When the Covid-19 pandemic struck, Ecuador was in the process of reorientating its development strategy. There was a shift underway from the public-sector-led growth during the years of the oil bonanza, to a private-sector-led growth strategy under a new reality of low oil prices, high fiscal deficits, over-indebtedness, limited policy tools, and tight and expensive external financing.

The pandemic made a difficult situation worse.

Oil prices dropped sharply as Covid-19 spread around the world, from almost US$70 per barrel in early January 2020 to less than US$30 per barrel in early April 2020. This affected Ecuador’s financing capacity, as oil accounts for 39 percent of exports and 21 percent of fiscal revenues. Furthermore, the spread of COVID-19 significantly disrupted economic activity. On top of the challenges Ecuador was already facing, the pandemic added overlapping economic and health crises that threatened to have a disproportionate effect on the country’s most vulnerable citizens.

Against this complex backdrop, the World Bank delivered a fast and effective response that contributed to reinforcing Ecuador’s macroeconomic stability, provided support to small and medium enterprises (SMEs), and helped strengthen the social safety net.

The World Bank’s response in Ecuador, which included a support package of up to US$1.4 billion over three years, with three rapid-disbursing budget support operations, has lessons that are applicable to future crisis responses. The support for Ecuador is one of a series of case studies in a recent evaluation of the World Bank Group’s response to the economic implications of the COVID-19 pandemic.

Lessons for crisis response

The success of the Bank’s support to Ecuador during the pandemic can be attributed to several driving factors.

One is the Bank’s close coordination with the IMF to ensure the consistency and complementarity of the policy measures being supported. The Bank prepared a Development Policy Financing (DPF) programmatic series to provide the government with budget support, including an additional Inclusive and Sustainable Growth Loan as part of an earlier budget support operation, all delivered in coordination with the IMF’s approval of an Extended Fund Facility (EFF)  totaling US$6.5 billion for the country and a Rapid Financing Instrument (RFI) for US$644 million, as bridge financing during the preparation the EFF.

While the earlier budget support operation was started before the Covid-19 emergency, it was quickly adapted to include COVID-19 response measures as part of its policy development objectives.  The full amount of this operation was disbursed within 5 days from its approval, with the resources allocated by the Ecuadorian government according to its needs during one of the harshest stages of the pandemic. This loan was followed by another in the programmatic series.

The Bank’s ability to quickly restructure and repurpose projects in its portfolio allowed this, and other operations, to be modified and adapted to respond to the Covid-19 emergency. This is another key success factor in the Bank’s response. This ability stemmed from a well-designed and flexible Country Partnership Framework (CPF), the strategy that guides the support for Ecuador.   While it was not possible to foresee the speed and severity of the Covid-19 external shock, the CPF provided a good understanding of the many issues Ecuador was grappling with and was sufficiently flexible to allow for reallocating resources and responding to the new challenges.

In addition to the series of budget support operations, the Bank’s response included the first health-related project in 15 years, projects providing access to finance to Micro, Small, and Medium-sized Enterprises (MSMEs), and technical assistance to prepare some of the ongoing reforms.

Another success factor in the Bank’s response in Ecuador was the fact that it was delivered in parallel and as part of a coordinated large international aid package. In addition to the Bank’s financing and the IMF’s EFF, Ecuador received a support package from the Inter-American Development Bank (IDB) of around US$643 million, a package from the Andean Development Corporation (CAF) of around US$500 million, and a loan from the Latin American Reserve Fund (FLAR) to support the country with US$418 million. This inter-institutional collaboration was instrumental in delivering a swift response.

Building on the lessons

Ecuador’s experience shows that, in a time of crisis, it is important to have the right instruments to directly support the real sector, where most of us work, in parallel to responding at the macro-fiscal level. Toward that end, exploring the use of structured finance solutions, such as partial credit guarantees, subordinated debt, and quasi-equity instruments, with a view to supporting small and medium-sized firms is also important.

More broadly, the Ecuador response underscores the importance of developing a global crisis response playbook, ideally prepared jointly with the IMF, to strengthen the role of the Bank Group as a crisis responder. Such a playbook would include, among others, considerations on the effectiveness of various lending instruments at the time of crisis, examples of which instruments worked best under which country conditions and for which sectors and industries, lessons learned on how to improve their use, and a list of partners with whom the Bank Group has successfully collaborated during COVID-19 and other crises.