IMF Wraps Up Ecuador Fund Review, 2024 Article IV Consult

• The IMF Executive Board completed the first review of the 48-month arrangement under the Extended Fund Facility (EFF) for Ecuador, allowing for an immediate disbursement of SDR 375.9 million (about US$500 million). The Executive Board also concluded the 2024 Article IV consultation.
• Ecuador has made significant progress in the implementation of its economic reform program, meeting all end-August 2024 quantitative performance criteria and indicative targets for the first review and advancing important structural reforms.
• The authorities' strong and decisive policy efforts helped safeguard macroeconomic stability, strengthen the fiscal and external positions, and protect vulnerable groups amid a challenging environment.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the first review of the EFF arrangement for Ecuador and concluded the 2024 Article IV consultation. [1] The completion of the first review enables the authorities to immediately draw an amount of SDR 375.9 million (about US$500 million), bringing total disbursements under this arrangement to SDR 1,128.8 million (about US$1.5 billion).

Ecuador's 48-month EFF arrangement was approved by the Executive Board on May 31, 2024 (see Press Release No. 24/197) with access equivalent to SDR 3 billion (about US$4 billion or 430 percent of Ecuador's quota). The program aims to support Ecuador's policies to strengthen fiscal and debt sustainability, protect vulnerable groups, rebuild liquidity buffers, safeguard macroeconomic and financial stability, and advance the structural reform agenda to lay the foundations for sustainable, inclusive, and stronger growth that benefits all Ecuadorians.

Program performance has been strong. All end-August 2024 quantitative performance criteria and indicative targets for the first review of the EFF arrangement have been met, and the authorities have made substantial progress on the implementation of their ambitious structural reform agenda supported by the program.

The strong performance happened amid a challenging macroeconomic backdrop. A security crisis was compounded by a historic drought triggering an electricity crisis that adversely affected economic activity. Real GDP is projected to contract by 0.4 percent in 2024 and recover by 1.6 percent in 2025, with inflation remaining low at about 2 percent.

The Article IV consultation discussions considered strategies to strengthen fiscal sustainability while safeguarding priority social and investment spending. Enhancing oversight of the financial sector is crucial. Additionally, discussions emphasized the need to promote stronger and inclusive growth, including by improving the security situation, fostering financial integrity and good governance, increasing female and youth employment opportunities, and boosting competitiveness. In addition, implementing measures to reduce vulnerabilities to climate change would help enhance macroeconomic resilience.

Following the Executive Board's discussion today, Ms. Gita Gopinath, First Deputy Managing Director and Acting Chair, issued the following statement:

The Ecuadorian authorities have made significant progress in implementing their economic reform program supported by the Extended Fund Facility (EFF) arrangement. Despite renewed challenges from a severe electricity crisis, the authorities embarked on a set of decisive policy actions and reforms to restore macroeconomic stability while protecting vulnerable groups. All quantitative targets for the first review of the EFF arrangement have been met and implementation of structural benchmarks is progressing well.

The authorities remain committed to their fiscal consolidation plan, which will help strengthen Ecuador's fiscal sustainability and keep public debt on a downward path consistent with the debt target. The plan envisages balanced efforts on the revenue and expenditure sides. These include mobilizing non-oil revenue through permanent measures and reducing reliance on the oil sector, while containing current expenditures and protecting essential social and investment spending.

The authorities continue to work on enhancing the social safety net by broadening the coverage of the social registry and gradually expanding cash transfer programs. This will help increase government support to the most vulnerable and mitigate the impact of fiscal consolidation on those groups.

The financial policy agenda include steps to strengthen financial sector oversight and resolution frameworks, increase coordination among financial supervisors, foster capital market development, and enhance the financial safety net, in line with the recommendations of the IMF's 2023 Financial Sector Stability Assessment for Ecuador.

The authorities remain committed to implementing their structural reform agenda. They are taking actions to enhance governance and transparency, combat crime, bolster financial integrity, strengthen public financial management, facilitate female and youth labor force participation, and promote strong and inclusive growth. In addition, the authorities are committed to advancing their climate policy agenda to enhance macroeconomic resilience, including measures to reduce vulnerabilities to climate change, diversify the energy supply, and lower greenhouse gas emissions.

Executive Board Assessment [2]

Executive Directors commended the authorities' strong program performance and reform implementation under their EFF arrangement, including taking decisive policy actions to address fiscal and external imbalances while protecting vulnerable groups. Directors particularly noted the strong program performance despite the difficult environment exacerbated by a severe electricity crisis triggered by a historic drought and security challenges, which have both weakened economic activity. With risks to the outlook remaining high, Directors urged the authorities to continue to deliver on their ambitious reform agenda to safeguard macroeconomic stability and promote stronger and inclusive growth.

Noting the authorities' commendable progress, Directors agreed that further fiscal consolidation in line with the EFF is needed to ensure fiscal sustainability over the medium term. They welcomed the authorities' fiscal plan combining measures to mobilize permanent, high‑quality tax revenue and rationalize current expenditure, including containing the public wage bill. Gradual implementation of these measures, together with careful communication, will be important to secure public support. Directors commended the authorities' continued efforts to expand social assistance programs targeting the most vulnerable.

Directors highlighted the authorities' steps to align domestic gasoline prices with international prices alongside a compensation scheme. This will help reduce reliance on volatile oil revenue and address longstanding structural fiscal vulnerabilities, while creating space for critical social and investment spending, especially in education, health, security, and energy.

Directors noted that the financial sector is broadly stable, but the financial soundness of some small banks and credit cooperatives has deteriorated. They welcomed the improved coordination among financial supervisors and advances in financial sector reforms in line with the recommendations of the 2023 FSAP. They urged the authorities to closely monitor and address weak institutions, strengthen financial sector oversight and resolution frameworks, and phase out regulatory forbearance at an appropriate pace.

Directors underscored the importance of continuing to advance the structural reform agenda, including to improve transparency and governance (including of SOEs), foster private investment, strengthen public financial management, enhance the AML/CFT framework, facilitate female and youth labor force participation, and build resilience to climate change.

Directors emphasized that risks to the program remain significant, including due to energy and security challenges, election uncertainties, and elevated sovereign spreads. Steadfast commitment to the program and its implementation will remain crucial for success and international market re‑access when conditions allow. Directors underscored the importance of continued close program monitoring, contingency planning, capacity development support, and timely and adequate external financing. Directors urged staff to maintain close engagement with stakeholders in the context of the forthcoming elections, to safeguard the program objectives.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .