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Ecuador’s Financial Sector Faces Challenges Amid Economic Slowdown

QUITO, Ecuador - The International Monetary Fund (IMF) has sounded the alarm about Ecuador’s financial sector facing significant challenges amidst an economic slowdown.

Economic Situation

According to a report released on Monday, Ecuador’s economy rebounded after the COVID-19 pandemic but has slowed down in 2023. While high oil prices have supported the country’s external and fiscal balances, inflation has increased, reaching 3.5 percent in 2022, although it has since eased.

Financial Sector Challenges

The financial sector has remained stable, with banks’ average capital ratios standing at around 15 percent of risk-weighted assets as of end-2022. However, non-performing loans (NPLs) are moderate, and the acceleration of credit growth during the pandemic contributed to mechanical dilution of NPL ratios.

  • Credit cooperatives have higher NPL ratios and lower loan loss provisions than private banks.
  • The sector is dominated by banks and credit cooperatives, with financial institutions providing mostly traditional products and limited services to underserved and financially excluded segments.

IMF Recommendations

The IMF recommended that Ecuador:

  • Redesign its credit support programs
  • Remove expectations of debt forgiveness
  • Migrate interest rate caps to a usury rate
  • Streamline the supply of government securities and transition to regular auctions
  • Promote the development of the repo and secondary markets, and broaden the investor base

Ongoing Challenges

Ecuador’s financial sector has yet to fully absorb pandemic-related losses, with banks’ average capital ratios above 30 percent covering the substantial gap in loan classification and provisioning found by an asset quality review (AQR) of one public bank. The AQR triggered supervisory action, highlighting the need for further reforms.

Call to Action

The IMF urged Ecuador’s financial authorities to address these challenges and promote a more stable and sustainable financial sector. An IMF spokesperson emphasized:

  • “Effective credit support programs can help mitigate the impact of economic shocks on households and businesses.”
  • “However, it is essential to ensure that such programs are designed and implemented in a way that does not create moral hazard or undermine the stability of the financial system.”

Government Response

Ecuador’s government has been working to address these issues and strengthen its financial sector. A government spokesperson stated:

  • “The IMF’s recommendations will help us strengthen our financial sector and promote a more stable economy.”
  • “We are committed to implementing the necessary reforms to ensure a sustainable and prosperous future for our country.”

By addressing these challenges, Ecuador can move towards a more stable and sustainable financial sector, promoting economic growth and development.