Ecuador: Strengthening Financial Stability for Economic Growth

International Monetary Fund (IMF) Recommendations

Economic Recovery Slows: Ecuador’s economy rebounded after the COVID-19 pandemic but has slowed in 2023. Real GDP growth moderated to 0.7 percent in the first quarter, indicating a broad-based slowdown and increased downside risks.
- The IMF notes that this slowdown is a concern for policymakers, as it may impact economic stability and growth.
Financial Sector Stability: The financial sector remains stable, with banks’ average capital ratios at around 15 percent of risk-weighted assets as of end-2022. Non-performing loans (NPLs) are moderate, including on an augmented measure that includes refinanced and restructured loans.
- While the financial sector is stable, there are still concerns about NPLs and their potential impact on bank stability.

Financial Sector Dominance: Ecuador’s financial sector is dominated by banks and credit cooperatives. The IMF Financial Development Index ranked Ecuador 133 out of 192 countries in 2019, the lowest ranking among peer countries.
- This dominance raises concerns about the sector’s diversity and potential vulnerabilities.
Public Banks’ Asset Quality Review (AQR): Public banks have significantly higher NPLs and recently underwent an AQR. While public banks have capital ratios above 30 percent, covering the substantial gap in loan classification and provisioning found by the AQR would trigger supervisory action.
- The AQR highlights the need for improved risk management and regulation of public banks.

To strengthen financial stability and promote economic growth, the IMF recommends:

Streamline government securities supply: Transition to regular auctions to reduce uncertainty and promote market development.
Develop repo and secondary markets: Broaden the investor base and improve liquidity in these markets.
Enhance financial inclusion: Develop services to reach underserved and financially excluded segments, increasing access to bank accounts and improving credit data quality.
- These recommendations aim to improve the sector’s resilience, promote market development, and enhance access to financial services.

The names of responsible agencies are listed in alphabetical order (Ecuadorian financial authorities).
I: immediate (less than one year), NT: short term (1-2 years), MT: medium term (3-5 years).

Sources

IMF staff calculations
Servicio de Rentas Internas; Banco Central del Ecuador; Banco Central de la República Dominicana; Organization of the Petroleum Exporting Countries
Barett and others (2022), “Measuring Social Unrest Using Media Reports”. Journal of Development Economics, 158