rise in the future. Importantly, in addition to
generating long lasting fiscal savings, the reform will encourage a more efficient use of
energy and help preserve the environment, curtail smuggling, and limit the depletion
of natural resources. The fiscal savings from the reform will finance higher priority
public spending, including the expansion of coverage of poor families under social
assistance programs.

• Expenditure review. Important analyses on our expenditure profile have been carried
out over the last years, as covered in the bullets above, pointing to redundancies in
some public sectors and large inefficiencies. In other areas where we received
significant technical assistance from the IMF and other multilateral partners, we will
implement the relevant recommendations. In addition to identify measures for any
additional savings, including as backup contingency purposes, we will carry out a
detailed expenditure review, drawing on inputs from the IMF and the World Bank over
the coming months, focusing on updating earlier analyses and less-studied areas.

• Arrears. We are dedicated to clear arrears gradually and avoid accumulating new ones.
Given the significant cash pressures faced by our treasury, the government ran large
account payables to other public entities and also to the private sector in previous
years. Consequently, our government inherited large central government account
payables of over 90 days overdue amounting to $967 million as of June 2021. Going
forward, we are committed to comply with our budget obligations. With the assistance
of a long-term expert provided by the IMF, we will work on the implementation of the
new monitoring system to evaluate the existing stock of domestic payment arrears of
the central government and selected relevant entities of the NFPS that were
accumulated in previous years and the first half of 2021. We will publish a
methodology to estimate the stock of arrears, and the reporting templates to be used
by public sector entities (structural benchmark for November 2021) We will also
revamp the strategy to clear, monitor, and prevent further accumulation at the NFPS
level that was prepared earlier this year. To that end, we will develop the Financial
Management Information System (the e-SIGEF in the short term and SINAFIP in the
long term), to register the due dates and other information required to determine
when an obligation falls into arrears in the system. We will design a policy to monthly
gather the information on arrears from other entities of the NFPS by the MEF. To
prioritize payments, we will outline detailed policies and systematize them.

• Social security. A reform of the social security system is necessary and urgent, as the

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present system is not only actuarially insolvent but will incur cash flow shortages while
posing rapidly rising pressures on the central government’s budget. A diagnostic of
the social security system was undertaken with World Bank support: we intend to
establish a high-level commission to promote a widespread public communication
effort on the need for pension reform and consider options to address it. The social
security administration (IESS) has started to reduce its personnel, and more efficiency
gains will be promoted while protecting the provision of health, pension, and disability
benefits.

• International cooperation. In addition to the establishment of a Large Taxpayer Unit

and enabling the declaration of assets held abroad, we will also pursue information
exchange with foreign tax authorities; already an agreement has been established with
the United States, and we are promoting an agreement with the Global Forum (CAAM)
that would also enable information exchange with more than 140 jurisdictions.

SDR allocation use

19. The new SDR allocation served a dual purpose of boosting Ecuador’s international
reserves and supporting government’s finances. To this end, we have reflected the new SDR
allocation directly on the Ministry of Economy and Finance (MEF) balance sheet and are
using it for the budget transparently. As every other balance of payments inflow, the SDR
allocation had the effect of increasing international reserves, an asset on the BCE’s balance
sheet. Its corresponding liability was recorded in the Single Account of the National
Treasury, enabling use by the MEF towards the budget. As the fiscal agent, the BCE
converted the SDRs into freely usable currency. All spending from the proceeds is recorded
with a unique budget code, which provides transparency and accountability to its use. We
have verified that the recording and use of the SDRs is in compliance with the Organic
Code of Planning and Public Finance (COPLAFIP) and the Organic Monetary and Financial
Code (COMYF). As the holder of the liability of the SDR allocation, MEF will be responsible
for the interest rate cost and exchange rate risk on the SDRs, along with reconstituting the
SDR balances when needed, as outlined in the joint BCE-MEF Memorandum of
Understanding.

Contingency policies

20. Cognizant of the risks to our 2021 and 2022 budgets and overall medium-term
fiscal framework, we have identified credible contingent policies. For the 2022 budget,
these risks will be reflected in the fiscal risk statement to be annexed to our budget
document. Risks to our fiscal framework include, but are not limited to, a deterioration of
the outlook for global oil prices, shortfalls in financing, and materialization of contingent
liabilities. In particular, a decline of global oil prices from our budget assumptions—
$59.8/barrel for 2021 and $59.2/barrel for 2022—would increase the annual fiscal deficit by
0.7-0.8 percent GDP for each $10 dollar/barrel decline, after taking into account the
concomitant reduction in fuel subsidies and import bill for fuel derivatives. We are adopting
a two-pronged strategy to cushion the impact of those risks on the near-term budget and
medium-term fiscal sustainability:

• For the near-term, we have prepared backup fiscal measures to be implemented

should there be a sharp decline in global oil prices or shortfalls in financing. These
include accelerating reforms on the expenditure side while continuing to base our

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revenue forecast on conservative assumptions for asset monetization until the related
projects mature.

• From a medium-term perspective, we will keep in mind inter-generational equity

considerations and broader public finances implication in allocating any additional oil
revenue windfall from what is currently envisaged. Saving part of windfall in
nonrenewable resources toward buffers would also reduce the procyclicality of fiscal
policy going forward and help finance environmental-friendly reforms. Two oil
stabilization funds are envisioned (in Decree 95 and in COPLAFIP, respectively).
Moreover, our ongoing SOEs reform, supported by asset quality reviews of public
banks, should help contain unexpected contingent liabilities and limit calls on the State
budget. The expenditure review we undertake later this year and the PIMA next year
will help identify additional contingency measures.

Strengthening Fiscal Frameworks, Governance, and Transparency

21. We are dedicated to increasing transparency and improving practices in Ecuador´s

fiscal management. In August, we published revised historical government financial
statistics for 2012-2020. This is an important improvement in fiscal transparency as fiscal
data from the public sector was discontinued in the mid-2010s and required significant
efforts, supported by IMF technical assistance, to bring the fiscal data up the latest GFS
manual. The data is now published on the MEF website
(https://www.finanzas.gob.ec/estadisticas-fiscales-historicas/). Importantly, the data is now
disaggregated between different levels of the non-financial public sector with consistency
between above- and below-the-line. These improvements will allow our government to
make better informed policy choices and our civil society to better monitor the state of the
public finances. We remain committed to further improving debt transparency.
Furthermore, a Compilation Guide for financial statistics has been published to enhance
transparency and statistics standardization. This includes continuing regular publication of a
statistical public debt bulletin as well as sovereign debt and crude oil pre-sale contracts as
legally permissible. Information on debt holder profile is now included in IMF staff reports,
in line with requirements under the Debt Limits Policy. We will also seek to identify
additional areas to improve debt data disclosure with the support of technical assistance. In
this connection, we will request IMF TA on quarterly debt data. Beyond the publication of
GFS, we are dedicated to enhancing fiscal transparency. To support this objective, we will
undertake a Fiscal Transparency Evaluation (FTE) in the second quarter of 2022, supported
by IMF technical assistance, to improve the quality of fiscal reporting, fiscal forecasting and
budgeting, fiscal risk analysis and management, and resource revenue management, which
are of importance for Ecuador. To enhance debt transparency and make our debt
operations more predictable, we will update the existing Medium Term Debt Strategy that
was formulated in February, so that it establishes a debt policy agenda, including analysis
on costs and risk tradeoffs of financing options and their impact on the future debt
portfolio. Public procurement reforms will enable more transparent and competitive
bidding processes. Under the leadership of the MEF, the Public Finance Statistics
Committee has been implemented, through which statistical compilation methodologies
are coordinated and communicated among the organizations that make up the NFPS.

22. We have also advanced in improving our fiscal policy management systems, with

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the following actions:

• We started implementing COPLAFIP regulations. The amendments to the organic code

of planning and public finances COPLAFIP that were adopted in July 2020 are a game
changer for Ecuador’s public financial management. In order to make the timely
collection, accurate compilation and publication of fiscal data systematic, a regulation
on data reporting by subsectors of the NFPS has been adopted end-September 2020.
Remaining regulations were adopted by Presidential decree in early December 2020,
also encompassing the regulations on data reporting that were adopted in September
2020 by a ministerial decree, so as to fully consolidate and operationalize all
amendments to the law. Going forward, we will implement the COPLAFIP with support
from the IMF on four areas: fiscal risks; medium term fiscal framework; fiscal rules, and
fiscal coordination.
i. Fiscal risk: We are developing and implementing a fiscal risk strategy to
underpin the fiscal risk statement that is now requested to be annexed to our
budget documents. The statement will present, analyze, and estimate the
impact of fiscal risks on the budget implementation, including from PPPs. The
2021s Budget Proforma incorporates the first Fiscal Risk analysis and strategy,
utilizing Fund TA. Advances are being made in establishing a fiscal risks unit
within MEF.
ii. Medium-term fiscal framework (MTFF): We will start presenting MTFF together
with our budget documents starting October 2021 and April 2022. MTFF will
help to guide the budget process with a top-down approach and ensure better
execution.
iii. Fiscal rules: With the enactment of amendments to COPLAFIP last year, we are
issuing regulations on expenditure ceilings that will support the newly
introduced expenditure growth fiscal rule.
iv. Fiscal coordination: Both the MTFF and fiscal rules require an enhancement of
coordination among intra-NFPS entities. In view of strengthening a coherent
fiscal policy at the national level, we will establish a National Fiscal Coordination
Committee (NFCC) by end-November, 2021 (structural benchmark). The
Ministry of Finance and Economy and the National Planning Agency will appoint
delegates to the NFCC. The Committee will be tasked with monitoring and
evaluating the National Development Plan as well as the budget execution,
voting on the overall and sectoral fiscal targets, while assessing the quality of
public spending. This Committee may formulate specific recommendations for
the rationalization of budget resources and corrections or modifications to the
planning instruments.
• We are enhancing transparency in our public procurement system. Our procurement
website centralizes information providing access to relevant procurement documents,
including contracts. In September 2020, we enacted a regulation mandating the
publication of additional information from procurement processes such as the names of
the awarded entities and their beneficial owner(s), and ex-post validation of delivery on
a dedicated government website to prevent the misuse of public resources. To further
promote data synergies that improve the overall capacity to reduce opportunities for
corruption, we have been working on complementary measures, including the updating
of the register of entities participating in public procurement (registro único de
proveedores) and the data requested by the company registry, to incorporate beneficial

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ownership identification requirements. Our government will ensure that such

information will be direct and freely accessible. While all information regarding entities
participating in procurement processes is being requested, including beneficial
ownership, the implementation and accessibility should be improved.1 To illustrate the
progress so far, SERCOP will present on a dedicated webpage the legal ownership and,
where available, the ultimate beneficiary owner information of the contracts exceeding
US$962,410 (a threshold defined by the Office of the Comptroller General, equivalent to
0.003 percent of the central government budget, to issue preemptive clearance reports
on public procurement, in order to improve anticorruption practices) awarded since
September 2020, which represent about 90 percent of the value of awarded purchases
over the last 12 months (prior action). SERCOP will also enhance the collection of
beneficial ownership information and its accessibility for all remaining contracts by the
end of November (proposed structural benchmark). Changes to the bidder application
process will ensure publication of 100 percent of new contracts, and beneficial
ownership information, going forward beyond end-November 2021. While SERCOP
maintains an independent and isolated registry of self-reported data, including final
beneficiaries, working in coordination with other entities such as UAFE would
significantly improve the robustness of our transparency capacity. Moreover, we will
conduct an independent audit of the 100 largest public procurement contracts awarded
over 2022-21. This audit will shed light on compliance and discretions in the attribution
of tax expenditure to the private sector in public contracts (structural benchmark for
September 2022).
• Additionally, we will improve our cash management capacities by preparing and
presenting to IMF staff a central government financial plan for the remaining of year
2021 approved by the Financial Committee (prior action). The financial plan will include
the detailed monthly cash flow, the arrears as of July 2021 verified by MEF following the
COPLAFIP definition by sector, 2021 clearance estimate and monthly accumulation data,
a document with the potential risks associated to the financial plan, potential mitigating
measures, and an explanation of the deviations of the 2021 Financial Plan delivered to
IMF staff in December 2020. Going forward, our cash management will aim at
monitoring the budget quota for the expenditure execution of the entities and align it
with the availability of cash, using instruments such as commitment and accrual quotas.
We will ensure that the budget Proforma and its corresponding Financial Plan consider
all the information on budget expenditure, arrears, and any other non-budgetary
expenditure and how they will be financed. We will proactively use commitment control
along the year and update to the Financial Plan. We will use the tools of alignment
between budget execution and cash availability and short-term securities
(CETES/NOTES) to solve temporary liquidity deficiencies. Finally, we will also improve
our projection capabilities of cash availability and its level of detail and use the Financial
Committee or other mechanism of high-level alignment.

Strengthening the Institutional Framework of our Central Bank

23. The landmark COMYF law was adopted on May 3rd of this year. As part of the
implementation of this law aiming to strengthen the Central Bank balance sheet, the

1
Available information is available at https://portal.compraspublicas.gob.ec/sercop/biblioteca/. Ultimate
beneficial ownership (UBO) information, where available, can be accessed by following these steps: go to
Ofertas Adjudicadas/ Descarga/ Ofertas/ choose REGIMEN/ choose sector; download contract; see section
I.3.

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ECUADOR

Ministry of Finance and the Central Bank signed an agreement on June 30, to transfer the
shares of the public banks held by the Central Bank to the Ministry of Finance with the
commitment by the Ministry of Finance to pay about US$2.4 billion during 2027–35

Treasury Payments to Central Bank

(In USD millions)
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Maturing Treasury securities 708.4 242 871.4 200 1,175.60 1,210.20 … … … … … … … … …
Repurchase of public bank shares … … … … … … 264.2 264.2 264.2 264.2 264.2 264.2 264.2 264.2 264.2

Source: Ministry of Economy and Finance and Central Bank of Ecuador.

according to the table included below.

24. The BCE will strengthen its research department with the goal of supporting
policymaking decisions. This includes preparing a financial stability report in 2022 and
presenting an annual technical assessment on the fiscal budget to the National Assembly.

25. A new unit, the Unit of Management and Regularization (Unidad de Gestion y
Regularizacion), was created for the clean-up of legacy assets in the central bank from the
1999 banking crisis. All legacy assets, liabilities, obligations, and rights that resulted from
the 1999 banking crisis will be transferred to the new agency after an independent audit,
expected to be completed by end December 2021. From the legacy assets, the central bank
already transferred 17 vehicles to the technical secretary of real estate management and
more than 100 items to the Ministry of Culture.

26. In addition, and consistent with our objective to improve central bank transparency,
we have continued to implement the recommendations of the IMF safeguards assessment.
In this regard, we will publish in 2022 the audit opinion on the BCE financial statements
starting with the 2021 report. We are also on track for making the Audit Committee
operational by appointing its Board members, and adopting the IFRS accounting standard,
both by the end of this year. Following the establishment of the Audit Committee, the
central bank will also advance the independence and capacity of the BCE’s internal audit
function.

27. The Latin American Bank for Foreign Trade (BLADEX) increased the amount of
letters of credit it has with the central bank, which are needed for fuel imports. New letters
of credit are planned to be negotiated with international banks to help manage the short-
term liquidity of the nation's Treasury. Finally, in September, the central bank will establish a
working group with private and public entities to identify shortcomings in the financial
payments system and develop a plan to address them. This initiative aims to prepare
reforms and proposals for the approval of the new Monetary Board.

Boosting the Resilience of our Financial System

28. Our financial system remains resilient and liquid. Although the economy has started
recovering, large uncertainties remain that could put strains on the system. We are
committed to ensuring greater supervisory scrutiny. To support those efforts, a Fund
technical assistance on stress testing is in progress. The objective is the improvement of
stress testing models of liquidity and credit risk in support of banking supervision and
policymaking during the transition to the post-COVID period. We will ensure that the
Superintendency of Banks has the needed resources and staff to effectively supervise the
system, implement the technical assistance being provided by the Fund on enhancing stress

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testing capacity and risk-based AML/CFT supervision, as well as the assistance being
provided by other development partners.

29. We note that the crisis measures introduced at the outset of the pandemic,
including the deferral and restructuring of loans, a reduction in banks’ contributions to the
liquidity fund as well as extending the period to classify borrowers as non-performer and
reducing provisioning requirements, have helped financial institutions and borrowers to
deal with the impacts of the crisis. At the same time, we recognize that crisis measures
being in place for too long can create distortions and weaken the health of the banking
system. On balance, since economic activity has started to gain steam, and banks have been
taking the proper safeguards measures under the close watch of the Superintendency of
Banks, we believe that banks are ready for a smooth transition for the crisis measures to
expire at the end of this year. If some banks are still under-provisioned after the NPL
classification and provisioning requirements revert to the pre-crisis system, the
Superintendency of Banks, after a thoroughly assessment of these bank’s financial situation,
and in line with international best practices, could grant additional time on a bank by bank
basis to achieve compliance under certain conditions, such as a clear financial plan to reach
needed provisioning levels, restrictions on dividend payouts, and closer supervisory scrutiny
to safeguard financial stability. The IMF would support the Superintendency on the strategy
of the action plans.

30. For the cooperative sector, the crisis measures, previously set to expire in December
2021, were extended recently to December 2022. At the same time, we note that the
regulatory arbitrage between the cooperatives sector and the banking sector, especially for
Segments 1 and 2, has spurred a growth in this sector that warrants closer scrutiny. Some of
these institutions are close in size to medium sized banks and their lending activities and
deposit taking and should eventually be held up to similar standards, in particular in terms
of their lending activities (following the principle of “same activity, same risk, same
regulation”). Therefore, we intend to use the additional time afforded by the crisis measure
extension to close the regulatory gap on NPL classification and provisioning by the time the
crisis measure expires. To this end, SEPS plans to work with the largest cooperatives to
develop a plan, in consultation with the IMF, aiming at aligning the provisioning
requirements for large cooperatives with those of banks by end 2022.

31. The supervisor of cooperatives and mutuals (SEPS) is implementing a plan to

strengthen the institutional framework by introducing higher standards in the statutes of
the institutions under their oversight and setting minimum capital requirements, to be fully
implemented by mid-2023. In addition, SEPS is in the process of enhancing corporate
governance standards for the institutions under their supervisory umbrella. These initiatives,
together with strict enforcement and further efforts to strengthen resources, are important
to enhance the stability of the cooperative system. While these initiatives are being
implementing, it is necessary to maintain the moratorium on the creation of new entities
until the technical conditions are appropriate for the reopening of registrations.

32. Separately, we are also interested in updating the overall provisioning framework
for banks as well as cooperatives. As there is no one-size-fits-all approach, designing a new
system of provisioning requires advance preparation and careful analysis on the Ecuadorian
system on credit cycles and expected losses. Through the technical assistance provided by
the Fund, we are in the process of building that capacity. We intend to carry out the needed
preparations before designing such a system, in close consultation with the Fund and

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banks, in the period ahead.

33. Non-performing loans in public banks, which were already high prior to the
pandemic, have further increased during the pandemic to reach an average of about 17
percent in two public banks; Banecuador and CFN. The other two public banks, BEDE and
CONAFIPS, are regularly audited and are in better financial health. To have a comprehensive
view on potential contingent liabilities arising from public banks, and to ensure that they
remain solvent and well capitalized, supervised by the Superintendency of Banks, we plan to
conduct an independent Asset Quality Review (AQR) in consultation with the IMF to
estimate any shortfall in provisioning and to assess capitalization needs (structural
benchmarks for November of 2021 to initiate the reviews, and for June 2022 to finalize
them). In addition, we will reform the CFN to focus its effort of being a second-floor bank to
support our development objectives. Banco del Pacífico, which is not legally a public bank
but is fully owned by the State, went through a detailed evaluation in 2019 in preparation
for an eventual sale. Its management plans to conduct another such evaluation in 2022.

34. In view of strengthening the central bank’s contingency facilities and improving the
resilience of the financial system, we recently doubled the size of our swap facility with the
Bank of International Settlements to $840 million as a precautionary measure in case of
USD liquidity shortages.

35. In August, the BCE completed the methodology for setting interest rate caps. The
new members of the Financial Policy and Regulation Board will have two months after
taking office to revise and approve the methodology developed by the BCE. It will be
implemented progressively for the thirteen credit segments. This methodology is based on
four components such as credit risk, funding, operational and capital costs in order to be
consistent with market conditions. Interest rates will be reviewed periodically by the BCE
based on information provided by regulators. This methodology pursues three objectives:
1) to have technical support for setting interest rates, 2) to foster competition in the
financial system, and 3) to promote financial inclusion. The Financial Policy and Regulation
Board will develop the regulation to apply the new methodology, while financial regulators
ensure its implementation.

36. The COVID pandemic creates a health concern about the use of cash and has sped
up technological absorption by individuals and businesses. This creates an opportunity to
further incentivize alternative forms of payments. Promoting alternative means of
payment—such as credit cards, online transfers, and online payment in e-commerce—that
reduce use of cash can bring operational efficiency to the BCE, increase financial inclusion,
reduce potential sources of COVID contagion, and even facilitate cash transfers for social
policy. We have been taking steps to encourage digitalization of payments to reduce costs
and improve transparency. The Monetary and Financial Policy and Regulation Board
approved Resolution 672 on August 5, 2021, that eliminated the 22-cent fee for receiving
electronic interbank transactions. This resolution also requests that all public service
payments for amounts greater than $76 will be made through of electronic means starting
January 1, 2022. We will revise sources of red tape and disincentives in the use of these
technologies, with a view to allow further adoption of those technologies. We also plan to
implement a Real-Time Gross Settlement (RTGS) for large-value interbank funds transfers in
early 2022.

37. We plan to maintain the liquidity fund assets in high quality liquid investments

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 ECUADOR

abroad at top international financial institution. As of June 2021, the liquidity fund had
about $2.7 billion, and about 95 percent of these funds are invested with CAF, FLAR, and
the BIS. We plan to continue this strategy. Regarding banks’ contributions to the fund,
which had been reduced in 2020 to help the financial system face the impacts of the
pandemic, COSEDE will make an assessment on restoring the pre-crisis contributions soon
after the president of its Board is appointed and share with the IMF.

Strengthening Competitiveness and Private Sector-led Growth

38. Our administration is committed to restoring the international competitiveness of

the Ecuadorian economy and to catalyzing a private sector-led growth that raises the living
standards for all Ecuadorians. Our goal is to make Ecuador a preferred destination for
businesses worldwide, supported by our international trade agreements, a gradual
reduction in the ISD, and reforming capital and labor markets. In this respect, the recent
Decree 95 will foster greater private sector participation in the oil and gas sector, enabling
participation contracts; mining Decree 151 will further facilitate investment in the mining
sector, which already is increasing production and exports at a high annual growth rate.

39. The COVID-19 pandemic has compounded pre-existing labor market weaknesses,
resulting in a timid recovery in formal employment to date and weak jobs quality. The
Humanitarian Law in effect since June 22, 2020, has helped save 74,000 jobs and create an
additional 240,000 jobs, including through a mechanism of emergency hour reduction upon
agreement between employers and employees. In order to improve competitiveness,
Ecuador needs to modernize its labor market to foster new forms of labor contracts that
can particularly support female labor force participation and employment opportunities for
the youth. We are preparing a new bill (Ley de Oportunidades Laborales) to foster private
sector employment, particularly for those currently in the informal sector (mostly women
and young people) lacking any social protection mechanisms. The law seeks to increase
flexibility in work arrangements, reduce rigidity in part-time work and temporary contracts,
and overall equity on the labor market, including the gender dimension. To build consensus
and promote the joint interest of employers and employees, we are adopting a consultative
approach to those labor market changes, bringing together all labor market participants,
including the unemployed. We are also committed to applying our newly developed
mechanism for setting the minimum wage, tied to concrete and predictable
macroeconomic aggregates such as inflation and productivity.

40. We adopted a regulation in November 2020 to enhance the online publication of

asset declarations by high-level officials, and/or politically exposed persons (PEPs) to
increase transparency and reduce corruption risks. This step is part of a broader reform to
strengthen the asset and interest disclosure regime for high-level public officials and
update it in line with international good practices, and in accordance with the domestic
legal framework. We have therefore ensured the General Comptroller can now publish
additional information online, including itemized information on assets and liabilities. The
General Comptroller Office has also enhanced the accessibility of this information in its
website, to ensure that additional information, including itemized information on assets and
liabilities, are accessible in an easy, searchable, free, and timely way.2

41. To continue with our broader reform agenda to promote good governance and

2
https://www.contraloria.gob.ec/Consultas/DeclaracionesJuradas

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effective anticorruption and AML/CFT frameworks, we will continue to strengthen our legal
foundations in line with international good practices and sustain the efforts towards their
effective implementation. To this end, we plan to:

• upgrade the AML/CFT legislative framework so that it is in effect ahead of the on-site
visit for the GAFILAT assessment expected to start in April 2022. With technical support
from the Fund, we are working to bring the current AML/CFT legislation in line with
FATF international standards by end-March 2022 (structural benchmark).

• enact legislation to strengthen the framework to prevent and manage conflicts of

interests in the public sector in line with the UNCAC (Articles 7 and 8) and international
good practices, such as those included in the ‘G20 Preventing and Managing Conflicts
of Interests Good Practices Guide’ elaborated by the World Bank, the OECD and the
UNODC (2019) (Structural benchmark by end-August 2022). Our efforts will broaden
the existing asset declaration system to ensure it continues detecting and enforcing
against illicit enrichment while also becoming a fundamental tool to detect and prevent
potential conflicts of interest in the public sector. To this end, the declaration form will
incorporate new categories of relevant information such as incomes (types, sources, and
values) and interests (for example, details of positions held outside of office,
participation in public and private entities, professional experience and past
employment, etc.) directly or indirectly owned (for which public officials are beneficial
owners) by the public official or by their close family members, in the country or
abroad. Public access to the information in the declarations is a key component of this
commitment as it allows civil society to complement these efforts. The legislation will
therefore prioritize transparency and ensure on-line public access to relevant
information on the assets, incomes, liabilities and interests in the declarations.

• continue strengthening the Superintendency of Banks’ capacity, with technical support

from the Fund, to implement of a risk-based approach (RBA) to AML/CFT supervision.
This will strengthen our AML/CFT framework and better support our efforts to tackle
underlying crimes, such as corruption and tax evasion, and support asset recovery.

42. Building on IADB’s technical support, we are committed to strengthening the

framework for the operation of state-owned enterprises (SOEs), aligning their standards to
that of private companies to improve efficiency and limit contingent liabilities to the
budget—the government absorbed about $490 million in SOEs losses during 2018–2020 in
addition to more than $600 million in transfers. The National Assembly is overhauling the
SOEs law to promote corporate governance practices, including on the appointment of
Board members, and strengthen transparency in the operations of SOEs. Seven SOEs are in
the process of liquidation. A presidential Decree (#[95]) was adopted to audit the merger
process of PetroAmazonas and PetroEcuador. To that end, we will also conduct an audit of
the 2019 and 2020 financial statements of PetroAmazonas and PetroEcuador (structural
benchmarks to launch the audits by end-November 2021, to complete the audits of
individual companies by end-April 2022 and the 2020 financial statements of the joint entity
by end-October 2022 in compliance with IFRS guidelines). We consider the reform of our
public banks an important pillar of SOEs reform. Consistent with our quest for private
sector-led growth, the PPP Committee is developing guidelines—with IADB and US
Treasury support—to operationalize the executive decree institutionalizing the approval
and bidding process for PPPs that was adopted in November 2020. A fiscal risk unit is being
set up within the ongoing reorganization of MEF; it will inter alia evaluate the viability of

94 INTERNATIONAL MONETARY FUND

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PPPs projects, including quantification of risks to the public sector’s balance sheet, and
propose ways to mitigate them. Such risks will be clearly presented in our fiscal risk
statement, to be developed starting with the 2021 and 2022 budgets.

43. The conduct of audits of COVID-related spending by the Office of the Comptroller
General, as per our commitment to the Fund when securing emergency financing in May
2020 under the RFI, have been implemented. The COVID-19 audit reports have been
consolidated and displayed in a dedicated webpage within the Comptroller General Office
website (see https://www.contraloria.gob.ec/EmergenciaSanitaria/Covid19). The webpage
provides easy access to all the published independent audit reports of COVID-19-related
spending with the corresponding links to the reports. The dedicated COVID-19 audit
webpage will also inform the public of other COVID-19 related audit reports that cannot be
published in the webpage at this moment due to confidentiality required by law arising
from ongoing investigations and legal proceedings (prior action).

44. We are dedicated to reducing the cost of operations of strategic infrastructure by

enhancing private sector’s participation with leasing concession rights (including for
renewable energy generation). To foster private sector’s participation, we will review and
enhance the Public Private Partnerships (PPPs) legal framework. For now, given recent
difficulties to secure asset monetization and PPP contracts, we will rely on conservative
revenue projections for the purpose of our budgets and medium-term fiscal framework. We
will strive to rely on international best practices to ensure transparent processes and
protecting the budget from contingent liabilities.

45. Our government is committed to pursuing equitable and environmental-friendly

policies. We will seek to reduce the reliance of our economy on oil and strengthen our
resilience to natural disasters. Leveraging our existing institutional set-up, we intend to
work with our international partners to identify, cost, and implement concrete actions to
reduce GHG emissions, including as part of our commitment under the Paris Agreement.
Already, our ongoing fuel subsidy reform and extensive reliance on hydropower for
electricity generation, by reducing CO2 emissions, are important steps toward climate
mitigation. Going forward, we will promote the transition to electric vehicles and the
installation of electric recharging stations. Climate change is a macroeconomic imperative
for Ecuador, as the global drive towards net-zero CO2 emissions is likely to permanently
depress oil prices. Our quest for private sector development will open up new business
opportunities and progressively contribute to diversifying our economy away from fossil
fuels. Moreover, our exposure to natural disasters calls for ex-ante preparation, for which
the financial support of the international community would be needed, including to protect
populations in vulnerable areas. We will receive IADB support to establish a climate finance
unit within MEF.

46. We will continue working on developing domestic capital markets to allow financial
deepening and diversifying financing sources for the government and the private sector,
with technical assistance from the United States Treasury. We intend to standardize
government securities, replace, on a voluntary basis, the non-standardized and excessively
short-term government debt securities held by market participants, including the BIESS,
with standardized, longer-term ones, develop a domestic yield curve, and lengthen
maturities of government short-term instruments. To date, domestic bonds with
standardized financial conditions have been placed to private and public investors. These
reforms can help increase the flow of resources from investors to corporations and to the

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government and eventually increase investment, productivity, and growth.

Capacity Development

47. We are committed to radically enhance the capacity of our civil servants in both the
MEF and the BCE. For this purpose, we are engaging in vast capacity building and technical
assistance programs with various international organizations, including the Fund. As stated
above, we are receiving support on cash management with the assignment of a long-term
expert, we have requested technical assistance on fiscal risks, fiscal rules, MTFF, and fiscal
coordination. In addition, we also plan to request support of the IMF in the process of the
expenditure review and have agreed to undertake a Public Investment Management
Assessment (PIMA) in the first quarter of 2021 and a Fiscal Transparency Evaluation (FTE) in
the second quarter of 2021.

48. We are committed to continue to work with the Fund on a customized Financial
Programming and Policies (FPP) for Ecuador. Our technical staff at MEF and the BCE already
received virtual training on FPP, and the core capacity building that would deliver a
customized macro-framework has been scheduled for delivery in the second quarter of
2022, The FPP training—which we see as a continuation of a series of macro-fiscal-financial
courses for our government officials—will allow our staff working in different areas and
relevant public entities to study the inter-linkages among different sectors of the economy
and run internally consistent policy scenarios. By bringing together staff from different
agencies, the strong inter-relations among the different sectors of the economy, inherent to
the FPP’s framework, will also practically illustrate the role of inter-agency coordination.

49. We will continue to improve balance of payments statistics and national accounts.
In order to improve the understanding of the financial account and capital flow movements,
we will work to improve the quality and coverage of information on the private sector for
external sector statistics, drawing on micro data where relevant. We will continue efforts to
ensure that the transition to BPM6 is fully implemented, including by strengthening
compilation and dissemination, and improving quality and coverage of the International
Investment Position, in accordance with recommendations from the IMF.

50. We will also ensure various public agencies have the capacity to upgrade their
knowledges and processes via the support of the Fund’s capacity building. Various
Superintendencies, e.g, of banks and of cooperatives and mutuals, are receiving technical
assistance support on stress tests. The Financial and Economic Analysis Unit (UAFE) and the
Superintendency of Banks are also receiving technical assistances to strengthen the
AML/CFT framework. Further technical assistance is also contemplated with the Office of
the Comptroller General in order to strengthen anti-corruption capacities.

Monitoring Progress Towards Our Goals

51. The program will be monitored based on performance criteria, indicative targets,
and structural benchmarks as set out in Tables 1, 2, and 3, based on definitions in the
Technical Memorandum of Understanding attached hereto. It is expected that the Fourth
Review will take place on or after December 15, 2021, and the Fifth Review on or after April
15, 2022.

96 INTERNATIONAL MONETARY FUND

 Table 1. Ecuador: Quantitative Performance Criteria and Indicative Targets, 2020-21
(Millions of U.S. dollars, unless otherwise indicated)
End- End-Dec.
End-Dec. 2020 End-Apr. 2021 Sep. 2021

Program Adj. 3/ Actual Status Program Adj. 3/ Actual Status Program Program
Quantitative performance criteria
1. Overall balance of the budgetary central government and CFDD (floor)1/ -4,005 -3,893 -3,655 Met -241 -305 -184 Met -2,301 -4,188
2. Accumulation of NFPS deposits at the central bank (floor) 1/ 300 487 1,293 Met -47 22 -55 Not Met 899 1,527
3. Non-accumulation of external payments arrears (continuous PC ) 0 0 0 Met 0 0 0 Met 0 0
4. (No new) Net credit to government from the central bank (continuous PC ) 0 0 0 Met 0 0 0 Met 0 0
Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) 1/ -5,467 -5,355 -4,072 Met -572 -636 -90 Met -3,368 -6,030
6. Overall balance of the NFPS (floor) 1/ -5,656 -5,544 -4,334 Met -273 -337 842 Met -513 -2,422
7. Change in the stock of NIR - program definition (floor) 1/ -4,228 -4,041 -2,357 Met -579 -110 542 Met 38 717
8. Coverage of the cash transfer programs for lower income families - number of families (floor) 2/ 226,000 226,000 271,668 Met 384,600 384,600 443,619 Met 453,700 514,000
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/ Cumulative change from January 1, 2021.
2/ Cumulative change from July 1, 2020.
3/ Adjusted for oil prices (and for disbursements from multilateral institutions and China for NFPS deposits) as per the TMU.

Table 2. Ecuador: Quantitative Indicative Targets, 2022

(Millions of U.S. dollars, unless otherwise indicated)
End-Apr. End-Aug.
2022 2022

IT IT
Quantitative performance criteria
1. Overall balance of the NFPS (floor)1/ 713 1,117
2. Accumulation of NFPS deposits at the central bank (floor) 1/ 678 1,135
INTERNATIONAL MONETARY FUND

3. Non-accumulation of external payments arrears (continuous PC ) 0 0

4. (No new) Net credit to government from the central bank (continuous PC ) 0 0
Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) -76 -991
6. Change in the stock of NIR - program definition (floor) 1/ 432 693
7. Coverage of cash transfer programs for families in the bottom three income deciles - percent of families in each province (floor) 60.0 65.0
8. Coverage of cash transfer programs for families in the first income decile - percent of families in the first income decile (floor) 50.0 57.5
9. Coverage of cash transfer programs for families in the first income decile - number of families in the first income decile (floor) 2/ 625,600 Ⲻ
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/ Cumulative change from January 1, 2022.
2/ Cumulative change from July 1, 2020.

ECUADOR
97
 Table 3. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs)

ECUADOR
98 INTERNATIONAL MONETARY FUND

Reform area Structural Conditionality Objectives Due date Status

Prior Actions

Transparency Pursuant to the regulation issued by SERCOP in September Strengthen Prior action
and AML/CFT 2020, make procurement contracts exceeding US$962,410 anticorruption and
awarded since September 2020, including the legal ownership AML/CFT and protect
and, when available, beneficial ownership information of legal the public purse
entities participating in public procurement, available to the
public in the procurement website, in a directly and freely
accessible and user-friendly manner.

Transparency Consolidate COVID-19 audit work in a dedicated Improve expenditure Prior action
webpage within the Comptroller General Office website. The control, including
webpage will provide easy access to all the COVID related
published independent audit reports of COVID-19-related spending, and
spending with the corresponding links to the reports. The governance
dedicated COVID-19 audit webpage should also inform the
public of other COVID-19 related audit reports that cannot be
published on the webpage at this moment due to
confidentiality required by law arising from ongoing
investigations and legal proceedings. The webpage should
provide a summary of the findings of such reports based on
information that can be disclosed.

Cash Prepare and present to IMF staff a central government Improve institutional Prior action
management financial plan for the remaining of year 2021 approved by the capacity and identify
Financial Committee. The financial plan will include the early warning signs of
detailed monthly cash flow, the arrears as of July 2021 verified impending liquidity
by MEF following the COPLAFIP definition by sector, 2021 constraints
clearance estimate and monthly accumulation data, a
document with the potential risks associated to the financial
plan, potential mitigating measures, and an explanation of the
deviations of the 2021 Financial Plan delivered to IMF staff in
December 2020.
 Table 3. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)
Structural Benchmarks

Fiscal Adopt a regulation, in consultation with Fund staff, to Strengthen the public End-Nov. 2020 Implemented with delay
framework implement the July 2020 amendments to COPLAFIP, among financial management
others, with regards to public debt, the MTFF, budget framework and fiscal
preparation and expenditure ceilings, preparation and discipline, and increase
publication of a fiscal strategy document, budget execution, fiscal transparency
cash management and arrears, budget modification
procedures, fiscal risk management framework, corrective
measures regime, and the fiscal rules framework.
BCE The JPRF will approve an internal audit charter prepared by Improve the BCE’s End-Nov. 2020 Met
the BCE Audit Committee aligned with international standards audit mechanisms
to provide for: (i) the function’s mandate and independence;
(ii) coverage of all BCE’s operations, (iii) adoption of a risk-
based approach, (iv) an internal and external quality
assessment program, and (v) regular reporting to an
independent oversight body.
Transparency Enhance the existing online publication of asset declarations Strengthen End-Nov. 2020 Partially implemented.
and AML/CFT ensuring the easy, searchable, and timely access to anticorruption and Proposed new Structural
declarations of high-level public officials and/or politically AML/CFT and protect benchmark to advance the
exposed persons (PEPs), and publishing additional information the public purse reform
online, including itemized information on incomes, assets and
liabilities, based on regulations adopted by the General
Comptroller, at the request of the government.
INTERNATIONAL MONETARY FUND

Cash Deliver to IMF staff a PGE financial plan for the year 2021 Improve institutional Dec. 16, 2020 Met
Management approved by the Financial Committee. capacity and identify
early warning signs of
impending liquidity
constraints

Transparency Enactment of the anticorruption legislation, approved by the Strengthen End-Dec. 2020 Met
and National Assembly, including measures to ensure that acts of anticorruption and

ECUADOR
Governance corruption are criminalized in line with Articles 15 to 30 of the protect public finances
United Nations Convention Against Corruption.
99
 Table 3. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)

ECUADOR
100 INTERNATIONAL MONETARY FUND

Organic Enactment of amendments to the Central Bank’s legal Strengthen the End-Jan. 2021 Not met. Implemented with
Monetary and framework, elaborated in consultation with Fund staff as autonomy and delay in April
Financial Code committed to under the 2019 EFF, in line with the substantive governance framework
(COMYF) elements and constitutional process described in MEFP ¶16. of the BCE
reform of the
Central Bank
framework

Debt Publish a Medium-Term Debt Management Strategy (MTDS), Facilitate domestic End-Feb. 2021 Met
management prepared with the support of IMF TA, which assesses the cost debt market
and risk trade-offs of the different sources of public funding, development, promote
and establishes a policy agenda. medium-term debt
management, and
increase transparency
of public debt policies

Domestic Share with IMF staff an updated arrears’ clearance strategy Strengthen the End-Apr. 2021 Not met. Converted to new
arrears with the updated information on the stock of arrears as of end monitoring and reduce benchmark
2020 based on quarterly flows for central government and accumulation of
selected relevant entities of the NFPS in line with IMF technical payment arrears
assistance recommendations.

Fiscal Statistics Correct and publish the historical NFPS data, both above- and Improve quality of End-May 2021 Not met. Implemented with
below-the-line, back to 2012. fiscal statistics delay in August

Fiscal Statistics Prepare a compilation guide, in consultation with IMF TA, and Improve quality of End-May 2021 Met
disseminate it to data providers across the NFPS through a fiscal statistics
workshop.

Transparency Undertake an independent audit of COVID-19-related Improve expenditure End-Jun. 2021 Not met. Reset as PA
spending by the Office of the Comptroller General by mid- control, including
2021 and publish the results on a government website. COVID related
spending, and
governance
 Table 3. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)
Tax reform Enactment of a tax reform, elaborated in consultation with Improve the efficiency End-Sep. 2021 New deadline of end-Oct.
Fund staff, aimed at generating revenue and improving the of the tax system 2021
overall efficiency of the tax system.

Transparency Establish and start operating the National Control Subsystem Strengthen End-Oct. 2021 Newly proposed
(SNC) to fight corruption in procurement. The SNC will anticorruption and
facilitate coordination amongst public entities with control AML/CFT and protect
competencies over the public procurement system, via the the public purse
interoperability of their databases.

Transparency Pursuant to the regulation issued by SERCOP in September Strengthen End-Nov. 2021 Newly proposed
2020, make all procurement contracts awarded since anticorruption and
September 2020, including the legal ownership and, when AML/CFT and protect
available, beneficial ownership information of legal entities the public purse
participating in public procurement, available to the public in
the procurement website, in a directly and freely accessible
and user-friendly manner.

Transparency SERCOP, in coordination with the Ministry of Economy and Improve expenditure End-Nov. 2021 Newly proposed
Finance and the National Secretary of Planning, will issue control
procurement guidelines for all sectors of government to
increase reliance on catalog purchases, improve procurement
INTERNATIONAL MONETARY FUND 101

processes, and enforce bulk and standardized purchases for

the central administration. Enforcement will be phased in from
the end of 2021 (Central Government, IESS) until the end of
first quarter 2022 (subnational governments, SOEs).

SOE Initiate independent audits of the 2019 and 2020 financial Strengthen SOEs End-Nov. 2021 Newly proposed
statements of Petroecuador and Petroamazonas by agreeing
on the terms of reference and timeline for completing the
audits.

Financial sector Initiate independent third-party asset quality reviews of the Improve fiscal End-Nov. 2021 Newly proposed

ECUADOR
2019 and 2020 balance sheets of all public banks by selecting transparency
the third-party firm and agreeing on a terms of reference.
 Table 3. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (continued)

ECUADOR
102 INTERNATIONAL MONETARY FUND

Domestic MEF will publish a methodology to estimate the arrears’ stock Strengthen the End-Nov. 2021 Newly proposed
arrears and the templates for reporting on arrears to be used by monitoring and reduce
public sector entities. accumulation of
payment arrears

Fiscal Establish the National Fiscal Coordination Committee (NFCC) Strengthen the public End-Nov. 2021 Newly proposed
framework as set out in COPLAFIP financial management
framework and fiscal
discipline

Social Complete the upgrade of the social registry and expand the Strengthen the social Dec. 16, 2021 New deadline of mid-Apr.
assistance coverage of the social assistance program to at least 80 safety net 2022
percent of families in the bottom three deciles of the income
distribution.

Transparency Enact legislation to strengthen the framework to prevent and Strengthen the End-Jan. 2022 New deadline of end-Aug.
and AML/CFT manage conflicts of interest in the public sector, broadening framework of conflict 2022
the existing asset declaration system to include incomes and of interest and illicit
interests of high-level public officials and/or politically enrichment
exposed persons (PEPs), and ensuring the online publication
of this information on incomes and interests for high-level
public officials and/or politically exposed persons (PEPs), in
line with the UNCAC (articles 7 and 8) and international good
practices.

AML/CFT Enact new AML/CFT legislation to strengthen the AML/CFT Strengthen End-Mar. 2022 Newly proposed
framework in line with the FATF standards. anticorruption and
AML/CFT

SOE Share with IMF staff the completed independent audits of the Strengthen SOEs End-Apr. 2022 Newly proposed
2019 and 2020 individual financial statements of Petroecuador
and Petroamazonas

Financial sector Share with IMF staff the completed independent third-party Improve fiscal End-June 2022 Newly proposed
asset quality reviews of the 2019 and 2020 balance sheets of transparency
all public banks.
 Table 3. Ecuador: Prior Actions (PAs) and Structural Benchmarks (SBs) (concluded)
Transparency Share with IMF staff the results of the independent audits by To fight against tax End-Sep. 2022 Newly proposed
and the Office of the Comptroller General on tax expenditures of evasion, increase
Governance the largest 100 public procurement contracts awarded over revenues, enforce the
2020- 2021. new tax code

SOE Share with IMF staff the completed independent audits of the End-Oct. 2022 Newly proposed
2020 financial statements of the merged entity Petroecuador
and Petroamazonas (joint entity audits, to accommodate IFRS
requirements)

Social Expand the coverage of the social assistance program to no Strengthen the social End-Dec. 2022 Newly proposed
assistance less than 70 percent coverage of the bottom three income safety net
deciles by province and no less than 65 percent of the first
income decile nationwide.
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ECUADOR

Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) sets out the understandings
regarding the definitions of the performance criteria (PCs) and indicative targets (ITs) that
will be applied under the Extended Fund Facility, as specified in the Memorandum of
Economic and Financial Policies (MEFP) and its attached tables. It also describes the methods to
be used in assessing the program’s performance and the information requirements to ensure
adequate monitoring of the targets.

2. Any variable that is mentioned herein for the purpose of monitoring a PC or IT and
that is not explicitly defined, is defined in accordance with the Fund's standard statistical
methodology, such as the Government Finance Statistics. For any variable or definition that is
omitted from the TMU but is relevant for program targets, the authorities of Ecuador shall consult
with the Fund staff on the appropriate treatment to reach an understanding based on the Fund's
standard statistical methodology. All references to “days” indicate “calendar days”, unless stated
otherwise.

3. Program exchange rates. For the purposes of the program, the exchange rates of the U.S.
dollar for the duration of the program are those that prevailed on July 31, 2020 as shown in Table 1.

Table 1. Ecuador Program Exchange Rates

US Dollar to Euro 0.85
US Dollar to Renminbi 6.98
US Dollar to Yen 105.83
US Dollar to SDR 0.71
US Dollar to British Pound 0.76
US Dollar to South Korean Won 1,191.03
US Dollar to Swiss Franc 0.91
US Dollar to Canadian Dollar 1.34
US Dollar to Danish Krone 6.32
US Dollar to Swedish Krone 8.78
US Dollar to Norwegian Krone 9.10
US Dollar to Australian Dollar 1.40
US Dollar to Mexican Peso 22.28
US Dollar to Colombian Peso 3,732.71
Gold prices (US$/ounce) 1,975.86

Source: Bloomberg, as of July 31, 2020.

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Table 2a. Ecuador Quantitative Performance Criteria, 2021

(In millions of US$, unless otherwise indicated)

End- End-Dec.
End-Dec. 2020 End-Apr. 2021 Sep. 2021

Program Adj. 3/ Actual Status Program Adj. 3/ Actual Status Program Program
Quantitative performance criteria
1. Overall balance of the budgetary central government and CFDD (floor)1/ -4,005 -3,893 -3,655 Met -241 -305 -184 Met -2,301 -4,188
2. Accumulation of NFPS deposits at the central bank (floor) 1/ 300 487 1,293 Met -47 22 -55 Not Met 899 1,527
3. Non-accumulation of external payments arrears (continuous PC ) 0 0 0 Met 0 0 0 Met 0 0
4. (No new) Net credit to government from the central bank (continuous PC ) 0 0 0 Met 0 0 0 Met 0 0
Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) 1/ -5,467 -5,355 -4,072 Met -572 -636 -90 Met -3,368 -6,030
6. Overall balance of the NFPS (floor) 1/ -5,656 -5,544 -4,334 Met -273 -337 842 Met -513 -2,422
7. Change in the stock of NIR - program definition (floor) 1/ -4,228 -4,041 -2,357 Met -579 -110 542 Met 38 717
8. Coverage of the cash transfer programs for lower income families - number of families (floor) 2/ 226,000 226,000 271,668 Met 384,600 384,600 443,619 Met 453,700 514,000
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/ Cumulative change from January 1, 2021.
2/ Cumulative change from July 1, 2020.
3/ Adjusted for oil prices (and for disbursements from multilateral institutions and China for NFPS deposits) as per the TMU.

Table 2b. Ecuador Indicative Targets, 2022

(In millions of US$, unless otherwise indicated)
End-Apr. End-Aug.
2022 2022

IT IT
Quantitative performance criteria
1. Overall balance of the NFPS (floor)1/ 713 1,117
2. Accumulation of NFPS deposits at the central bank (floor) 1/ 678 1,135
3. Non-accumulation of external payments arrears (continuous PC ) 0 0
4. (No new) Net credit to government from the central bank (continuous PC ) 0 0
Indicative targets
5. Non-oil primary balance of the NFPS (including fuel subsidies) (floor) -76 -991
6. Change in the stock of NIR - program definition (floor) 1/ 432 693
7. Coverage of cash transfer programs for families in the bottom three income deciles - percent of families in each province (floor) 60.0 65.0
8. Coverage of cash transfer programs for families in the first income decile - percent of families in the first income decile (floor) 50.0 57.5
9. Coverage of cash transfer programs for families in the first income decile - number of families in the first income decile (floor) 2/ 625,600 Ⲻ
Note: Aggregates and adjustors as defined in the Technical Memorandum of Understanding (TMU).
1/ Cumulative change from January 1, 2022.
2/ Cumulative change from July 1, 2020.

4. In addition to the performance criteria listed in Tables 2a and 2b above, the

arrangement will include the performance criteria standard to all Fund arrangements, namely:

(i) no imposition or intensification of restrictions on the making of payments and transfers

for current international transactions;
(ii) no imposition or intensification of import restrictions for balance of payments reasons;
(iii) no introduction or modification of multiple currency practices;
(iv) no conclusion of bilateral payments agreements that are inconsistent with Article VIII of
the IMF Articles of Agreement.

These four performance criteria will be monitored continuously.

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• QUANTITATIVE PERFORMANCE CRITERIA: DEFINITION

OF VARIABLES
Floor on the Overall Balance of the Budgetary Central Government and
CFDD

Definitions

5. The budgetary central government (Gobierno Central or CG hereafter) and CFDD, for
the purposes of the program, consist of the budgetary central government (PGE, including
universities) and the account of financing oil derivatives, namely Cuenta de Financiamiento de
Derivados Deficitarios (CFDD).

6. The overall balance of CG and CFDD is defined as the total revenues of the CG and CFDD
minus their total spending.

7. Total revenues are recorded on cash basis.

Revenues explicitly included are:

• Revenues from oil exports;

• Revenues from the domestic sales of oil derivatives;
• Interest revenues;
• Tax revenues (ingresos tributarios);
• Other revenues (otros ingresos);
• Proceeds from asset monetization (i.e. revenues from the leasing of assets owned by CG and
CFDD).

8. Total spending is recorded on an accrual basis and comprises spending on wages and
salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios), interest
expenditure (interés), other current spending, capital expenditures (including capital transfers and
other investment outlays). Other current spending also includes the cost of imports and local
purchases of petroleum derivatives (Cuenta de Financiamento de Derivados Deficitarios).

9. Government-funded, public-private partnerships will be treated as traditional public

procurements. CG obligations that are accrued on public private partnerships would be recorded
transparently in budget data and measured as part of the CG deficit as they accrue. The accrued but
not settled obligations related to these public private partnerships will be transparently recorded
either as public debt or as a contingent liability of the government (e.g. public guarantees)
depending on the nature of the obligation.

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10. Costs associated with divestment operations or the liquidation of public entities, such
as the cancellation of existing contracts or severance payments to workers, will be recorded as
spending.

11. All expenditures recorded as a credit in “Account 99” (due to the lack of corresponding
budget allocations) will be recorded as spending above-the-line on an accrual basis as the spending
obligations accrue.

Monitoring

12. 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.

Adjustors

13. Adjustor on oil prices: The floor on the overall balance of the budgetary central
government and CFDD 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 the Table 3. This adjustor is capped at US$119.33 million at
corresponding test dates. The average price of Ecuador mix oil price will be calculated as the total
value of crude oil exports divided by the total volume of oil exports over the period since the prior
test date.

Table 3. Ecuador: Adjustor due to Oil Price Differences Relative to Program Assumptions
2021 2022
September December April August
Ecuador mix crude oil price (US$ per barrel) 62.1 62.1 56.1 54.6
Source: Ministry of Finance and IMF staff estimates

14. Adjustor on external financing from China. The floor on the overall balance of the
budgetary central government and CFDD will be adjusted downward by the amount of excess in
external loan disbursements from China relative to the amounts in the baseline reported in Table 4,
which are the amounts received during 2021 through the end of August, up to a cumulative
maximum through end-December 2021 of US$300 million.

Table 4. Ecuador: Adjustor due to excess in external loans from China

2021 2022
September December April August
Expected disbursements from China 1/ 209.4 209.4 0.0 0.0
1/ For 2021, cumulative from January 1. For 2022, cumulative from January 1, 2022.

Floor on The Accumulation of Non-Financial Public Sector Deposits at

the Central Bank

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Definitions

15. The Non-Financial Public Sector (NFPS, Sector Público No-Financiero) for the purposes
of the program consists of the CG and CFDD, as defined above, 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 5), Development Bank of Ecuador (BDE) as well as accounts
related to the payments to private operators of oil concessions (Ministerio de Energia y Recursos
Naturales no Renovables). The Central Bank of Ecuador falls outside of the NFPS perimeter.

Table 5. Ecuador: Non-Financial Public Sector Corporations Covered Under the

Definition of NFPS
Empresa Pública de Exploración y Explotación de Hidrocarburos Petroamazonas - PAM
Empresa Pública de Hidrocarburos del Ecuador Petroecuador - PEC
Empresa Pública Flota Petrolera Ecuatoriana-EP FLOPEC
Empresa Nacional de Ferrocarriles del Ecuador – ENFE (*)
Empresa Pública Línea Aérea del Ecuador TAME (*)
Empresas Públicas Menores (Empresas de Agua Potable)
(*) SOEs in liquidation process, which will be in fiscal data until the liquidation process finishes.

16. Deposits of the NFPS at the Central Bank of Ecuador (BCE) include all depository
liabilities (time and on-call deposits) at the BCE of the NFPS, as defined above.

Monitoring

17. The accumulation of NFPS deposits at the BCE at each test date will be measured as
the change in the stock of deposits between the first and last day of the corresponding test
dates as shown in Table 2.

18. 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.

Adjustors

19. Adjustor on external borrowing. The floor on the accumulation of NFPS deposits will be
adjusted upward/downward by the amount of NFPS borrowing from non-residents above/below
than envisioned under the program, as reported in Table 6 below and net of issuances related to
liability-management operations that have no net impact on the outstanding stock of NFPS debt.
International borrowing will comprise issuance of international bonds.

Table 6. Ecuador: Adjustor Due to International Borrowing in Shortfall/Excess vis-a-vis

Program Assumptions
2021 2022
September December April August
Total market issuance consistent with program targets (cumulative) 1/ 0.0 0.0 0.0 0.0
1/ For 2021, cumulative from January 1. For 2022, cumulative from January 1, 2022. 2022 market issuance projected in Table 3 is expcted to take place after August,
2022.

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20. Adjustor on disbursements from multilateral institutions.1 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, other multilateral institutions (the IADB, World Bank,
CAF, and FLAR), and grants, relative to the baseline projection reported in Table 7. Program loan
disbursements are defined as external loan disbursements (excluding project financing
disbursements) from official creditors that are freely usable for the financing of the NFPS budget
operations.

Table 7. Ecuador: Adjustors Due to Shortfall/Excess in Program Loan Disbursements by

Multilateral Creditors

2021 2022
September December April August
Expected disbursements of program loans by multilaterals 1/ 1483.0 3803.0 300.0 600.0
1/ For 2021, cumulative from January 1. For 2022, cumulative from January 1, 2022.

21. Adjustor on oil prices. The floor on the accumulation of NFPS deposits 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$119.33 million at corresponding test dates. The average price of
Ecuador mix oil price will be calculated as the total value of crude oil exports divided by the total
volume of oil exports over the period since the prior test date.

Ceiling on External Payment Arrears by the Non-Financial Public Sector

Definitions

22. External debt is determined according to the residency criterion except in the case of the
debt securities for which the criterion is the place of issuance of the instrument.2 The term “debt”
will be understood to mean 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. Debts can take several forms; the primary ones
being as follows:

(i) loans, i.e., advances of money to the obligor by the lender made on the basis of an
undertaking that the obligor will repay the funds in the future (including deposits, bonds,
debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that
are equivalent to fully collateralized loans under which the obligor is required to repay the

1
The adjustor for disbursements from China is temporarily removed given that disbursements are not currently built
into the baseline projections. It would be reintroduced when disbursements are projected in the baseline.
2
As defined in Guidelines on Public Debt Conditionality in Fund Arrangements, Decision No. 16919-(20/103).

INTERNATIONAL MONETARY FUND 109

ECUADOR

funds and usually pay interest, by repurchasing the collateral from the buyer in the future
(such as repurchase agreements and official swap arrangements);

(ii) Suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments
until sometime after the date on which the goods are delivered or services are provided; and

(iii) Leases, i.e., arrangements under which property is provided which the lessee has the right to
use for one or more specified period(s) of time that are usually shorter than the total
expected service life of the property, while the lessor retains the title to the property. For the
purpose of the program, the debt is the present value (at the inception of the lease) of all
lease payments expected to be made during the period of the agreement excluding those
payments that cover the operation, repair or maintenance of the property.

23. Under the definition of debt set out above, arrears, penalties and judicially awarded
damages arising from the failure to make payment under a contractual obligation that
constitutes debt are debt. Failure to make payment on an obligation that is not considered debt
under this definition (e.g., payment on delivery) will not give rise to debt.

24. External payment arrears for program monitoring purposes are defined as (i) external debt
obligations (principal and interest) falling due after September 30, 2020 that have not been paid
within 90 days of the due date, considering the grace periods specified in contractual agreements,
as well as (ii) payment arrears on goods delivered or services rendered by external entities.

Coverage

25. This performance criterion covers the NFPS. This performance criterion does not cover (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 September 30, 2020.

Monitoring

This PC will be monitored on a continuous basis.

Ceiling on New Gross Central Bank Direct Financing to the NFPS and
Indirect Financing to the NFPS Through the Public Banks

Definitions

26. BCE direct financing to the NFPS and indirect financing to the NFPS through the public
banks includes overdraft transfers from the BCE to the entities of the NFPS as defined above,
advance distribution of unrealized profits from the BCE, the BCE acquisition of government debt on
the primary market or by purchase from public institutions, and the BCE lending to public banks for

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the purpose of acquisition of government debt on the primary market or by purchase from public
institutions.3

Monitoring

27. This PC will be monitored on a continuous basis. Monthly data on amortizations and
disbursements of 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.

• INDICATIVE TARGETS (IT): DEFINITION OF VARIABLES

Floor on The Non-Oil Primary Balance Including Fuel Subsidies of the
Non-Financial Public Sector

Definitions

28. The Non-Financial Public Sector (NFPS) is defined as above.

29. The non-oil primary balance of NFPS, including fuel subsidies, is defined as the non-oil
primary balance of the NFPS minus spending on subsidies on petroleum products.

30. The Non-Oil Primary Balance of the NFPS is defined as total non-oil revenues (ingresos
no petroleros) minus primary non-oil spending (gastos primarios no petroleros).

31. Primary non-oil revenues are recorded on cash basis.

Revenues explicitly included are:

• Tax revenues (ingresos tributarios), but excluding corporate income tax paid by state-owned oil
companies;
• Social security contributions (contribuciones sociales);
• Other revenues (otros ingresos);
• Proceeds from asset monetization (i.e. revenues from the leasing of assets owned by the non-
financial public sector);

Revenues that are explicitly excluded from primary non-oil revenues are:

• Interest income (recorded on cash basis);

• Proceeds from the sale of financial assets;
• Revenues from the privatization of government-owned entities;

3
For the purpose of this target, any restructuring of the debt originally owed by the Ministry of Economy and
Finance to Goldman Sachs that was subsequently transferred to the BCE will not be considered as financing to the
NFPS.

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• Revenues from oil exports;

• Revenues from the domestic sales of oil derivatives;
• The operating surplus of state-owned oil companies (PetroAmazonas and PetroEcuador);

32. Primary non-oil spending is recorded on accrual basis and comprises spending on wages
and salaries (sueldos y salarios), purchases of goods and services (compra de bienes y servicios),
social security benefits (prestaciones sociales), other current spending, capital expenditures not
related to oil investment. Other current spending excludes cost of imports of petroleum derivatives
(Cuenta de Financiamento de Derivados Deficitarios) and payments to private operators of oil
concessions (Ministerio de Energia y Recursos Naturales no Renovables).

33. Petroleum product subsidies include, but are not limited to, subsidies for gasoline, diesel,
jet fuel, av gas, fuel oil and liquefied petroleum gas. Subsidies are defined as a difference between
the distributor sale price of the product and the cost of this product. The cost of the product is a
weighted average between the cost of imported petroleum derivative products and the cost of
domestically produced petroleum products, cost of transportation, storage, and commercialization.
For the cost of domestically produced petroleum products, the export price of eastern crude
(opportunity cost) is considered as raw material, as well as the cost of refining. The import cost
includes the price at FOB value plus freight and insurance.

34. Government-funded, public-private partnerships will be treated as traditional public

procurements. NFPS government obligations that are accrued on public private partnerships would
be recorded transparently in budget data and measured as part of the NFPS government deficit as
they accrue. The accrued but not settled obligations related to these public private partnerships will
be transparently recorded either as public debt or as a contingent liability of the government (e.g.
public guarantees) depending on the nature of the obligation.

35. Costs associated with divestment operations or the liquidation of public entities, such
as the cancellation of existing contracts or severance payments to workers, will be recorded as
spending. All expenditures recorded as a credit in “Account 99” (due to the lack of corresponding
budget allocations) will be recorded as spending above-the-line on an accrual basis as the spending
obligations accrue.

Monitoring

36. All fiscal data referred to above and needed for program monitoring purposes will be
provided to the Fund within 60 days from the end of each test date as shown in Table 2. The
data submission would also include below the line data. Preliminary monthly data will be provided
with the lag of no more than 45 days after the end of each month.

Adjustors

37. Adjustor on oil prices. The floor on the non-oil primary balance including fuel subsidies of
the NFPS will be adjusted downward/upward by US$23.85 million at corresponding test dates for

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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$119.33 million at corresponding
test dates. The average price of Ecuador mix oil price will be calculated as the total value of crude oil
exports divided by the total volume of oil exports over the period since the prior test date.

38. Adjustor on external financing from China. The floor on the non-oil primary balance of
the non-financial public sector including fuel subsidies will be adjusted downward by the amount of
excess in external loan disbursements from China relative to the baseline projections reported in
Table 4, up to a cumulative maximum through end-December 2021 of US$300 million.

Floor on the Overall Balance of the Non-Financial Public Sector

Definitions

The Non-Financial Public Sector (NFPS) is defined as above.

39. The overall balance of the NFPS is defined as the non-oil primary balance of the NFPS plus
the oil balance of the NFPS plus interest revenues of the NFPS minus interest expenditures of the
NFPS.

The oil balance of the NFPS will be defined as the sum of (i) revenues from oil exports, (ii) revenues
from the domestic sales of oil derivatives, and (iii) the operating surplus of state oil companies
(PetroAmazonas and PetroEcuador) minus the sum of (i) expenditures on investment in the oil
sector, (ii) expenditures on imports of petroleum derivatives (de Financiamento de Derivados
Deficitarios ) and (iii) payments to private oil companies (Ministerio de Energia y Recursos Naturales
no Renovables).

NFPS interest expenditures are measures on cash basis while all other expenditures are
measured on accrual basis.

Monitoring

40. All fiscal data referred to above and needed for program monitoring purposes 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 the lag of no more than 45 days after the end of each month.

Adjustors

41. Adjustor on oil prices. The floor on the overall balance of the NFPS 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 the
Table 3. This adjustor is capped at US$119.33 million at corresponding test dates. The average price
of Ecuador mix oil price will be calculated as the total value of crude oil exports divided by the total
volume of oil exports over the period since the prior test date.

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42. Adjustor on external financing from China. The floor on the overall balance of the non-
financial public sector will be adjusted downward by the amount of excess in external loan
disbursements from China relative to the baseline projections reported in Table 4, up to a
cumulative maximum through end-December 2021 of US$300 million.

Floor on the Change in the Stock of Net International Reserves (NIR)

Definitions

43. Net International Reserves (NIR) of the central bank are computed under the program as
the US dollar value of the usable gross international reserve assets of the BCE minus (i) gross reserve
related liabilities to nonresidents of the BCE, and (ii) the reserve holdings of domestic banks and
deposits of other financial institutions held at the BCE. Non-U.S. dollar denominated foreign assets
and liabilities will be converted into U.S. dollar at the program exchange rates.

44. Usable gross international reserve assets comprise all readily available claims on non-
residents denominated in convertible foreign currencies and controlled by monetary authorities,
consistent with the Balance of Payments and International Investment Position Manual (Sixth
Edition). Specifically, they include: (i) currency and deposits; (ii) monetary gold; (iii) holdings of SDRs;
(iv) the reserve position in the IMF; (v) securities (including debt and equity securities); (vi) financial
derivatives; and (vii) other claims (loans and other financial instruments).

Specifically excluded from gross international reserves are:

• Any precious metals or metal deposits, other than monetary gold, held by the BCE
• Assets in nonconvertible currencies and illiquid assets
• Claims on residents.
• Any reserve assets that are pledged, collateralized or otherwise encumbered (in so far as those
assets are not already excluded from gross international reserve assets of the central bank),
including assets tied up in repurchase agreement transactions.
• Net positions with ALADI and SUCRE.

45. Gross reserve-related liabilities comprise:

• All short-term liabilities of the BCE vis-à-vis non-residents denominated in convertible foreign
currencies with an original maturity of one year or less;
• Short-term loans, securities, and other liabilities (excluding account payables) of the central
government with an original maturity of less than 30 days;
• The stock of IMF credit outstanding
• The nominal value of all derivative positions (including swaps, options, forwards, and futures) of
the BCE, implying the sale of foreign currency or other reserve assets

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• The reserve holdings of domestic banks held at the BCE comprise:

• All liabilities of the BCE to other depository institutions (otras sociedades de depósitos, as defined
in the BCE’s Metodología: Información Estadística Mensual, 4th Edition of May 2017).
• The deposits of other financial institutions at the BCE comprise:
• All liabilities of the BCE to other financial institutions (otras sociedades financieras, as defined in
the BCE’s Metodología: Información Estadística Mensual, 4th Edition of May 2017), with the
exception of deposits of the BIESS, including those held in trust funds (“fideicomisos BIESS y
fideicomisos IESS).

Adjustors

46. Adjustor on external borrowing. 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 6 above and net of issuances related to liability-
management operations that have no net impact on the outstanding stock of NFPS debt.
International borrowing will comprise issuance of international bonds.

47. Adjustor on multilateral disbursements.4 The floor on net international reserves will be
adjusted downward/upward by the shortfall/excess in loan disbursement by multilateral institutions
(the IADB, World Bank, CAF, and FLAR), and grants, relative to the baseline projection reported in
Table 7. Program loan disbursements are defined as external loan disbursements (excluding project
financing disbursements) from official creditors that are freely usable for the financing of the NFPS
budget operations.

48. Adjustor on oil prices. The floor on the on net international reserves 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 the
Table 3. This adjustor is capped at US$119.33 million at corresponding test dates. The average price
of Ecuador mix oil price will be calculated as the total value of crude oil exports divided by the total
volume of oil exports over the period since the prior test date.

Monitoring

49. The change in net international reserves (NIR) will be measured as the cumulative change in
the stock of NIR between test dates in Table 2.

50. 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.

4
The adjustor for disbursements from China is temporarily removed given that disbursements are not currently built
into the baseline projections. It would be reintroduced when disbursements are projected in the baseline.

INTERNATIONAL MONETARY FUND 115

ECUADOR

Floor on Social Assistance Coverage of Poor Families Under Central

Government’s Social Programs

Definitions

51. Social assistance coverage of poor families for the purpose of the program is computed as
the sum of all active beneficiary families in the three bottom deciles of the income distribution that
benefit from at least one social assistance programs. Poor beneficiary families are defined according
to information in the RS2018. Coverage expansion will occur through the following social assistance
programs: Bono de Desarrollo Humano (BDH), Bono de Desarrollo Humano Variable (BDH-V),
Personas con discapacidad, Pensión para Adultos Mayores, Mis mejores años, and Pensión Toda
Una Vida. The level (size) of benefits of any of the cash transfer programs in the bottom three
deciles of the income distribution should not be reduced (with respect to their level on September
30, 2020).

Monitoring

52. Monthly data on (i) number of poor families with at least one active beneficiary in any of the
social assistance programs, and (ii) monthly data on numbers of registries with information updated
and validated following RS2018 by income decile will be provided to the Fund with a lag of no more
than 30 days after the end of each month.

OTHER INFORMATION REQUIREMENTS

53. In addition to the data needed to monitor program conditionality, the authorities will also
provide to Fund staff the following data so as to ensure adequate monitoring of economic variables:

54. In accordance with IMF Government Finance Statistics Manual (GFSM) 2014 and Public
Sector Debt Guide for compilers and users total gross debt covers all liabilities that are debt
instruments. A debt instrument is defined as a financial claim that requires payment(s) of interest
and/or principal by the debtor to the creditor at a date, or dates, in the future. The following
instruments are considered debt instruments:

• Special drawing rights (SDRs);

• Currency and deposits;
• Debt securities;
• Loans;
• Insurance, pension, and standardized guarantee schemes; and
• Other accounts payable.

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55. All liabilities included in the GFSM balance sheet are considered debt, except for liabilities in
the form of equity and investment fund shares and financial derivatives and employee stock options.
Equity and investment fund shares are not debt instruments because they do not require the
payment of principal or interest. For the same reason, financial derivatives are not considered debt
liabilities because no principal is advanced that is required to be repaid, and no interest accrues on
any financial derivative instrument.

For the purpose of the program, Ecuador’s NFPS debt includes the following instruments:

• Debt Securities including short term liquidity instruments (held by nonresidents, and by
residents not included in the Non-Financial Public-Sector entities)
• Loans
• Other Accounts Payables

56. Any liabilities issued by entities of the NFPS, held as an asset by other entity of the
NFPS should be netted out. Since the consolidation is done at the level of NFPS, central bank
lending to the government is included in the stock of NFPS debt.

Monitoring

57. The data on NFPS stock of debt in US$ will be provided to the Fund monthly with a lag of no
more than 60 days after the end of each month. The data submission will also include cross-
holdings among NFPS entities.

Daily

58. Daily monetary and financial data in the template agreed with Fund staff, no later than 1
business days after the end of the day. This template at least 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. c) Daily oil production.

Weekly

59. 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.

60. Weekly monetary data in the template agreed with Fund staff, no later than 5 business days
after the end of the week.

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ECUADOR

61. Weekly data on international reserves and foreign currency liquidity, in line with SDDS
requirements (see http://data.imf.org/?sk=2DFB3380-3603-4D2C-90BE-A04D8BBCE237), no later
than 5 business days after the end of the week.

Monthly

62. Data on stocks and flows (above- and below the line), disaggregated by each subsector of
the NFPS (budgetary central government and CFDD, rest of the central government, subnational
governments, SOEs and social security) using the templates previously agreed with the IMF team.
One template with the detailed data on revenues and expenditures of each of the subsectors and
the consolidations between them, and the other template data by subsectors with a summary of
above the line data and the comparison with the below the line data for monitoring the statistical
discrepancy and data on stocks of financial assets and liabilities and the financing (below the line
data) also by subsectors.

63. NFPS financing data compiled based on the detailed information on financial assets and
liabilities, namely, deposits, loans, securities, equities, other accounts payable including oil related,
and their amortizations, disbursements and arrears accumulation.

64. NFPS 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. This will include expected monthly amortizations
and repayments on NFPS debt as defined above.

65. Provision of detailed information on collateralized debt and debt with similar arrangements,
such as repo transactions and other similar debt involving the pledge, sale/resale, or encumbrance
of assets within 2 weeks of signing new contracts. The information on collateralized debt and debt
with similar arrangements will include all contracts related to such debt; information on the escrow
accounts overseas that serve as collateral; and detailed information for each creditor on the stock of
debt, its terms (including on the amounts pledged, sold/resold, or encumbered, as well as any
related commitments or obligations to purchase related or unrelated goods and/or services from
the lender), and expected repayment schedules.

66. Data to determine the latest net SDR position at the end of each month. For the central
government, this would include total external liabilities with the SDR department. For the central
bank, this would include total SDR holdings. All reported data should be denominated in SDRs.

67. Export price of Ecuador mix crude oil, with a lag of no more than 20 days after the closing of
each month.

Quarterly

68. Detailed balance of payments data, no later 90 days after the end of the quarter.

69. Detailed fiscal and debt data by the subsectors of NFPS, no later than 60 days after the
end of the quarter. This data includes: Above and below the line data, summary of the statistical

118 INTERNATIONAL MONETARY FUND

 ECUADOR

discrepancy, calendar of amortization and payment of interest by instrument of debt stock at the
end of the quarter and stock of gross debt.

INTERNATIONAL MONETARY FUND 119

 ECUADOR
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION,
September 20, 2021 SECOND AND THIRD REVIEWS UNDER THE EXTENDED
ARRANGEMENT UNDER THE EXTENDED FUND FACILITY,
REQUEST FOR A WAIVER OF NONOBSERVANCE OF
PERFORMANCE CRITERION, AND FINANCING
ASSURANCES REVIEW—INFORMATIONAL ANNEX

Prepared By The Western Hemisphere Department

(In Consultation with other Departments)

CONTENTS

FUND RELATIONS _____________________________________________________________________ 2

A. Nonfinancial Relations _______________________________________________________________ 2

RELATIONS WITH OTHER INTERNATIONAL FINANCIAL INSTITUTIONS ___________ 4

STATISTICAL ISSUES ___________________________________________________________________ 5

ECUADOR

FUND RELATIONS
(As of August 31, 2021)
Financial Relations

https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberKey1=270&date1key=2099-12-31

Membership Status: Joined: December 28, 1945, Article VIII.

Safeguards Assessment: An update to the safeguards assessment of the BCE was finalized in June
2019, which provided recommendations on restoring the autonomy of the BCE as well as
strengthening the credibility of the dollarization regime. With the enactment of the new central
bank law (COMYF) in April 2021, the authorities have implemented most of the recommendations.
The BCE is on track implement the remainder albeit with some delay. These include adopting IFRS
accounting standards and making the Audit Committee operational by appointing its members; they
also intend to publish the audit opinion on the BCE financial statements starting with the 2021
report (MEFP ¶26). Steps are being taken to modernize the BCE’s internal audit function.

A. Nonfinancial Relations

Exchange Rate Arrangement:

On February 12, 1999 the central bank abandoned the exchange rate band and floated the sucre. On
March 9, 2000 the economy was dollarized at 25,000 sucres per U.S. dollar. The de jure and de facto
exchange rate arrangement is an arrangement with no separate legal tender; there are local coins
(small denomination) in circulation in the amount of about US$80 million. Ecuador has accepted the
obligations of Article VIII, Sections 2, 3, and 4 but maintains an exchange restriction subject to Fund
approval arising from a 5 percent tax on transfers for the making of payments and transfers abroad
on current international transactions. There are a number of exemptions from this tax. In September
2021 the government enacted an Executive Decree lowering the tax rate to zero for foreign airline
companies operating in Ecuador, which will enter into force upon its publication in the official
gazette. In addition, the SUCRE (Sistema Unitario de Compensación Regional de Pagos) regional
payments arrangement also gives rise to an exchange restriction subject to Fund approval since the
period for settlement under the bilateral payment arrangement exceeds three months.

FSAP: The most recent FSAP took place in 2004.

Last Article IV Consultation:

On March 11, 2019 the Executive Board concluded the 2019 Article IV consultation and approved
the request for EFF arrangement. The staff report is available at:
https://www.imf.org/en/Publications/CR/Issues/2019/03/20/Ecuador-Staff-Report-for-the-2019-
Article-IV-Consultation-and-Request-for-an-Extended-46682
Technical Assistance:
STA Government Finance Statistics, July 2021

2 INTERNATIONAL MONETARY FUND

 ECUADOR

STA Government Finance Statistics, April 2021

FAD Revenue Administration, March 2021
MCM Stress Testing, January 2021
LEG Developing Implementation Regulations for COPLAFIP, December 2020
MCM Medium Term Debt Strategy, November 2020
STA Government Finance Statistics, September/October 2020
MCM Credit Cooperatives Supervision, July 2020
FAD Tax Expenditure, April 2020
STA Government Finance Statistics, September/October 2019
STA External Sector Statistics, August/September 2019
STA Export and import price indices, July 2019
FAD Revenue Administration and Tax Procedures, June/July 2019
MCM Regulatory and Prudential Framework, June 2019
FAD PFM and Fiscal Rules, May 2019
LEG Central Bank Law, April 2019
FAD Customs Administration, March/April 2019
FAD Revenue Administration, March 2019
FAD Non-Resource Revenues, January/February 2019
STA External Sector Statistics, January/February 2019
FAD Wage Bill Reform, January 2019
MCM Debt Management, December 2018
STA National Accounts Statistics, November 2018
FAD Public Financial Management, September 2018
STA Government Finance Statistics and Public Debt Statistics, August 2018
STA Monetary and Financial Statistics, August/September 2017
STA Balance of Payments Statistics, August/September 2017
MCM Network Analysis Toolkit, January 2016

INTERNATIONAL MONETARY FUND 3

ECUADOR

RELATIONS WITH OTHER INTERNATIONAL FINANCIAL

INSTITUTIONS
World Bank: http://www.worldbank.org/en/country/ecuador

Inter-American Development Bank: https://www.iadb.org/en/countries/ecuador/overview

4 INTERNATIONAL MONETARY FUND

 ECUADOR

STATISTICAL ISSUES
(As of September 10, 2021)

I. Assessment of Data Adequacy for Surveillance

General: In spite of some shortcomings, macroeconomic data are broadly adequate for
surveillance purposes.
National Accounts: The Central Bank of Ecuador (BCE) disseminates GDP series with fixed base
year of 2007. Annual and quarterly GDP series are compiled based on the expenditure and
production approaches, both in current and constant 2007 prices. Currently, disseminated data
spans from 2007-20 for annual series and 2007Q1-2021Q1 for quarterly series. The GDP by the
income approach is published on an annual basis, up to 2019. Annual gross fixed capital
formation is disseminated by product under the expenditure-based GDP; the disaggregation of
private and public capital formation is only available in current prices. The BCE is working on a
project to update the base year of the national accounts.
Price Statistics: The CPI is a Laspeyres-type index covering nine urban areas amounting to 83
percent of the population and 87 percent of the expenditure. The weights are based on the 2011-
12 household expenditure survey results, and the current index reference period is 2014. The PPI
is also a Laspeyres-type index with weights based on the national accounts of 2013, and the
current index reference period is 2015. International best practices call for updating weights every
five years. The PPI covers the sectors agriculture, forestry and fishing, and manufacturing.
Government Finance Statistics: The authorities publish GFS time series (revenues expenditures
and financing data) for Non-Financial Public Sector (NFPS) and its subsectors (Central
Government, Social security Funds, Local Government and a sample of SOEs) from January 2012
up to December 2020. The national classification of revenues and expenditures has been updated
and improved. The improvement on the classification of revenues and expenditures will allow the
authorities to participate in the Government Finances Statistics Yearbook (GFSY) database shortly,
which is based on GFSM 2014. Areas of further improvement include the provision and
dissemination of the consolidated NFPS Debt Statistics Data broken down by sector.
Monetary and Financial Statistics: The BCE compiles monetary statistics generally following the
methodology of the Monetary and Financial Statistics Manual. The BCE reports detailed monthly
monetary data for the central bank and other depository corporations using the standardized
report forms (SRFs). An integrated monetary database that meets the monetary data needs of the
BCE the Fund is in progress. Core financial soundness indicators (FSIs) for deposit-takers and five
(out of 13) encouraged FSIs are reported to STA on a monthly basis.

INTERNATIONAL MONETARY FUND 5

ECUADOR

External sector statistics: Ecuador compiles and disseminates quarterly balance of payment and
annual international investment position (IIP) statistics. It completed the migration to the sixth
edition of the Balance of Payments and International Investment Position Manual (BPM6) in 2019.
Ecuador also disseminates quarterly external debt data and monthly data on the Template on
International Reserves and Foreign Currency Liquidity. Areas of further strengthening as noted by
recent TA, include improve quality and coverage of balance of payments and IIP. These include
enhancing the coverage and analysis of quarterly data on the non-financial public sector for
External Sector Statistics (ESS) and making better use of available source data for compiling ESS.
II. Data Standards and Quality
The country has been a SDDS subscriber since
March 27, 1998 and met all SDDS
requirements on July 14, 2000.

6 INTERNATIONAL MONETARY FUND

 ECUADOR

Ecuador: Table of Common Indicators Required for Surveillance

(As of September 10, 2021)
)
Date of Latest Date Frequency of Frequency of Frequency of
Observation Received Data6 Reporting6 Publication6
International Reserve Assets and
Reserve Liabilities of the Monetary Jul, 2021 Aug, 2021 M M M
Authorities1

Reserve/Base Money Jul, 2021 Aug, 2021 M M M

Broad Money Jul, 2021 Aug, 2021 M M M

Central Bank Balance Sheet Jul, 2021 Aug, 2021 M M M

Consolidated Balance Sheet of the Jul, 2021 Aug, 2021 M M M

Banking System

Interest Rates2 Aug, 2021 Aug, 2021 M M M

Consumer Price Index Mar, 2021 Apr, 2021 M M M

Revenue, Expenditure, Balance and

Composition of Financing3 – General May, 2021 Aug, 2021 M M M
Government4

Revenue, Expenditure, Balance and

Composition of Financing3 – Central May, 2021 Aug, 2021 M M M
Government

Stock of consolidated Non-Financial May, 2021 Aug, 2021 M M M

Public Sector debt

External Current Account Balance Q1/2021 Jul, 2021 Q Q Q

Exports and Imports of Goods and Q1/2021 Jul, 2021 Q Q Q

Services

GDP/GNP Q1/2021 Apr, 2021 Q Q Q

Gross External Debt 2019 Jan, 2020 A A A

International Investment Position5 Q1/2021 Jul, 2021 Q Q Q

1
Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise
short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives
to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.
2
Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and
bonds.
3
Foreign, domestic bank and domestic nonbank financing.
4
The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds)
and state and local governments.
5
Includes external gross financial asset and liability positions vis-à-vis nonresidents.
6
Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

INTERNATIONAL MONETARY FUND 7

 Statement by the Staff Representative on Ecuador
September 29, 2021

1. This statement provides information that has become available since the staff report
was finalized. This information does not alter the thrust of the staff appraisal.

2. The September employment survey data suggests some improvements in the labor
market. The unemployment rate declined by 0.6 ppt to 6.1 percent among women between June
and August; it remained flat at 4 percent among men. Adequate employment (full time workers
earning at least the minimum wage) improved from 31.3 to 32.4 percent but remains well below
the pre-pandemic level of around 40 percent.

3. The three prior actions for the Second and Third Reviews have been completed:

• The procurement contracts that had been awarded after September 2020 that exceeded
US$962,410 have been published on the national public procurement agency SERCOP’s
website, including the legal ownership and, when available, beneficial ownership
information of legal entities participating in public procurement, in a directly and freely
accessible and user-friendly manner.1 Of the 522 contracts published, 119 were missing
the ultimate beneficial ownership information.

• Approved audits of COVID-19 related spending during the state of emergency were
published on a dedicated webpage on the Comptroller General Office website in an easily
accessible way.2 The dedicated webpage also provides a summary of the findings in audit
reports that cannot be published at this time due to ongoing investigations and legal
proceedings. The main findings of this summary were a) deficiencies in the publication of
relevant information of the contracting processes (most common error detected), b)
deficiencies in the determination of the reference budget of the contracts, c) selected
suppliers not complying with the legal requirements to contract with the State, d)
uncompetitive pricing, and e) deficiencies in the elaboration of technical specifications.

• The authorities prepared and presented to IMF staff a central government financial plan
for the remaining of year 2021 that was approved by the Financial Committee. The
financial plan included a detailed monthly cash flow, the arrears until August 2021,
clearance of arrears from past years and estimated monthly accumulation of arrears
during 2021, a document with the potential risks associated to the financial plan, and
potential mitigating measures. A supplementary report explained the deviations from the
2021 Financial Plan that had been delivered to IMF staff in December 2020. Staff is

1
https://portal.compraspublicas.gob.ec/sercop/beneficiario-final/
2
https://www.contraloria.gob.ec/EmergenciaSanitaria/Covid19/Informes
 2

reviewing the Plan jointly with the authorities to ensure full consistency with the program
and alignment with PFM practices.

4. The National Planning Council approved the National Development Plan (NDP) for
2021-2025 on September 21. The NDP aims to promote trade, tourism, foreign investment, and
modernize the domestic financial system. It sets out medium term goals, including achieving a
real GDP growth rate of 5 percent, generating 2 million high-quality jobs, reducing rural poverty
and malnutrition by 15 and 6 ppts respectively, expanding access to the internet by 10 percent to
reach a coverage of 78 percent across Ecuador, and combatting corruption to improve Ecuador’s
ranking in the Transparency International’s index of perception of corruption from 93 to 50 by
2025. The NDP was provided to the National Assembly for information following its approval.

5. The tax rate on transfers abroad for foreign airline companies operating in Ecuador
has been lowered to zero (Staff Report ¶49). The Executive Decree was published in the official
gazette on September 22, 2021.

6. The National Assembly sent the 2021 Budget back to the government, but this will
not affect enactment of the budget. The Assembly was consulted on the budget and rejected it,
seeking clarification on several technical issues including oil price assumptions (deemed
optimistic), inflation forecast, quantification of savings from fuel subsidies reform, and
consistency between the budget revenue forecast and information previously provided by the
revenue agency. They also inquired about the budget allocation for education and health, support
to women, arrears to the social security fund, and the use of the recent IMF SDR allocation. The
authorities plan to provide technical responses to the Assembly and resubmit the budget without
changes in the coming days. Regardless of the Assembly vote, the submitted bill will be enacted
as is, as per Ecuadorian law.

7. The authorities submitted to the National Assembly a package of reforms (“Law for
Creating Opportunities”) on September 24. The reform package includes i) a tax bill aimed at
raising revenues; ii) a labor bill aimed at making the labor market more flexible, and iii) reforms
to improve competitiveness and promote investment. The law was submitted under emergency
procedures, which gives the Assembly 30 days to vote on the bill; failure to do so would result in
automatic adoption of the law.

i. The main changes on tax policy are the reform of personal income tax to have a greater
contribution from those who earn more than $2,000 per month, a temporary tax on high
net-worth individuals for two years, and a similar tax on profitable large companies for
one year. The largest measures in the bill, the personal and corporate income tax policy
changes, are aligned with the commitments in the MEFP (MEFP ¶16). Compared to the
MEFP, the temporary tax on high net-worth individuals would be applied to a wider base
and for two years instead of one year, and a new administrative measure to mediate tax
disputes would raise both permanent and temporary revenues. By contrast, the temporary
tax on profitable large companies would be applied for one instead of two years; some
personal hygiene goods would be exempted from VAT; mobile phone plans would be
 3

exempted from excise taxes; and the 2 percent sales tax for micro, small and medium size
firms would be eliminated. Overall, the authorities estimate that the proposed bill may
yield slightly higher revenues compared to the MEFP commitments of about $220
million (0.2 percent of GDP) per year in the next two years; staff is liaising closely with
the authorities to assess the measures and their expected yields.

ii. The labor bill includes provisions to increase flexibility in work arrangements and
reduce rigidity in temporary contracts, such as allowing hourly hiring schemes, with the
view to promoting formal employment and promoting equity in the labor market (Staff
Report ¶39).

iii. Among the main changes to improve competitiveness and investment are opening the
possibility for some public services to be provided by the private sector, such as utilities
and transportation, reducing customs red tape in order to facilitate trade, allowing banks
to invest in the stock market.
 Statement by Afonso Bevilaqua, Executive Director for Ecuador, Ricardo Velloso, Senior
Advisor to Executive Director, and Jorge Gallardo, Advisor to Executive Director
September 29, 2021
1. We wish to express, on behalf of our Ecuadorian authorities, our gratitude to the Managing
Director and the other members of the IMF management team for their continuing support to
Ecuador’s economic policies and reforms. Also, we want to thank Ms. Oner and her team for the
hard work and well-written set of reports on the Article IV consultation and the second and third
reviews under the Extended Arrangement.
2. As detailed below, our Ecuadorian authorities have taken tangible actions to successfully
implement a strong program under extremely challenging circumstances posed by the global
pandemic. In addition, the authorities of the new government have shown strong commitment to
the program’s objectives. The successful conclusion by Executive Directors of the second and
third reviews under the Extended Arrangement would signal the international community’s
continuing support to sound policies and the well-being of the Ecuadorian people. It would also
recognize the smooth and efficient transition that took place, following peaceful and open elections
earlier in the year that reaffirmed the pursuit of market-friendly reforms to boost inclusive growth.
Background
3. The former government took swift actions to deal with the health and economic
challenges posed by the global pandemic. It concluded a debt restructuring with private creditors
that provided much needed relief. Also, it called on the IMF for policy advice and financial support,
initially through an RFI emergency disbursement that was shortly followed by the approval of an
exceptional access 27-month Extended Arrangement. This also unlocked technical and financial
support from other IFIs. Altogether, the strong support by the international community has been
instrumental in mitigating the effects of the crisis. The economy contracted by 7.8 percent of GDP
in 2020, but less than the 11.0 percent initially projected by staff. In the first quarter of 2021, the
economy expanded by 0.7 percent (quarter-on-quarter). The fiscal position in 2020 was better than
projected by staff and, together with a higher nominal GDP, public debt at end-2020 was almost
eight percentage points of GDP lower than projected by staff at the time of the EFF-supported
program request. Inflation remains subdued, and the financial system is liquid and well capitalized.
4. Following peaceful and open elections, the transition to a new administration was
smooth and efficient, and engagement with the Fund remained close. On April 11, 2021, Mr.
Guillermo Lasso obtained a landmark victory in the presidential runoff election, and a new
government took office on May 24, 2021. During the transition, President Moreno and then
President-Elect Lasso organized several commissions to be briefed on, and receive information
from, different governmental institutions, greatly facilitating the initial work of the incoming
administration. In addition, during this time and subsequently there was a close dialogue with Fund
management and staff, which was critical to bringing to the Board, in a timely fashion, this request
for completion of the second and third reviews under the Extended Arrangement.
Recent performance under the Extended Arrangement
5. Program implementation has been strong since the first review. All quantitative
performance criteria for end-December 2020 and all but one for end-April 2021 were met. In this
period, all indicative targets were met. The authorities are requesting a waiver of the end-April
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2021 quantitative performance criterion on the accumulation of NFPS deposits at the central bank,
which was not met by a small margin. While the breach was minor and does not have a significant
macroeconomic effect, it highlights the need for a better management system. In this regard, the
authorities have requested IMF technical assistance in this area. On the structural reform side, the
compilation guide for the government financial system has been concluded and published. The
initial challenges to publish information on historical revenue and expenditure statistics of each of
the sectors of the NFPS have been overcome, and these data have been disseminated. In other areas,
including the review of the medium-term debt strategy and better assessing domestic payments
arrears, good progress is being made with technical assistance from the IMF.
6. Parliament approved in April 2021 a landmark reform that gave the Central Bank of
Ecuador (BCE) institutional independence to conduct monetary policy. This reform created a
new institution, the Monetary Commission (Junta Monetaria), in charge of monetary policy
decisions. This institution will appoint the General Manager of the BCE. Each member of the Junta
Monetaria will be appointed by parliament out of a list of three candidates put forward by the
President of the Republic. To strengthen the balance sheet of the central bank, shares of three of
the state-owned banks held at the central bank (worth US$2.4 billion) were transferred to the
ministry of finance, which agreed to repay the central bank in equal installments during 2021-2035.
Also, legacy assets received by the BCE during the 1999 banking crisis will be removed from its
balance sheet.
7. Support to the vulnerable population most affected by the economic and social effects
of the pandemic has continued. The authorities have made progress in updating the social registry
to expand the coverage of social assistance programs. Between July 2020 and end-April 2021, the
number of beneficiary families has increased substantially. While changes in the survey of poor
families and lack of census data to clearly identify poor families are affecting the pace of
implementation, the authorities have increased their efforts to continue expanding the reach of the
social assistance programs using pre-census data. The government’s target to cover under these
programs four-fifths of the families in the bottom three income deciles is expected to be reached
no later than April 2022.
Near-term priorities of the new administration
8. The authorities acknowledge that the recovery may prove elusive if the pandemic is
not quickly brought under control. As promised during the campaign, the administration of
President Lasso has been implementing a comprehensive plan to vaccinate the eligible population
as soon as possible, reaching ahead of time its initial goal of vaccinating more than half of the
adult population in the first one-hundred days in office. As of September 20, 2021, 60 percent of
the adult population received at least one dose of the vaccine, and 55 percent were fully vaccinated.
A rapid vaccination rollout will enable a faster, stronger, and more equitable recovery.
9. Another immediate goal of the new administration is to change Ecuador’s economic
strategy, from government promoted to private sector led growth. In this regard, the
government is committed to opening the economy to the world, bringing more Ecuador to the
world and more world to Ecuador. The authorities have already started conversations with Mexico,
Colombia, Peru, and Chile to be part of the Pacific Alliance. Also, conversations with the United
States, which started by the former administration, are underway on a bilateral free trade agreement.
In addition, negotiations on a free trade agreement with China will begin soon.
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Medium-term priorities of the new administration

10. Fiscal consolidation will place stronger emphasis on expenditure rationalization.
Overall, the authorities are targeting a reduction in primary spending by 4.2 percent of GDP by the
end of the administration, through improvements in procurement practices, lower fuel subsidies,
and expenditure rationalization. The largest savings will be generated by improving procurement
practices, which are expected to yield 1.5 percent of GDP. Rolling back one-off expenditures (from
this year) will yield another 0.9 percent of GDP in savings, together with savings of 0.9 percent of
GDP from the continued reduction in fuel subsidies. The remaining 0.9 percent of GDP will be
achieved through expenditure rationalization across a range of items, including the wage bill.
11. The envisaged tax reform will increase revenues while making the tax system more
equitable, simpler, and growth friendly. The authorities believe that those who benefitted most
from the crisis and those who earn more should make an additional contribution to support the
ones most affected by the crisis. In this regard, the reform will reduce tax expenditures in both the
personal and corporate income taxes, yielding a combined 0.7 percent of GDP in additional
revenues. The government will introduce revenue administration measures to improve collections
through the newly created Large Taxpayers Unit as well as improved customs controls and VAT
compliance that will yield, altogether, 0.3 percent of GDP. Special contributions from corporations
and high net worth individuals as well as enhanced disclosure of foreign assets held abroad will
generate 0.5 percent of GDP in one-time revenue collections. The admission of Ecuador’s Internal
Revenue Service (SRI) as a member of the Global Forum on Transparency and Information
Exchange under the auspices of the OECD should contribute to the fight against tax evasion.
12. Fiscal transparency will continue to be strengthened with IMF technical assistance.
During the previous administration, the fiscal responsibility law (COPLAFIP) was amended to
help anchor medium-term fiscal sustainability, and the anti-corruption framework (COIP) was
strengthened with the criminalization of corruption offenses. More recently, revised historical
government financial statistics have been published. In the second semester of 2022, a Fiscal
Transparency Evaluation will be undertaken. The authorities are updating the medium-term debt
strategy, with a view to further enhancing debt transparency. They are also updating the registry
of entities that participate in public procurement and are incorporating requirements on beneficial
ownership identification in public tenders. This information will be freely accessible through the
public procurement institution (SERCOP). Finally, the AML/CFT legislation will be reviewed and
amended, as needed, by end-March 2022 to incorporate the latest available international standards.
13. Fostering competitiveness is key to boost Ecuador’s medium-term growth potential.
In this regard, on September 24, 2021, President Lasso presented to parliament the Draft Law on
Creating Opportunities that envisages the establishment of a modern labor market framework, with
greater flexibility to promote job creation. The BCE has prepared a reform proposal to promote
financial inclusion and competition in the financial system. This should facilitate a market-driven
reduction in interest rates, which in Ecuador are extremely high in comparison to other dollarized
economies in the region. The government is also committed to liberalizing foreign trade and
fostering businesses’ access to external trade and finance. These reforms, together with the other
reforms mentioned above, will create a favorable environment for private investment and private
sector led growth and job creation.
Final remarks
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14. The EFF supported program has been critical for Ecuador to mitigate and start overcoming
the harsh humanitarian and economic crisis triggered by the global pandemic. The program is fully
financed and Ecuador’s capacity to repay the Fund remains adequate. While some signs of
recovery are already visible, much remains to be done. The continued support from the IMF and
other IFIs is therefore more important than ever for Ecuador to successfully overcome the
pandemic crisis, open the economy to the world, and set course on a clear path of inclusive growth.