Abstract
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.
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. All five prior actions for the Fourth and Fifth Reviews have been completed:
The Ministry of Economy and Finance (MEF) and the Social Security Institute (IESS) signed an agreement on May 30, 2022, to undertake the procurement process, agree on the timeline, and prioritization for the medical firm(s) to undertake healthcare audits, to be reflected in the terms of reference for these audits. This prior action is also a corrective action (CA) to address the misreporting. MEF made a payment of US$140 million to IESS on May 31 for the recognized healthcare transfer obligations resulting from the 2013-16 healthcare audits.
The terms of reference and timeline for completing the independent audits of the 2019 and 2020 financial statements of Petroecuador and Petroamazonas and the 2021 financial audit of the merged entity Petroecuador have been agreed. The authorities are proceeding with contracting the audit firms with financial and procurement support from the IADB.
The authorities published the MTFF, and fiscal targets approved by the NFCC, in line with program commitments on June 8, 2022, in the Official Bulletin No. 79.1
A Presidential Decree was issued on June 20, 2022, which establishes the optimization of public expenditure, including of the wage bill, in line with the MTFF and fiscal targets.
A Presidential Decree was issued on June 20, 2022, which mandates the use of public framework agreements and other dynamic procurement methods and collection and publication of ultimate beneficiary ownership information in public procurement contracts.
3. The Ministry of Economy and Finance published on May 31 revised historical nonfinancial public sector (NFPS) and budgetary central government (PGE) data back to 2017, with explanations for revisions.2 The NFPS data included nonoil primary balance including subsidies, with the recommended treatment of interest income and its distribution. The PGE data incorporated corrections to the pension transfers based on accrual principles of accounting, as well as the conservatively estimated healthcare transfer obligations to the social security fund (IESS). These adjustments were reflected in the debt statistics and fiscal risk report, including in the estimate of contingent PGE liabilities, as part of the corrective actions for the misreporting.
4. The authorities are progressing with upgrading the social registry and expanding the coverage of social assistance to low-income households. The number of poor families that receive social assistance increased by 630,173 from July 2020 to June 2022, surpassing 80 percent coverage of families in the bottom three deciles of the income distribution. In addition, on Children’s Day, June 1, 2022, the authorities announced a new cash transfer program to address child malnutrition called “1,000 Days.” This program is expected to further enhance the coverage of the social safety net by an additional 37,500 households.
5. The authorities are making steady progress on the structural benchmarks (SBs) and corrective actions (CAs) that are due in the coming months:
IESS has initiated a procurement process to hire an independent medical audit firm(s) to undertake healthcare audits, with the goal of hiring the first at end-June (CA).
MEF is making progress at identifying the existing stock of PGE potential obligations, including gross health claims from IESS, other claims from IESS, local governments, private sector or others (if any), by nature of expenditure, year and beneficiaries (end-June SB and CA).
Public banks’ asset quality reviews (AQR) are close to being finalized, except for a slight delay with one bank. One of the AQRs is already finalized (CFN), and two others are well advanced to be finalized by the June deadline of the relevant SB. The authorities are working on speeding up the AQR for the Ecuadorian Development Bank (BDE), which had been delayed because of a change in the bank’s management team in April. They expect BDE’s AQR to be finalized in July.
The Procurement Agency, SERCOP, is backfilling missing UBO information in the largest 100 procurement contracts awarded since September 2020. Staff has been working closely with SERCOP and the Superintendent of Companies to ensure that the information will be made available on time (end-June 2022 SB). So far, SERCOP has identified 4 contracts, out of the largest 100, with missing UBO information and has contacted the companies to request the information.
The authorities are advancing on the strengthening of the frameworks of conflict of interest and AML/CFT. Staff has been supporting the Comptroller General’s Office (CGE) and the Financial and Economic Analysis Unit (UAFE) with capacity building and technical assistance. Draft legislation is close to being finalized and is expected to be submitted in time for enactment by the end-August SB target date.
6. Inflation pressures continue to grow. May 2022 inflation data showed a 0.6 percent monthly increase and a 3.4 percent year-on-year increase, slightly above staff’s projections, led by higher food and transport prices. The WEO assumptions released in June entail higher global food prices and pose upside risk to the inflation projections.
7. There are anti-government protests ongoing. Protests by the indigenous movement (CONAIE) started on June 13, against, among others, the rising cost of living, fuel prices, and natural resource extraction on indigenous land. President Lasso announced a package of measures, including higher social spending on low-income families and financial support to the agriculture sector and small businesses. The measures are estimated to cost about $44 million (0.04 percent of GDP) but would not have a net fiscal impact as the authorities will absorb the cost within the current budget envelope by reprioritizing other expenditure. The authorities are working to promote a dialogue and reach agreement with the protestors. They remain committed to the program objectives and policies, and plan to absorb any potential new cost within the existing fiscal plans.
8. Ecuador’s spreads have risen relatively more than other emerging markets’ since the protests began, by about 200 bps to over 1,000 bps. Bond yields have also risen to over 14 percent up from 10-11 percent in early June, partly due to the spreads and partly due to higher global interest rates as in other emerging markets. The impact on debt service is expected to be limited, as Ecuador’s debt other than to multilateral creditors has fixed rates, and the DSA already includes conservative assumptions on future rates and borrowing costs. The $400 million IDB bond guarantee would enable Ecuador to reaccess markets at more favorable rates when they choose to do so.